Evaluating Cash Payments
Retirement packages often include a cash payment (usually based upon the length of your service with the company) that can be taken as a lump sum or as a continuation of salary (to equate to the value of the lump sum payment).
Continuing to receive a salary may not be the most beneficial method of payment. In order to evaluate whether to take the lump sum or the continuation of salary, consider the following criteria.
Tax Deferral
The timing of your payments, whether as a lump sum or as a continuation of salary, can provide some tax deferral.
For example, if you left your position on November 1, 2000, and your employer agreed to defer your payment until January 1, 2001, the payment you receive would be included in your 2001 tax return that would be filed in April 2002 - providing approximately 16 months of tax deferral. If the payment was received in November 2000, the tax liability would be due in April 2001.
Depending upon the size of the cash payment, the continuation of salary would also provide a deferral of tax since the payments you receive would be spread over several years (2001 and 2002 in the previous example).
Note that while tax deferral is an important issue, it should not be your only concern. Flexibility of the payment option should also be considered.
Flexibility
The concept of flexibility is dependent upon your particular circumstances.
For some people, salary continuation will be more flexible simply because it will provide cash flow to fund ongoing expenses.
An advantage of receiving a lump sum payment is that if you have debt, you may be able to repay it.
You can also use a lump sum payment in the same manner as a continuation of salary to provide cash flow to support your ongoing expenses.
You may also want to receive a lump sum payment to ensure that you receive all the money you are entitled to. For example, if the company you are leaving is in any financial difficulty, it may be advisable to receive all your payment now.
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