Mistake #5 Putting Your Severance Package or Pension in the Wrong Tax Year
When receiving a taxable severance package or pension payout in January or February and contributing it to an RRSP, avoid utilizing the deduction in the prior year, to avoid having to pay tax in the current year. For example:
Joe retired effective December 31, 2018. He received $40,000 on January 31, 2019 which will be reported as taxable income on a T4A for 2019.
As soon a he received the money he deposited it to an RRSP for which he received a contribution statement that he can elect to use when filing 2018 tax return or save until 2019 tax return.
He uses it with 2018 and receives a substantial refund which he uses for a trip for his family.
When he files his 2019 taxes, he will have to claim the $40,000 as income, which with the offsetting RRSP contribution already claimed in 2018 will result in taxes owing. This could be a large amount depending on Joe’s other taxable income.
Had he waited with the RRSP it would have been a direct offset of taxable income.
Speak to us regarding how you can avoid this issue, but also when making an RRSP contribution, connect with expert financial advisors such as the Forward Finances team in Belleville.