Behold! The tax man cometh

Having signed off on the release form regarding how much severance payout I will receive and agreeing not to sue my former employer, my next hurdle was to protect my severance from the tax man. I learned that were I to elect to receive my severance as a lump sum payment, I would lose about 45% of it to withholding taxes. That's no good!

My best option to protect it would be to flow it into an RRSP. That way I would receive the full amount. Yes, I will still pay taxes on it when I take it out of my RRSP but if I can avoid doing that until at 2009 then at least I will have greater control over the timing, and more options available for planning a tax strategy.

I considered holding back enough out of my RRSP to cover the next 2-3 months of expenses. However, any amount that I don't flow into my RRSP is subject to taxation. On the other hand, one of the credit card companies offered me a great promotional rate plus a lowered transaction fee on a balance transfer. It turns out that it's cheaper for me to pay the balance transfer fee plus the interest rate than it is for me to pay the tax man.

So my course of action then is to put my entire severance into an RRSP and take out a balance transfer to cover a few months of expenses. This way I have a safety net for the next three months and I don't have to feel so rushed to get a replacement source of income.