5 FINANCIAL BOXES FOR WEALTH ACCUMULATORS TO CHECK BEFORE THE YEAR ENDS

5 FINANCIAL BOXES FOR WEALTH ACCUMULATORS TO CHECK BEFORE THE YEAR ENDS

As 2022 comes to a close, it is an excellent time to review your finances and plan for the year ahead. Here are 5 financial boxes you should check off before the year ends.

 

1 – Take advantage of your company benefits.

Most employer sponsored health plans turn over at the calendar year end. If you have benefits remaining, be sure to schedule some time to get that massage, see your physiotherapist or arrange the dental cleaning you’ve been putting off. Now is a great time to review your coverage overall, and start planning for next year especially if you’re not quite sure what your coverage provides. Bonus: Pull out your life, disability, and any other insurance coverage you hold. Review your beneficiaries, the amounts of the coverage, and when/how it would pay out. Contact your financial planner to help you determine if you have what you need.

 

2 – Review your registered contributions and your income for the year.

You have until the end of February of the following calendar year to contribute to your RRSP or a spousal RRSP to reduce your taxable income for the current calendar year. Talk to your financial planner who can help you optimize this.

 

3 – Review your fixed expenses, recurring expenses and your borrowing costs.

Sitting down at least once/year to look at your financial commitments can help put your finances into perspective. Borrowing costs have increased dramatically for some in 2022, and now is a great time to make sure you’re compensating for these increases in your variable spend or elsewhere if necessary. Bonus: set a calendar reminder to review your cash flow quarterly.

 

4 – Consider your goals for next year plus the next few.

Determine how much those goals might cost. Sit down with your financial planner to help you find the best source of money to tap into to achieve these goals.

 

5 – Make a plan for charitable contributions.

Review who you’ve donated to and if you want to make further donations for the calendar year. Donations should be complete by the end of December to use for the current calendar year income or saved for future years. If you have securities that have appreciated, consider a donation of securities in-kind. Bonus: Review the profiles of the organizations you donate to at charityintelligence.ca.

 

 

If you need assistance with any of these financial planning items before year-end, please reach out to us.

QUESTIONS FROM CLIENTS: WHAT ARE CAPITAL GAINS AND LOSSES?

QUESTIONS FROM CLIENTS: WHAT ARE CAPITAL GAINS AND LOSSES?

As we approach the end of the year, some clients may have questions about capital gains and losses that have occurred in their portfolio.

Watch this video to understand what capital gains and losses are and how they may impact your taxes.

Today we are discussing capital gains and losses.

Capital gains and losses are in reference to a taxable account and today we are discussing them as they relate to stocks, although capital property is another variety of property that they can apply to.

Capital gains and losses occur when you dispose of a stock at higher or lower than your adjusted cost base (ACB).

Your adjusted cost base (ACB) is the total price that you have paid for your stock. In addition, you can add some of the cost that you had to acquire the stock, such as commissions, to the adjusted cost base.

A capital gain occurs when you sell your stock for more than your adjusted cost base. A capital loss occurs when you sell your stock for less than the adjusted cost base.

 

Capital Gain

Let’s say you paid $100 for your stock and you sell it for $150. You would have a capital gain of $50 – the difference between your sale price, and in this example, your adjusted cost base.

Half of the $50 is taxable, so $25 would be taxable for you in the year that you dispose of the security.

 

Capital Loss

Conversely a capital loss would happen if you sold your security for $75.

You’ve incurred a loss of $25 and half of that – $12.50, can be used to reduce any capital gains that you’ve experienced in the year that you’ve sold your security, three years prior, or essentially indefinitely going forward.

 

Capital gains and losses are in reference to a taxable account (Non-Registered Accounts). They do not apply to Registered Retirement Savings Plans (RRSPs) or Tax-Free Savings Accounts (TFSAs).

Capital gains and losses can be used for tax planning, so please reach out to our team if you have a tax planning situation that you need assistance with. Learn more about the tax planning services we provide here. If you have any further questions about capital gains and losses, contact us here.

QUESTIONS FROM CLIENTS: WHAT ARE CAPITAL GAINS AND LOSSES?

QUESTIONS FROM CLIENTS: HOW DOES AN RESP WORK?

In this edition of Questions From Clients, Kelley Doerksen, CFP®, CIM® explains how RESPs (Registered Education Savings Plans) work. Learn about some of the key concepts surrounding RESPs such as grants, contributions, and withdrawals.

RESPs are a very effective way to save money for your child’s post-secondary education as you receive grants from the Government when you make contributions to the RESP.

An RESP will provide you with a 20% grant from the Government when you make contributions. You can receive up to $500 a year in grants. However, if you’ve missed some years of making contributions, you can go back and you can receive up to $1000 a year of the current year’s grants and previous year’s missed grants. You can continue to receive grants for your child until your child is 17, so long as you’ve started making contributions prior to their age 16.

When you go to withdraw from an RESP, although there are some rules and regulations, it’s actually fairly simple. When your student starts University or Post-Secondary, so long as they’re in a qualified post-secondary institution, you can begin withdrawals.

The student will need to provide proof of enrolment, and from there, RESP withdrawals can be made. There is no limit to how many dollars of contributions that can be taken out, however in the first year of school, there is a limit to the amount of grants and growth that can be withdrawn during the first 13 weeks of school.

The nice thing about an RESP is that your contributions have already been taxed when you’ve made the contribution initially to the RESP, and you won’t pay any tax on the contributions when they are withdrawn.

The grants and the growth are going to be taxed in the hands of your child. Many students don’t pay tax or pay very minimal tax while they’re students in University; therefore an RESP is a very effective way to income split from your assets to your child and potentially see no tax on the grants and the growth when that withdrawal is made.

To learn more about the terminology and specific rules pertaining to RESP accounts, please watch this video. If you have questions about how to use an RESP, please contact us and we’d be happy to help.

QUESTIONS FROM CLIENTS: WHAT ARE CAPITAL GAINS AND LOSSES?

QUESTIONS FROM CLIENTS: HOW DOES MY PENSION WORK?

If you have a Defined Benefit Pension Plan (DB Pension), you likely have questions about how it works and how it interacts with your overall financial plan. In our latest Question From Clients video, Kelley Doerksen, CFP® explains some of the key information you need to know about these plans.

It’s common to have a pension from your employer that you contribute to and know very little about! Especially if you contribute to a “Defined Benefit” pension (often referred to simply as a DB pension). While each pension is unique, let’s look at 6 similarities:

1. Predictable Income for a Lifetime

Once retired and your pension begins, a DB pension will pay you a set amount of income for your lifetime. Some pensions also offer indexing, which will increase your income by some percentage of inflation.

2. Income for spouse or partner on death

Many DB pensions allow you to choose if your pension will continue to be paid to a spouse or partner in full upon the death of one of the pensioners, or if it will continue at a reduced rate. The choice you make at retirement will influence the amount of pension income you receive for life.

3. Guarantees

Most DB plans allow you to choose a guarantee period. This is not related to how much time you will receive your pension income for (remember, these plans pay for life), but relates to how long a death benefit would be made available to your beneficiaries upon death of the pensioner(s).

4. Commuted Value (lump sum transfer) is an option

When you leave the plan, either due to retirement or leaving the employer, most plans allow you to take a commuted value (lump sum). This lump sum can be transferred in part without immediate tax penalty to a LIRA (Locked-in Retirement Account), however often there is also a taxable portion to consider. You should always make sure that any immediate tax hit does not erode the assets available to you in such a way that you cannot equal your predicted pension income. This is a complex decision, and assistance from your financial planner will be valuable.

5. You are making contributions

Nearly all Defined Benefit pensions require a contribution from the employee as well as the employer. In fact, most DB pensions have relatively large contribution requirements of their employees in the range of 10 – 11% of your gross salary. You can be assured that the employer contributes at least as much as you do.

6. Limited Reporting

Many DB pension holders receive a statement only once annually. This is different than what you may be used to with your investment reporting. Since your value from a DB pension comes from the income you will be provided with at retirement, there is little need to receive more frequent statements as the ‘value’ is related to your years of service (and other factors), not specifically investment returns.

 

If you have questions about how your Defined Benefit Pension interacts with your overall financial plan, please reach out to us and one of our financial planners would be happy to walk you through your specific details.

WHAT IS THE DIFFERENCE BETWEEN A TFSA & RRSP?

WHAT IS THE DIFFERENCE BETWEEN A TFSA & RRSP?

We often get asked what the differences are between a TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan) account.

We’ve put together this summary to review the primary differences and rules pertaining to each account. If you have any questions, please reach out to us here.

TFSA vs. RRSP Accounts

 

TFSA (Tax-Free Savings Account):

  • There is no deduction available, but no tax on withdrawals
  • TFSA contribution limit is cumulative, less contributions; withdrawals provide room back (including growth) in the new calendar year
  • Can be used for short-term savings, mid-long term, and estate planning
  • Can name spouse as successor owner, and beneficiaries for estate planning
  • Withdrawals do not generate a tax slips; drawing money out does not impact income-tested benefits
  • You must be 18 years old in order to open a TFSA, and can contribute and withdraw based on the plan rules for your lifetime
  • Can invest using many of the same types of investments as within an RRSP or Non-Registered account
  • You might be required to pay non-resident withholding tax on US situated investments
  • There is no need at any time to convert your TFSA to an income plan, it can be held as-is until your death if desired

 

RRSP (Registered Retirement Savings Plan):

  • Deduction provided against T4 earnings; suitable if you are earning employment income, not dividends
  • Contribution room is limited to 18% of previous years’ earned income, less adjustments for pension contributions, up to a maximum specified by CRA each year. Accumulates if you don’t use it
  • Access available through the Home Buyers Plan or Lifelong Learning Plan without immediate tax consequences
  • Naming beneficiaries on an RRSP other than your spouse can have unintended tax consequences and it’s important to speak with your Financial Planner, Accountant, and Lawyer to determine your best course of action
  • Withdrawals are taxed as ordinary income
  • On death, an RRSP may be eligible for a “spousal rollover”, shifting taxation of the RRSP to the death of the recipient spouse
  • When withdrawing from RRSP assets once retired, most individuals are in a lower tax-bracket than during their working years which could result in favourable tax outcomes
  • Depending on your situation, a spousal RRSP could be used to accomplish long-term income splitting
  • You must convert your RRSP to a RRIF (Registered Retirement Income Fund) by age 71, and you must begin to withdraw a CRA mandated minimum at age 72

 

Both TFSA & RRSP Accounts:

  • You can’t deduct interest costs related to borrowing to invest in either a TFSA or RRSP
  • You can’t deduct investment management fees in either a TFSA or RRSP
  • You can’t claim a capital loss in either a TFSA or RRSP

 

Please reach out to us for further information regarding these accounts, or if you have a specific question pertaining to your individual situation.