Author: Mike Erickson – Financial Advisor
Another year has come and gone, and we find ourselves back in the swing of things after a busy holiday break. We are committing to new goals and pressing reset for the new year. It is also a great time to get finances in order and ensure that we are on track. As we enter another RRSP season, we will be faced with the same sentiments from years past – to contribute or not to contribute… that is the question. Here are 4 things to consider when deciding on whether to contribute or top-up your RRSPs before the March 2nd , 2020 deadline.
1 – RRSP’s still matter: If you are a high-income earner or in one of the top marginal tax rates then you should consider contributing to RRSP’s purely for tax saving purposes. Because of Canada’s progressive tax system, not only are you reducing your taxable income, but you are earmarking money for retirement that will be invested and will continue to grow tax deferred. The RRSP contribution limit for your 2019 tax return (contributions up to March 2, 2020 are eligible) is 18% of your 2018 income, up to a maximum of $27,230. Carry-forward amounts from prior years can also increase your 2019 limit.
2 – Did your income change this year, or will it change in the coming year? If your income increased this year or you received an unexpected bonus, then it may make sense to make a contribution depending on your tax bracket. Higher income means more RRSP contribution room, which is noted on your previous years Notice of Assessment. Keep in mind that if you don’t use your RRSP contribution room you don’t lose it. It carries forward each year.
3 – Mortgage or RRSP? We often get asked what makes more sense when deciding whether to pay down your mortgage or contribute to an RRSP. Depending on your income, it can often make a lot of sense to do a hybrid strategy. This is where you make an RRSP contribution to reduce your taxable income, and then put a lump sum on your mortgage with the tax refund received from the contribution. Often the lump sum payment on a mortgage will go directly towards the principal amount still owed.
4 – RRSP’s can help serve 2 other purposes to assist you in either purchasing a home or going back to school. RRSP’s can give you and your spouse the ability to withdraw $35,000 each from your RRSP’s ($70,000 total) toward the down payment of a home, through the First Time Homebuyer Plan. RRSP’s also allow you to pull a max of $20,000 ($10,000 per calendar year) through the Life Learning Plan program to help further your education. Although you must pay back both programs within a certain time frame, they will allow you access to capital without penalty.
At the end of the day, everyone has a different situation when it comes to contributing to RRSP’s with many variables to account for. Our job is to understand your unique position and walk through the pro’s and cons of making that decision. RRSP’s are another investment vehicle we use to help you get you to where you want to go. Feel free to reach out and have the conversation on whether or not it makes sense for you.
If you have any further questions, or would like more information, don’t hesitate to reach out.
Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting edge technology to maximize planning efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at www.connectwealth.ca
De-Bunking Your Budgeting Barriers. If you don’t have a million dollars in your account right now, it is likely that you hate budgeting. It’s even more likely that you’re annoyed, even enraged, the moment the topic arises. It’s an interesting phenomenon, we all want to be financially successful, yet this first step is often the […]
The income sprinkling rules outlined in July 2017 held strong and the rules pertaining to passive investment income weren’t as harsh as predicted. Specifically, Budget 2018 has implemented two simple measures as it pertains to passive investment income:
Budget 2018 proposed to provide for an alternative reduction to the small business tax rate where a Canadian Controlled Private Corporation (CCPC) and its associated corporations have investment income in the year exceeding $50,000. The amount of the reduction is $5 for every $1 of investment income exceeding $50,000. In effect, the small business tax rate reduction disappears if passive income in a related business exceeds $150,000 in a fiscal year.
Currently, private corporations are entitled to claim a tax refund equal to $38.33 for every $100 of taxable dividend Where the corporation has a combination of regular business income (taxed at the regular business rate which does not include a refundable tax element) and investment income (taxed at the corporate investment rate which includes a refundable tax component), planning was commonly implemented to have the business income distributed by way of eligible dividend (taxed at a lower rate) while still being able to claim the tax refund.Budget 2018 proposes to modify the refundable tax regime to eliminate this planning and ensure that, in general, the private corporation is entitled to a dividend refund only when non-eligible dividends are paid.
There are ways to reduce the impact the business tax changes outlined within Budget 2018 through other financial strategies. These strategies may include Individual Pension Plans, Cash Value Insurance, as well as the strategic use of prescribed loans. We highly recommend contacting your financial advisor to determine which of these strategies will best suit your financial situation.
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If you have any questions on this taxes, or the different kind of impact it could have on you, please, do not hesitate to contact us!
Connect Wealth is an independent financial planning firm that offers holistic advice to clients based on their current goals and future aspirations. We use well-established workflows and cutting edge technology to maximize financial efficiencies while simplifying the process for clients. Learn how you can maximize your financial opportunities at connectwealthp.wpengine.com
There are numerous articles that focus on the many highlights (some are listed below) that will work to assist the many varied interests of middle and lower income households in BC. Less reported however is that in order to provide the tax relief outlined within the budget, the BC Government will undertake a record-breaking capital spend and increase overall taxes to the tune of $4.4 billion over three years.
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