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I'm Too Stupid to Own Money

weather: light rain
outside: 14.3°C
mood: bleh
music: Lee Bartel/Daniel May - Cascading Comfort
I have a chunk of severance pay that I'm thinking I want to do something with. And by "doing something with", I mean an investment of some sort, not spending it. Although, it might be nice to finally go on my honeymoon. =}

I don't know if we can do that yet though. You would think this is a nice windfall and I'm in a sweet position, but because I found a job again so soon after being laid off, I'm essentially "double-dipping" right now and I'm terrified of the tax implications for 2005.

My salary plus the severance pay might put me over some kind of watermark for taxes. I'm talking to my Financial Advisor Guy about it tomorrow. But whatever I do with it, I think I'd like to keep it fairly liquid until I figure out exactly what I owe next year. Or if I tie it up in something, I want it to mature by January 2006 or shortly thereafter.

My first thought was to stuff as much as I can into our RRSPs right away because that's where any extra money of mine would go first anyway. It's the best idea if I wanted to bring my net income down. But if I don't know how much I owe, I don't want to put it all somewhere where I can't get it back.

I'd thought of just sticking it in my 2.5% savings account for now. 2.5% is pretty sad, but at least it's a notch better than the Between-The-Mattress-And-The-Box-Spring method of saving.

[Update - Wednesday, May 11, 2005]

The Financial Advisor Guy laughed at me =) "You've got TAX PROBLEMS!" he exclaims. "You're REALLY movin' up in the world!"

HAHA. XD XD Ben's great. He has a few ideas on what I can do to for Legal Tax Evasion. =)



( 14 comments — Leave a comment )
May. 9th, 2005 07:20 pm (UTC)
Heya... ING Direct offers a 2.5% RSP savings account... just put it in something like that. Then you can easily take it out next year or when you need it, although they will withhold 10% off the top. Still, having 90% of it at your disposal is better than having 100% of it locked up. If you don't need, then you've reduced your income.

It's good to remember that even if the extra income puts you up a tax bracket, you only pay the increased tax on the portion of your income that exceeds the cutoff. I think a lot of people don't get that... they think that if they go past the magic number, they're suddenly paying a lot more on all their income.
May. 9th, 2005 07:37 pm (UTC)
Maybe I'm thinking it's scarier than it actually is then. =P
May. 9th, 2005 10:02 pm (UTC)
Possibly... and that's understandable: it's not like we get taught about this kind of thing like we should.

But yeah, when I found out about how tax brackets work, I couldn't understand what everyone was so freaked out about. I had always been under the impression that if a new bracket started if you made more than, say, $30,000, then you would have to pay the higher tax rate on ALL your income. As it turns out, you'd only pay it on the portion ABOVE $30,000. So I have no idea what the big freak-out deal is that most people have about earning enough to hit the next bracket up. The only problem I could see would be if proper deductions weren't done and so you ended up owing more money at the end of the year. But unless your income for the entire year somehow doubled or something, I can't see how that would be a big problem. Tax brackets differ only by a few percent... from highest to lowest is only 13%... and you would only potentially be paying that on the portion of your income that exceeds the cutoff for the highest tax bracket.

When I received my "big" payout when WebCT was bought, the morons paid it out as salary, but they were at least smart enough do a proper deduction from it. It sucked more than I can say to watch more than half of it go to the government in one fell swoop but the end result was that I didn't owe any extra taxes at the end of the year, even though my salary was nearly double what it would have been without the payout. In fact, I'm pretty sure I got a decent return that year.

I think ultimately taxes and finances are purely psychological warfare that you have to learn to kinda roll with.
May. 10th, 2005 06:30 am (UTC)
Possibly... and that's understandable: it's not like we get taught about this kind of thing like we should.

We did budgetting and personal income tax preparation in Consumer Ed. 12. Our teacher was insane and made us do the family return for "The Brady Bunch" (Canadian edition XD). But I'm not doing that every day and the laws change, so I have no idea what's what anymore. =P
May. 10th, 2005 12:13 am (UTC)
2.5% is very high..is it just a normal account, any rules?

our normal accounts are like.....0.125
May. 10th, 2005 06:28 am (UTC)
It's a high interest savings account. There's a minimum balance and no more than 1 withdrawal per calendar month... which is fine with me. That's our Snowballer account and it's better than a GIC that doesn't let me withdraw at all. =)
May. 10th, 2005 04:45 pm (UTC)
With ING Direct's accounts, there's no minimum balance and no restrictions on withdrawals, which are free. Only downside is that it takes a business day for deposits and withdrawals to complete. I'd seriously check them out. Their current savings rate is 2.4%.
May. 10th, 2005 07:22 pm (UTC)
I've had my eye on ING Direct products/services for a while and I may still move everything over.

But the whole point of my snowballer account was to make it easy to deposit but harder to withdraw. =D
May. 10th, 2005 12:51 am (UTC)
I don't know if you've already received that cash in hand or if it's at your former employer's bank account but here's some info on severances. There's a fair bit in the way of tax planning/deferral you can do with a severance.

You can direct your former employer to send that retiring allowance (severance) directly into your RRSP. The benefit to this is that the whole amount of the retiring allowance goes to work for you. That is to say that there is no withholding tax deducted at source.

The retiring allowance comes in two parts and is determined by your employer and is reflected on the T4A tax slip they will issue. There is an eligible amount and an ineligible amount. The eligible portion is the amount that may be transferred irrespective of contribution room into your RRSP where you are both the annuitant and contributor.

The ineligible portion may be directed into your RRSP or a spousal plan where you are the contributor without immediate withholding tax as well but you must ensure that you have contribution room to make the contribution.

If you opt to receive that retiring allowance as cash, withholding tax is deducted at source. There's no getting outta that. Now it can go into your RRSP but you gotta wait about a year for those taxes to come back to you in the way of the income tax refund.

I can send you a tax bulletin (it's written in plain english for the most part) on retiring allowances if you'd like.
May. 10th, 2005 06:25 am (UTC)
You can direct your former employer to send that retiring allowance (severance) directly into your RRSP.

I might have opted for that, but they didn't ask us. They just had the cheque issued (and yes, withholding tax was deducted at the source). I think the reasoning was because they didn't know when we would be employed again, so they wanted us to have the cash available for living expenses.

The Husband's RRSP is bigger than mine because he started working about 2 years before I did. And both of ours are maxed every year. Can we still get Spousal RRSPs? That doesn't sound quite right...

Thanks, Dave =)
May. 10th, 2005 10:23 pm (UTC)
It's not something that most employers will pro-actively suggest as they're not in the business of financial planning and it could be a sensitive question considering that they just put you out of a job.

You're under age 69, married and are residents of Canada so yes, you can open up a Spousal RRSP account. There's no problem with that. It'll have to be a new account and is useful if one of you is in a higher income tax bracket than the other so you may use it to split income. If you're in the same tax bracket, there's not much reason to open up a spousal RRSP account.

Generally how income splitting works is that the higher earning partner is the contributor. The lower earning partner is the annuitant. The higher earning partner (the contributor) gets the tax deductions but the assets in the spousal RRSP are owned by the lower earning partner (the annuitant).

The contributor may contribute as much as is indicated in their annual Notice of Assessment from CRA. Generally speaking, withdrawals from the Spousal RRSP are taxable in the hands of the lower earning partner (the annuitant).

There is an exception to that called the anti-avoidance rule too where income from the spousal RRSP could be attributed back to the higher earning contributing spouse. (this is bad) That happens if you make a contribution and withdraw that money within 2 calendar years of year in which the last contribution was made.

If one of you has a large pension, it's generally not recommended that the partner with the pension be the annuitant on the spousal RRSP cos they'll end up with a whack of taxable income in their retirement.
May. 16th, 2005 05:34 am (UTC)
There's this really great book called "Readers Digest: ___ Money Sense CDN Edition'. My sister is going to check out the title tomorrow for me, but its got a whole bunch of little tips and information that you might not otherwise know. Maybe check it out. I know my policy and plans here cover some financial advisors, but it sounds like things are already in motion for yah. Cheers. --Ray
May. 16th, 2005 05:49 am (UTC)
Thanks, I'll check that out... http://www.moneysense.ca looks like an interesting site too.
May. 16th, 2005 06:43 am (UTC)
Yeah awesome. I've seen that site before and it looks pretty good. I got some RRSP tips in there too. --Ray
( 14 comments — Leave a comment )


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