Anthony Tobias
For Business Edge
Downsized. Outplaced. Outsourced. Severed. These employment – or unemployment – buzzwords may have a profound meaning for you or someone you know.
If you are about to receive a severance package, there are many choices to make. One of the most important things to remember is that even if you couldn’t control what’s happened at work, you’re in the driver’s seat now.
Your situation should not be viewed as an end of your employment, but as an opportunity to start anew.
If you’ve just received a severance package or expect to be offered one in the near future, make sure you get the best deal possible. Don’t be pressured into signing anything or agreeing to anything until you’ve seen a lawyer who is experienced in severance issues. Your lawyer can determine if the offer is fair, or if you can do better.
It’s also important to get your financial house in order. Look at your current and anticipated expenses: the mortgage, the car and household insurance, the amount you’ll need to contribute to your kid’s tuition next semester, daycare or other payments.
This is the time to truthfully assess your family’s wants and needs. Strike a balance that won’t bleed you dry or alter your lifestyle unnecessarily. Do not incur big-ticket expenses; put them off. And for a more complete safety net, consider negotiating a line of credit with your bank to cover emergencies.
Your next step is to minimize the cash going out and to maximize the effectiveness of the savings and assets you have, at least until you have a clear picture of your next regular source of income.
Look at paying off that credit card and consider a money market mutual fund with chequing privileges, rather than your typical chequing account.
If ever there was a time to get a good financial adviser, it’s now. You need someone to take a fresh look at your situation and ask questions you might not have thought of. A financial adviser can help you avoid making mistakes in the heat of the moment.
An adviser will know the tax implications of the severance offer . . . what can be done to either shelter your money or avoid paying excessive taxes on it. Your adviser will help you set some financial objectives and goals, and devise a plan to meet them.
The next step is to do a personal audit and assess your options and opportunities. These depend on your age, your psychological readiness for change, the marketability of your knowledge and skills, the amount of savings you have and perhaps how ready you are to retire.
Will you polish up your resume and hit the job-hunting trail in hope that you’ll find work soon? Maybe you can acquire some new skills, or start your own business.
But no matter which situation you find yourself in, obey two cardinal rules: * Minimize your taxes, because while tax evasion is a crime, minimizing taxes is not;
* Get the highest possible return on your severance.
To minimize taxes on your severance, you can make the maximum allowable RSP contribution for the current year and also make retroactive RSP contributions from past years in which you didn’t make your maximum contributions.
Revenue Canada also regards a portion of a severance payment as a retiring allowance, which can be contributed to your RSP based on years of service with your former employer.
Another tax-reducing option that you might consider is to request that your former employer pay your severance over the course of two years. Spreading that income over two years would probably place you in a lower tax bracket.
There are also other tax-saving or tax-deferral avenues available, but they’re for quite specific circumstances and needs. Ask your financial adviser.
You owe it to yourself to make your severance package — or any invested savings — work as hard as possible; to achieve the highest possible return that your risk tolerance will allow.
Down the road, it could make a big difference in your business, in your retirement, in your enjoyment of life. A severance can provide a great opportunity. Please use it to your best advantage, no matter which path you choose.
(Anthony Tobias is branch manager with Great Western Financial Corporation in Calgary. These ideas are those of Anthony Tobias and do not necessarily reflect those ideas of Great Western Financial Corporation. Mutual funds are not guaranteed, their values will change and past performance may not be repeated. Read the prospectus before investing.)
