EARLY RETIREMENT

A little planning can pay big dividends

“EARLY RETIREMENT” ¢

an strike at almost any age

these days. That's when a iiitle iax knowledge can pay big
dividends —- and at a time when such savings will be most

welcome.

Once again we kick off the
North Shore News’ annual sum-
mertitne series of tax tips, courtesy
of Elio Lucngo and Tony
Lobmeier, of KPMG Peat Mar-
wick Thorne, chartered accoun-
tants.

Over the next few weeks, we'll
cover topics like moving from
employment to self-employment,
investing and retiring. We'll show
how some planning, both basic
and more sophisticated, can easily
save you hundreds if not thou-
sands of tax dollars.

Note: use this information to
prompt further research on how
the relevant strategies might apply
to your situation and what specific
steps you should take.

In many cases, you should also

- seek the advice of a tax expert —
especially when large amounts of
money could be involved.

“As many companies cut ex-
penses, they often offer employees
early retirement or severance
packages,’’ Luongo said. ‘‘While
you might be pleased to get such
an offer, you need to deal with
the money carefully so you don’t

-end up with an unexpected — and
* sometimes devastating — income
tax bill.

“S} did the calculations for a
50-year-old engineer — 1711 call
him Mr. Smith — being offered a
voluntary retirement program

_ after 25 years with a large public
‘utility company. He’d been earn- .
ing $55,000 a year.

‘The company offered him
$60,000 in severance pay and he

-had to take a lump sum of
: $180,000 out of his peasion plan.
“But if he took the money he

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would end up with a tax bill of
about $120,000 this year —- even
though his employment income to
Aug. 31, his last day of work,
would be only $37,500.

The key to avoiding such a huge
tax blow is to make maximum use
of the rules allowing certain tax-
free rollovers to a registered
retirement savings plan.

“You may transfer a lump sum
pension amount to cither another
registered pension plan or to your
own RRSP — possibly a Iccked-in
RRSP,”’ Luongo said. ‘‘There is
no limit to the amount of such a
rollover, and this doesn’t affect
your norma! RRSP contribution
limit.

“*You transfer the money di-
rectly to your RRSP; you don’t
even have to report the transaction
on your tax return. In Smith’s
case, this move would save about
$86,000 in tax.’”

INCLUDES:

The engineer’s severance
package offered a choice of a
jump sum retiring allowance paid
now or divided into one payment
now and the other next year.

“You are allowed to transfer
$2,000 per year of service with
your employer plus another $1,500
per year before 1989 in which
your pension was not vested,”’
Luongo said. ‘‘And again, this
doesn’t affect your normal con-
tributions.”

“Vesting’’? means you are en-
titled to your employer’s con-
tributions. And the calculation is
based on named years, so if you
started work Dec. 31, 1990, and
left Jan. 1, 1993, that’s four
years.

Smith could transfer a max-
imum $57,500 of the $60,000 sev-
erance pay to his RRSP.

“You may put the money in
any time up to 60 days after the
end of the year in which you get
the payment,’’ Luongo said. “But
to avoid having tax withheld, ask
your employer to transfer the
money directly to your RRSP.”’

However, warned Luongo, if
Smith did put $57,500 into his
RRSP, whiie he’d cut his regular
tax bill for this year to about
$13,000, he'd face an alternative
minimum tax bill of $3,000.

“You can get stuck with the
AMT if you claim certain ‘pref-

erence’ deductions, like RRSP
contributions,’”? Luongo said. ‘‘In
many cases, you can recover the
tax over the next seven years.

“But Smith could avoid the
AMT by simply dividing his retir-
ing allowance into two payments
— and two tax years. He should
do the AMT calculation to find
how much he can take now
without paying the AMT, then
take the rest of the money in
January.”’

That approach should save

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Smith more tax because the $2,500
of his retiring allowance he can’t
transfer to his RRSP will be
received in the 1994 tax year,
whcn he'll probably be ir, a lower
tax bracket than in 1993

Luongo noted if you had to sue
your employer to get your sever-
ance pay, you would be able to
deduct the legal fees against the
taxable part of the payment.

“In that case, take enough of
the severance as cash to offset the
legal fees, and transfer only the
balance to your RRSP,’’ Luongo
said.

Mike Grenby is a North Shore-
based columnist and independent
financial adviser who works with
individuals; he will answer your
questions as space allows — write
to him c/o The North Shore
News, 1139 Lonsdale Ave., North
Vancouver V7M 2H4.

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