Worried about severance transfer

Question: I am planning to retire at the end of 2005 from employment with the Ontario Government for 36 years. I will receive severance pay of approximately $42,000. My pension will be approximately $55,000 per year.

If I take the severance as a lump sum, I will be taxed at approximately 30 per cent and have EI and CPP deductions as well. I have been advised to roll it over into an RRSP and no tax will be deducted until I withdraw the money.

The problem here is that, although the tax saving look good, I want to roll it over into a type of RRSP where I can soon start to withdraw a monthly amount to supplement my pension income.

What should I do? Will I save any income tax? It seems that I cannot find anyone that can give me a straight answer. – E.T., Pembroke, ON

Gordon’s answer: In your case, you can transfer all of the severance into an RRSP and save tax. You are allowed to roll over $2,000 for every year or part-year of service prior to 1996 into an RRSP. You say you have been with the employer for 36 years, so that means you should have 26 years of eligibility. Multiplying that by $2,000 gives you a rollover allowance of $52,000, whi will cover the full amount of the lump-sum payment.

There is no restriction on the type of RRSP that you use so there is nothing to prevent you from making monthly withdrawals on the basis of your plan.

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