Q&A: Out of work
Question: I will be out of work within a few weeks and I am wondering how best to hold the money I will be living off for the time I am out of work. Between my tax refund, my performance bonus, plus compensation package from my company, I figure I could manage well for a year in the event that I cannot find suitable work. So I am wondering if I should use my TFSA room for part and simply put the rest into a savings account to live off of, or contribute as much as I can to my RRSP and withdraw as needed on the basis that I would be doing so at a lower tax bracket since I will have reduced income. – Xavier D.
Gordon Pape answers: It is impossible to give you a precise answer without knowing all the numbers. However, here are some points to consider.
For starters, it sounds like you are being laid off. Therefore some of the money you receive from your employer will qualify as a “retiring allowance” and therefore can be rolled directly into an RRSP, which means no tax will be withheld and none will be payable on that amount if it stays in the plan. You should consult a financial planner to determine the exact amount that can be treated in this way.
Once the RRSP has been taken care of, the Tax-Free Savings Account is a good option and you should make the maximum possible contribution. However, since you may need to withdraw money to live on, be sure to choose a plan that allows unlimited free withdrawals and invest in something safe and liquid, such as a high-interest savings account.
If there is still some cash left after the RRSP and the TFSA, keep it in an easily accessible high-interest account.