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As we mentioned in previous articles we know that our government only represents about 30% of our retirement income. The company retirement pension plan offers another 30 % and many of us do not have one. It is up to individuals to invest wisely short and long term in order to make up for the short fall if he or she would like to live comfortably after retirement without giving up some retirement plans. Retiring allowance options allow you to choose to take out your 401k plan or registered pension plan as soon as leaving or retiring from your company. Here are some options:
I. Take all of it in cash
Many young people prefer this option. They may be right because they are too young to think about retirement. For many other older people, taking all your retirement allowance all in cash will trigger tax withholding from 10-30% in Canada and 20% in the US.
II. Transfer all of it into personal pension plan
1) In Canada, by transferring your retiring allowance to an RRSP you shelter the allowance from the taxes you would otherwise pay. Another benefit is that your investment will grow on a tax-deferred basis, and you will only pay taxes upon withdrawal from your RRSP.
You may also make a special transfer of some or all of your retirement allowance to your RRSP with your regular RRSP contribution room untouched (you can transfer up to $2,000 per year of service with your employer from your start date to the end of 1995).
2) In the US, with a 401k rollover, the best way is to make a trustee-to-trustee transfer.
In this case your retirement allowance goes directly from one tax-deferred account to another and there are no potential tax consequences for you.
If the retirement allowance is sent directly to you, you will have a 60-day period in which to place the money in a new tax-deferred account. Otherwise, you will have to pay an early withdrawal penalty if you are younger than 59½ and taxes on the amount.
III. Other options
In case of being laid off and you are not sure when you can find a new job, specially when you are between 50-59 years you may consider to take a percentage of the retirement allowance in cash and shelter the rest into your personal plan.
Always remember by transferring your retiring allowance to an RRSP or IRA account, you shelter the allowance from the taxes. Another benefit is that your investment will grow on a tax-deferred basis, and you will only pay taxes upon withdrawal from your RRSP and IRA account.
I hope this information will help. If you need more information or insurance advices, please follow my article series of the above subject at my home page at:
http://medicaladvisorjournals.blogspot.com
http://lifeanddisabitityinsuranceunderwriter.blogspot.com/
