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  1. #1
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    Default RRSP's & money back at tax time?

    Just wondering how this works. Is there a certain percentage you would get back at tax time from this. My dh will be getting a buyout in a few years (trying to plan early )we are able to put all of it into RRSP's if we went to. We just want to be able to get as much out of his buyout that we can. We are hoping to put 100,000 into RRSP's, can be a mix of mine and his. We were just wondering when tax time comes around, what that could mean in regards to money we get back from contibuting, how is it figured out?
    TIA

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    Hi there,

    Sorry to hear he's looking at losing employment ... but if I'm understanding this correctly it's a severance package he's getting so the bad news is that it's considered income so it's added to his tax return and then everything that's contributed to the RRSP is deducted from his income so it's really an in and an out and he ends up in the same place that particular year without any 'extra' deductions which would generate a bigger refund .

    If I've read your post wrong and it's not termination pay of some sort then the amounts contributed to the RRSP reduce his other income directly and he'll only pay tax on the net amount of income left over. He'd only need to claim enough of the contributions to eliminate his tax owing for the year with anything left over carried forward until the next year.

    It's hard to say without knowing what marginal tax rate he's typically in - but whatever he pays in tax the year he gets the package is potentially what he'd get back in a refund.

    Please let me know if I've read this incorrectly - or if you have any other questions.

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    thank you I know its called a buy out, but i am assuming severance package is the same thing. Thanks for your knowledge, just trying to get all the info to be able to decide the best way to use that money to get the most out of it. You explained it very well..we just had no idea how rrsp's work because we dont have any at this point.

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    I think you're pretty smart to be planning now and still think RRSP's are a great option. He'll avoid paying tax the year he get's the package and then ... if needed ... you can draw on it later in smaller amounts at likely lower tax rates.

    Depending on the time of year he gets the package (and how much income he's already earned that year) you may also want to think about putting some of this money in a TFSA (tax free savings account). This kind of account makes you pay the tax now on the money you put in ... but then this amount plus everything it earns in income from that point forward is yours tax free whenever you want to take it out. It's a great account for longer term savings - and the exact opposite of an RRSP (which lets you put the money in without paying tax on it but then makes you pay the tax when you take it out).

    As it gets closer - don't hesitate to ask any other questions.

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