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Tax & Estate

Managing your severance

Losing a job can be one of the most emotionally traumatic experiences you will ever have. Whether it is due to corporate downsizing, a personality conflict with a superior or a "change of direction" for the employer, losing your day-to-day routine, and source of income, is psychologically devastating and financially scary.

But, in many cases it can also end up being a financial windfall. You may walk away with a good-sized severance package. And, if you find a new job quickly, that severance can help you pay off debt, sock some more savings away for retirement, or even help you buy that sports car you've always wanted.

Before you make any decisions about the money you receive when you lose your job, it is crucial that you seek professional advice - both legal and financial. Good advice can help you turn what you see as a major life challenge into an excellent opportunity. Do not sign any documentation without speaking to a lawyer and financial advisor. Be sure to talk to your advisors about these issues:

  • Make sure you are negotiating the best severance possible. Depending on your circumstances, you may be entitled to more than the legal minimum.
  • If you receive a severance package, is there a possibility of splitting it over two calendar years so that taxes can potentially be lower? Severance payments are considered income and can catapult you into a higher tax bracket.
  • Instead of taking a lump sum, is there a way to stay on the company's payroll and continue with benefits until the severance period runs out? But, make sure you don't lose any of your severance if you find a new job.
  • Find out if some of your severance qualifies to be rolled into an RRSP.
  • If you were a member of a company pension plan you will need to decide what to do with your entitlement. If you were in a defined benefit plan (which outlines what pension you would have received at retirement) you will need to decide on whether to stay in the pension or take a lump sum. A financial advisor will need to crunch the numbers for you to ensure the best decision for your circumstances.
  • Try to negotiate a career transition service if it isn't part of your package.
  • Budget and plan for expenses you know will continue while you are out of work.

And, even if you really don't want to believe it - it's true - when one door closes, another one opens.

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