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OSSTF District 11- Thames Valley
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District 11 Office |
Education Matters Online
Feature
Volume 3, Issue 1: November 10, 2004
Retiring This Year?By Marie C. Blanchet, Hon. B. Comm, CFP, RFP, CIM, FCSI |
Spring is upon us and our thoughts turn to gardening, summer vacations;
meanwhile teachers become focused on year-end, exams and report cards. For
some, this is also a time of reflection as they embark on a new phase in
life: retirement. And for the lucky few, the proverbial "golden handshake"
will come in the form of a retirement gratuity. Be sure to carefully
review the information sent to you by the Board of the actual amount to be
paid as well as the portion which they've indicated can be rolled over or
sheltered in an RRSP. For those of you who may have taken time off to be
home with young children, the calculation can be more challenging and some
part years are often missed.
There are two options available to a retiring teacher in how to handle
your gratuity: you can receive a direct cash payment or you can roll all
or part of the funds into a registered retirement savings plan (RRSP). I
should note at this point that you are only eligible to roll the funds
into your own Individual RRSP - the funds can not be rolled Into a spousal
plan. How much can be rolled over and sheltered in an RRSP depends solely
on your years of credited service for years up to and including 1995 - it
is NOT dependant on your actual RRSP contribution room. For example, a
career teacher retiring in 2002 with 30 years of credited service would be
eligible to shelter up to $46,000 (30 years less 7 post-1995 years times
$2,000) of their retirement gratuity.
If you choose to take the gratuity as a direct cash payment, be prepared to pay a significant amount of tax. Not only will the Board have to withhold taxes at source but you may ultimately have to pay an additional amount the following April when you file your tax return and include the amount as income. In your final year of teaching, you may be putting yourself into the highest tax bracket of your career by taking your retirement gratuity as a cash payment. For example, an average career teacher might find themselves with the following tax scenario in their final year of teaching:
| Salary (1/2 of the year, at $65,000): | $32,500 |
| Pension Income (1/2 of $46,000): | $23,000 |
| Full retirement gratuity (1/2 of salary): | $32,500 |
| Total income for 2002: | $88,000 |
On the other hand, if the retirement gratuity is rolled into an RRSP, you receive a contribution slip for the investment and your taxable income is reduced by the contribution amount. Funds can then be withdrawn in subsequent years when your income has dropped down to $46,000 per year (taxable pension income); smaller withdrawals would not push your income into a higher tax bracket. For those of you who may need an additional source of income until age 60 when you can elect to start a reduced CPP payment, this latter alternative is the most tax efficient option to using your gratuity.
Please contact us for individual financial planning assistance in deciding the best option for yourself and your family.
Previous Columns by Marie Blanchet:
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Marie C. Blanchet, Hon. B. Comm, CFP, RFP, CIM, FCSI is a salaried financial planner with the OTG Financial Inc., and manager of Client Advisory Services. OTG Financial is a mutual fund corporation dedicated to helping educational employees and their family members achieve financial independence through sound financial advice. The above comments are presented for information purposes only and should not be relied upon as a substitute for professional advice in specific situations.
