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MONEY TALK: It’s not what you make, it’s what you keep
When you’ve invested time, money and effort to build your investments, the last thing you want is to pay more tax than you have to. If you’re looking for tax-smart strategies to save and grow your wealth – read on.
The Registered Retirement Savings Plan (RRSP)
You may already be familiar with the tax savings and tax-deferred growth that an RRSP offers. Yet there are several strategies that make the most of your RRSP, including:
Contribute to a spousal RRSP. If your spouse earns less than you do and as a result expects in the future to pay tax at a lower marginal tax rate, you can “split” your income with them so your two smaller retirement incomes are taxed at a lower combined rate, instead of your larger retirement income being taxed at a higher rate. You can do this by contributing to a spousal RRSP on behalf of your lower-income spouse, who will then receive income from the spousal RRSP during retirement. If you chose not to do a spousal RRSP, you may still be able to split this income when you turn age 65 and you are receiving income from a RRIF
Shelter interest-bearing investments. In a regular non-registered account, interest income, say from GICs and bonds, is fully taxable at your marginal rate. Consider allocating more of these interest-bearing investments to your RRSP, where you can maximize tax-deferred growth. Then your more tax-efficient investments (like Canadian dividend-paying stocks) can be placed in your non-registered account.
Closing up your contribution room with the forgotten RRSP contribution. If you turn 71 in 2013, you cannot have an RRSP after December 31, 2013. So consider making your expected 2014 RRSP contribution in December 2013 before converting your RRSP to a RRIF, allowing you to claim the RRSP deduction on your 2014 income tax return. Although you will have over-contributed to your RRSP, the tax savings realized should easily outweigh the penalty of 1% per month. (For example, the penalty on a $22,000 RRSP contribution for 2014 will only be a maximum of $220 if you make this contribution in December 2013. However the tax savings on the $22,000 RRSP deduction in 2014 could be as high as $11,000 (depending on the province of residence).
Delaying conversion to a RRIF. If you can, delay converting your RRSP into a RRIF until the end of the year in which you turn 71 – so you can continue to benefit from tax-deferred growth. For an income stream, draw from other sources that are not tax-advantaged such as GICs from a taxable non-registered account.
The Tax-Free Savings Account (TFSA)
Although the maximum contribution is currently $5,500 annually, when compounded tax-free over the long term, such as on a 20-year timeframe, its growth can be nothing less than surprising.
An insured annuity is an insurance-based strategy in which you invest a lump sum in a life insurance policy and receive a guaranteed stream of income for life. The payments comprise taxable interest income and a tax-free return of your original capital, plus a portion of each payment funds the policy. It’s important to note that you’re required to commit and lock-in your capital at a fixed rate, which means you don’t have access to it after the fact. So this strategy may be best for some of your assets – but not all.
The Insured Retirement Plan (IRP)
If you are at least 10 to 15 years away from retirement, are maximizing your annual RRSP contributions and you are looking for additional tax-deferral strategies, an IRP may be appropriate for you. With an IRP, you lock in assets that would otherwise be exposed to your high tax rate in a tax-exempt insurance policy. While the funds are permanently locked-in, you can take out tax-free bank loans for retirement income, using the policy as collateral. When your estate is settled, the proceeds of the policy are used to pay back the loans, and the balance goes tax-free to your beneficiaries.
If you live in Canada, taxes are a part of life. But with proper planning and consultation with a tax planning specialist, you can minimize the taxes you do pay. Talk to us today to see what your options are.
This article was supplied by Colin MacAskill CFP, CIM, a Vice-President and an Investment Advisor with RBC Dominion Securities Inc. * Member-Canadian Investor Protection Fund. This article is for information purposes only. Please consult with a professional tax or legal advisor before taking any action based on information in this article. Colin welcomes your call on his direct line (604)-257-7455.