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
How To Best Use This Investment Account
What is a Tax-Free Savings Account (TFSA) and how can you benefit from it?
Since it was launched back in 2009, financial advisors and institutions have added a new investment acronym, TFSA. While there has been lots of discussion and advertising about TFSAs, it still seems that there is confusion about how to best use this tool. Read more
What Are Your Options?
What is the best investment plan to use to save for retirement? It used to be fairly simple; the answer was maximizing your RRSP. Do you know what is the best strategy for your situation? Do you know what your options are?
Here is a basic overview:
1. Save – The first rule of thumb to be concerned about is that you are saving money for your future. Too many Canadians are spending all of what they earn and not putting away any money for their future. A good place to start is to aim at putting away 10% of what you make.
2. Tax Efficient – Ever since the launch of the TFSA, there has been a debate by financial professionals over which investment plan is more tax efficient to use, the RRSP or TFSA? My opinion is that it depends on your situation both now and in the future and should be looked at on a case-by-case basis to see what fits best. I would be cautious if a financial advisor is always only promoting one plan type over the other, both have their benefits. (For more info on TFSAs, see my article from Sept 2013 – http://jaybrecknell.ca/demystifying-tfsa/)
3. Business Owner – If you are a business owner the question can get even more complex as you have more options. Should you use your RRSP, TFSA or instead save your retirement funds in a holding company? Since corporate tax rates are at an all time low in Canada more business owners are saving corporately versus in a RRSP or TFSA. There can be many benefits to saving corporately as it can provide flexibility to the business owner. As this can be complex it needs to be put together by a professional that understands your corporate structure and the tax and legal rules that are involved.
As with any financial strategy we would recommend ensuring that you have your personal situation reviewed by a professional to make sure that is done in the best way possible. If you have any questions or would like your plan reviewed feel free to contact us.
Prepare Your Business For Sale
Only 9% of business owners have a documented transition plan in place and yet 70% of small business owners plan to transition in the next 10 years*! As a financial planner I continue to meet business owners who are planning to sell or transition their company but they do not have a plan. Typically they are either unsure of the process, so they procrastinate or the business is their baby and they do not want to let it go. It is understandable that a major decision like this is hard to make, especially without someone to assist you.
When a business owner is considering selling here are some things to consider:
1. Don’t Leave the Party Last – You see this with professional athletes when they face the question of when to retire? In my opinion you are either growing your business or it is shrinking it, there is no standing still. A lot of business owners later in their career can get into maintenance mode, which usually means the business is starting to decrease in revenues. At first the revenues may hold but after a couple of years you typically see them start to decline. If you want to maximize your selling price and be attractive to potential buyers be careful to wait too long.
2. It Takes Time – Selling a business can take you longer than you think. You need to find the right candidate to take over your business. You are looking for an individual that is an entrepreneur; remember there are more employees in the world than business owners. Also, in most transitions the current owner is asked to stay with the company to assist with the passing of the reigns. You should plan for 1-2 years to sell. This means you should be creating a plan 5-7 years prior to your planned exit.
3. Change – Every industry is faced with changes due to technology, regulatory, competition, etc. If you owned a video or record store in the 80 or 90’s, when was the best time to get out? What if the technology that Google is working on to make it so that cars drive themselves eliminate car accidents in the future. Could that affect you if you own an auto body business? What changes face your business?
4. Financials – Often times the financial statements for a business are ignored until it is too late. Yet they will play a very important role in the sale of the business. You want to make sure that your financials present the best view of your company so that a potential buyer is enticed to make an offer.
There are many things to consider when selling a business. The first is to get a professional that can assist you with putting a plan together to ensure that you maximize the value, save tax, and control when and how you sell your business. As with any financial strategy we would recommend ensuring that you have your personal situation reviewed by a professional to make sure that is done in the best way possible. If you have any questions or would like your plan reviewed feel free to contact us.
*Source – http://www.advocis.ca/Update2014/index.html
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