Receiving a payout from Stelco has been a long time coming for many workers and families. After everything people have gone through, the money comes as welcome news. The next question is how to keep as much of that payout as possible. Watch the video below where I detail a strategy using your RRSP.
Using RRSP Contributions to Lower the Tax Bill
One of the simplest ways to reduce tax on a lump sum payout is to use available RRSP room. RRSP contributions reduce your taxable income for the year. This means that when you contribute part of your payout into an RRSP, the contribution creates a deduction that lowers the amount of income the government taxes.
If you have RRSP room available, you can take a portion of your Stelco payout and make an RRSP contribution right away. A common approach is to contribute about half of the payout. This amount is flexible and depends on your comfort level and your available room, but the idea is the same whether you use half or a smaller portion.
Once that RRSP contribution is made, you can withdraw those same funds early the following year. That withdrawal will be taxed in the new year. The result is that your payout becomes split between two tax years. This spreads out the taxable income and often keeps you within a lower tax bracket in both years. When taxable income is spread out, families usually end up paying less overall.
Spousal RRSPs for Added Flexibility
Some people who receive the payout are over age 71 and can no longer contribute to an RRSP. Others may simply not have room left. Spousal RRSPs can help in both situations.
A spousal RRSP allows you to contribute money into an RRSP that is in your spouse’s name. The spouse must have RRSP room available. When you make a contribution to a spousal RRSP, the deduction goes on your tax return. Later on, the withdrawal is taxed in the spouse’s name. This is helpful if the spouse has lower income or will be in a lower tax bracket during the year the funds are taken out.
The same timing strategy applies here. Contribute part of the payout into the spousal RRSP now, then withdraw those funds in January, February, or March of the next calendar year. Again, this spreads the income over two years and often results in tax savings.
Book A Pension Consultation Call - Don't Delay!
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Book A Call With Bruce
Every family’s situation is different. Age, income level, RRSP contribution room, and future withdrawals all matter. If you want to explore these ideas in more detail, speaking directly with a financial planner can help clarify the best option for your situation.
Bruce Youngblood at Pension Solutions Canada understands the unique needs of Hamiltonians receiving payouts like the Stelco distribution. A free fifteen minute call is available for anyone who wants guidance on RRSP strategies, pensions, commuted value, or retirement planning options. The services provided by Pension Solutions Canada are at NO COST TO YOU.
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