Angela Iermieri | Financial planner | Desjardins group
What are the best tax strategies to help you achieve your goals? How can you optimize your investment portfolio to lower your tax bill?
The best way to find answers to these questions is to get a financial plan. A financial advisor can help you identify your priorities and develop strategies based on your short-, medium- and long-term goals, so you can make the most of your money. If you already have a financial plan, that's great--just don't forget to update it regularly so it keeps pace with the changes in your life.
Until you meet with your fiancial advisor, we've put together our answers to 5 common questions, as we approach tax season.
1. Should I pay down my mortgage or contribute to my RRSP?
The question of whether to pay down debt or invest in your financial future is a big one. You can start by comparing your mortgage interest rate with the rate of return on your investments and your expected tax results. Ideally, ask your financial advisor to run through different scenarios, so you can find the strategy that works best for you.
2. How will a pay increase affect my tax bill?
It's always nice to get a salary increase or additional income, but this can have bigger impacts than you might think from just looking at the personal income tax tables. A number of government benefits, grants and tax credits are awarded based on your income, which means they can be lost or reduced if your income goes up. Depending on your personal situation and your goals, the right investment vehicle or strategy can help you keep more of that money.
3. Is an RESP as generous as people say?
Absolutely! It's a fabulous way to save for your child's education, and in Quebec*, government grants add at least 30% to the amount you invest. To take full advantage of these grants, it's good to open an RESP when your child is young. But don't worry if you haven't started one yet, you have until your child is 15 to open an account, and until your child is 17 to take advantage of the grants. Eligibility for grants can be carried over from previous years, so you can still benefit if you invest a lump sum after missing out on early contributions.
4. What's so great about an RRSP?
When it comes to your RRSP, two crucial planning factors are time and the rate of return. To get the best return over the long term, start saving as soon as you can and choose a diversified portfolio. It's the perfect vehicle to build your retirement savings. Below are some of the main reasons to opt for an RRSP:
- Greater access to tax credits and government programs
An RRSP contribution counts as a reduction on your income. This means you not only pay less income tax, but you can also enjoy greater access to several tax credits and government benefits, which normally drop as your income goes up. Here are some examples:
o Canada child benefit
o Increased RESP grants
o Child assistance payment**
o Reduced daycare contributions for Quebec residents
- Finance a return to school
Your RRSP can help fund your studies for a career change or professional development. You can withdraw up to $20,000 tax free to finance full-time education or training.
- Maximize your retirement savings
To maximize your retirement savings, you can catch up on unused contribution room. You may be able to take out an RRSP loan; ask your advisor.
Even if you have an employer pension plan, you might still have unused RRSP contribution room. Try the Desjardins Retirement Calculator --it's an easy way to find out if you're on track to reach your retirement goals.
- Pay less tax as a couple
Did you know that the spousal RRSP is a great income-splitting solution both before and after retirement?
5. Should I open a TFSA?
The tax-free savings account is a powerful and flexible savings vehicle. But the greatest advantage of the TFSA is that it offers a tax-sheltered, long-term investment. If you use your TFSA to save for retirement, you'll enjoy tax-free withdrawals that won't affect your eligibility for social programs, like the Old Age Security pension
Remember that a financial advisor is your best ally when it comes to developing and updating your financial plan. Your advisor will work with you to make sure you always have the best financial strtegy as your circumstances change.
*20% in Ontario
**Provincial child benefit in Ontario