If you are fortunate enough to have kept your job throughout the pandemic and even received a bonus for 2020, count yourself lucky.
After a year of being told all the things you can’t do, the impulse to take your bonus on a spending spree would be completely understandable.
Yet before you whip out your credit card, take a moment to consider embracing your good fortune as an opportunity to top up your registered retirement savings plan (RRSP).
Contributing your bonus to your RRSP will help supercharge your retirement savings, setting the stage for much bigger rewards in the years ahead. And just as importantly, it will help you create something positive out of such a horrible year.
The 60-second RRSP refresher
What is it?
An RRSP is a powerful investment tool that delays the timing of when you pay income tax. This may not sound significant, but the impact on your finances can be huge.
How does it work?
Directing your bonus to your RRSP allows you to invest pre-tax income, separating it from your taxable income before the government takes a big bite out of it. As the investments within your RRSP account grow over the years, any dividends, interest, and capital gains that they accumulate are not taxed.
How does this help me?
By starting with a larger pre-tax amount and avoiding tax deductions as it grows, your RRSP has the potential to grow much larger compared with investments made over the same period that are not tax-protected.
Reap the rewards of a tax-protected investment
The graph below illustrates the difference between contributing a bonus of $10,000 towards your RRSP vs. getting your bonus in cash (taxed at 47%). In both cases, we assume a growth rate of 5% per year.
As the graph shows, putting your bonus into your RRSP can help you reap significant rewards over the long term.
Follow the rules or pay a price
To take advantage of the great benefits offered by RRSPs, you need to play by the rules. This means staying within the contribution limits.
For the 2021 RRSP season, individuals are allowed to contribute up to 18% of their income or $27,830 – whichever is lower.
Keep in mind:
Some factors can reduce your contribution limit (e.g. contributions made to your employer’s pension fund)
Some factors can increase your contribution limit (e.g. unused contribution room from a previous year)
You can find your contribution room for 2021 on your latest notice of assessment from CRA. If you can’t find your NOA, you can call your accountant and/or CRA.
In general, withdrawing funds from your RRSP before you retire will result in a considerable penalty, so this is something to avoid unless absolutely or strategically necessary.
There are exceptions when early withdrawals are allowed – such as to pay for education or buy a house – but these withdrawals must meet specific criteria. To ensure you don’t accidentally break the rules, it’s always a good idea to consult your financial advisor before withdrawing.
Don’t miss the deadline
Timing is also critical when it comes to your RRSP. To be counted by CRA as an RRSP contribution for the 2020 tax year, it must be made by 1 March 2021. If you miss this deadline, you’re out of luck.
This means that if you want to put your 2020 bonus to work in your RRSP, you need to take action now:
Speak with your financial advisor about how to use your bonus to maximize the value of your RRSP
Determine your RRSP contribution room
Check with your employer for any internal deadlines for directing your bonus towards your RRSP (this may be earlier than the CRA deadline)
Today’s opportunity, tomorrow’s windfall
If you’re a working professional with a high income, maxing out your RRSP contribution is almost always the right decision. And if you are among the lucky ones to come away from 2020 with a bonus, now is your chance to move forward with some lasting good from a year to forget.
If you would like help optimizing your RRSP or would like to discuss other complementary strategies within an overall financial plan, Rubach Wealth can help. We invite you to contact us at info@rubachwealth or 647.808.7700 to discuss how acting now can give you so much more to be thankful for in the future.
Tips for a Successful RRSP Season in 2021
With RRSP season here once again, now is the time to give some extra thought to your retirement.
Arguably, retirement planning can be stressful – especially as you draw closer to your retirement day – and the uncertainty of the past year certainly hasn’t helped. Outliving your savings is, rest assured, a lot more stressful. If you want to enjoy your retirement years in comfort, what should you be doing now?
MAXIMIZING YOUR RRSP CONTRIBUTIONS
Contributing to a registered retirement savings plan (RRSP), and ideally maxing out your annual contribution limit, is one of the fundamentals of sound retirement planning.
If you’ve been doing this diligently over the years, well done! However, it’s also important to review the investments in your RRSP to ensure they continue to align with your investment objectives and risk tolerance.
Here’s an overview of key information and some helpful tips to ensure you have a successful RRSP season in 2021.
- Contribution deadline: March 1, 2021
- 2021 contribution limit: 18% of earned income (less any pension adjustment) to a maximum of $27,830
MAKING THE MOST OF YOUR RRSP
How to maximize the value of your RRSP will depend on your specific needs and situation. However, here are some general tips to consider.
- Consider recent market developments. Historically, annual returns on equities following downturn years have yielded higher than average returns. Whatever you do, don’t try to time the market. Given the upheaval seen in financial markets in 2020, you may want to discuss with us an RRSP strategy that makes sense based on your needs.
- Use an RRSP catch-up loan. An RRSP catch-up loan can help you utilize any unused RRSP contribution room. Depending on your personal income tax situation, this may result in a tax refund that could be used to help pay down the RRSP loan. This is not a strategy for everyone. Let’s talk before you do it!
- Invest your tax refund or bonus. If you’re banking on getting a tax refund this year or expecting a bonus from work, what are your plans for this money? Rather than spending it on nice-to-have things, consider putting some or all of it into your RRSP. You may have to forego a bit of fun in the short term, but it can help give your retirement lifestyle a big boost in the long term. We can show you what that looks like for you.
- Plan for taxes. As you put money into your RRSP, always remember that what you’re doing is deferring taxes today, not avoiding them forever. When you start withdrawing RRSP funds during retirement, you’ll have to pay tax on this money. The key to remember (and the big benefit of an RRSP) is that the tax rate will be based on your tax bracket at the time of withdrawal rather than your current tax bracket. In theory, you will be at a lower marginal tax rate… but what if you’re still at the highest? By simply looking at your RRSP account statements and not thinking of future taxes, you may think you will have access to more money than what you will actually have.
TAKING ACTION FOR A SUCCESSFUL RRSP SEASON
If the events of 2020 have left you stressed out and mentally exhausted, we get it. Yet an open conversation with your financial advisor to check in on your retirement plans might be just what you need to shift your focus to brighter days ahead.
Investing a small amount of time into retirement planning now to ensure you get the most out of this RRSP season will pay dividends many times over in terms of peace of mind and financial stability going forward.
Have you already maxed out your RRSP contribution room? This is a good problem to have! If you’re now looking for other investment alternatives to help you shelter additional growth from taxes, we can help.
Whatever your situation, we invite you to contact us at info@rubachwealth or 647.808.7700 to discuss your options. The RRSP deadline is approaching, so now is the time to act.
Marriage is the perfect time to start shopping for life insurance. Why? Because it’s when you start sharing your life – and your debt – with the one you love.
Here’s why life insurance for married couples should go hand in hand with saying, “I do.”
A shared life means shared responsibilities
While it’s quite unromantic to think about all the legal and financial changes that come with signing a marriage license, I firmly believe in talking about it.
The reality is that marriage comes with a joint responsibility of sharing life together, which includes debt.
Even if you have no outstanding debt at the time of your wedding, you will undoubtedly be sharing some financial obligations with your spouse down the road, whether that’s a car, a house, graduate school or credit card debt.
With this financial future ahead of you, now’s the time for you and your spouse to review your insurance coverage. Having the right type and right amount of insurance will help ensure that your finances are protected from any accidents or lawsuits down the road.
You can lock in a good rate now
In general, life insurance premiums increase with age, so the earlier you lock in a rate, the more affordable it can be.
Some plans even let you cancel later, so it’s possible to get out of a policy if at some point you decide you don’t want it anymore. The one thing you can’t do is go back in time and purchase a new policy 10 years down the road at the lower rate that you’d be able to get at this age.
If you’re starting married life with fewer financial burdens – e.g. no house, no kids – taking on a small monthly premium won’t be a significant burden on your bank account now, but it will set you up with more affordable premiums for the future when you may face more financial stress.
Purchasing life insurance when you’re healthy also makes a lot of sense as it guarantees you’ll be covered no matter what happens to your health in the future.
When it’s not always happily ever after
When you’re preparing for your wedding day, it’s natural to think your love will last forever. Unfortunately, divorce becomes a reality for some couples, and not all of them are prepared for the financial fallout.
A report from the BMO Wealth Institute found that 70% of surveyed Canadians are financially unprepared when going through a divorce. What’s more, divorce can impact women particularly hard: 43% experienced a substantial decrease in household income after their marriage ended.
We hope you never have to go through a divorce. If you do, however, it’s critical to examine your current life insurance policies and any spousal coverage benefits to which you may be entitled. Your beneficiaries – the people you’re leaving money to – should also be re-examined.
Building a shared future together
Marriage is about building a life together with someone you love. And while it may not sound romantic, that includes a financial life.
Chances are you will need to buy life insurance at some point as part of your shared future – particularly if plan to have kids one day. So, as you start building your new married life together, keep in mind that this might also be a good time to apply for life insurance so you can take full advantage of your youthfulness and good health.
For a conversation about how to set your young family on the right financial path, contact us at firstname.lastname@example.org or at 647.349.7070.
While various government programs have helped the country through these challenging times, this support has been incredibly expensive. Sooner or later, the government will need to take proactive steps to tackle an enormous deficit. Unfortunately, this means tax increases may be on the horizon. If you are concerned about the prospects of a rising tax bill and want to stay ahead of the curve, we highlight some tax strategies that may help. Strategies for optimizing your taxes Effective tax planning is highly dependent on your personal situation, so there is no one-size-fits-all solution. However, here are 4 strategies that may be useful in optimizing your tax situation:
- Estate freeze. An estate freeze can be used to defer the realization of taxable capital gains in the value of a family business. After a properly structured freeze, any further growth in the company’s value will accrue not to the owner, but rather to their successors or to a discretionary trust set up as part of the freeze.Estate freezes have many potential benefits, including locking in probate tax liabilities, locking in a purchase price for a business, providing retirement income and strengthening creditor protection.
- Capital losses. Stock markets around the world have plunged during the pandemic, and despite some strong rebounds, many investors have stock portfolios with unrealized losses. It some situations, it can be beneficial from a tax perspective to sell holdings and trigger capital losses to offset capital gains.Capital losses can be applied retroactively up to three years and carried forward indefinitely. However, there are restrictions on how such losses can be applied, so any decisions should be made with advice from a tax professional.
- Prescribed rate loan. A prescribed rate loan allows individuals with high marginal tax rates to transfer investment income to family members with low marginal tax rates.Under this strategy, the high-income earner makes a loan to a family member or a family trust, which invests the money and earns investment income. The high-income earner receives interest payments at a rate prescribed by CRA (currently 1%) while the remaining investment income can be distributed to the family member(s) and will be taxed at their lower tax rate.
- Spreading corporate losses. Owners with multiple businesses are not allowed to directly consolidate their profits and losses across their corporate group to minimize their overall tax bill. However, there are permissible tax strategies that can be used to spread at least some corporate losses and achieve similar outcomes.Management fees are one example, although there are restrictions on how this strategy can be applied.
Being proactive ahead of potential tax increases Nothing is certain about how the government will navigate these challenging times, but one thing is clear: tax increases are a real possibility as the government determines how to pay for its extensive pandemic relief programs. Whatever happens in one month or one year, there are steps you can take now to proactively optimize your tax exposure and extract any corporate surpluses in a tax-efficient manner. To discuss how tax strategies can help to strengthen your financial situation, contact us at email@example.com to schedule a call with a Rubach Wealth advisor.
There is a common misconception that only wealthy individuals need to worry about estate planning. In reality, nearly everyone can benefit from having an estate plan.
By planning for tomorrow today, you can retain more of your assets, protect your estate and leave a lasting legacy for your family.
The COVID-19 pandemic has highlighted the need for everyone to have an estate plan in place and the importance of taking action now. In an uncertain world, estate planning is more critical and urgent than ever.
8 steps for smart estate planning
If you have any assets at all, you need an estate plan to ensure these assets are managed in line with your wishes in the event that you’re unable to do so yourself – whether that’s during your lifetime or following your death.
Here are 8 steps you can put in place now to help you ensure you have an effective estate plan in place:
- Speak with the experts.
You don’t have to go it alone, and it’s better if you don’t. Instead, get your financial advisor, lawyer and accountant involved to make a plan that is optimized from both legal and tax perspectives.
Many of these professionals are currently available to assist you remotely during COVID times with telephone and online virtual meetings. Ask your advisor for help to get all the experts around the same table to develop a cohesive, coordinated plan.
- Understand your cashflow needs.
Get a clear snapshot of your financial situation by documenting all your assets and liabilities.
A detailed overview is an important starting point for understanding your cashflow requirements and ensuring that your needs are being comprehensively addressed.
- Get life insurance.
Life insurance is a powerful and versatile financial tool. It can protect your family, minimize taxes and serve as an efficient investment vehicle, playing a crucial role in your overall estate plan.
The pandemic has reinforced the importance of life insurance. Now is a good time to review your existing policies and ensure they are meeting your needs.
- Have a will and power of attorney.
Your power of attorney is about your wishes and decision-making while you are alive. Your will addresses what you want to happen after you die.
Both are important to ensure you have a voice in your care, your estate and your legacy.
- Seek tax efficiencies.
When you die, the federal government regards all your capital assets as disposed of for tax purposes. This can lead to your estate being hit with a considerable tax bill upon your death.
With an estate plan in place, you can transfer ownership of your assets and minimize the taxes incurred following your death.
- Get organized.
Make a list of your key personal information, advisors, important documents (and their locations), accounts, other financial assets and computer passwords, and then place this list in a safe place.
Be sure to inform the person to whom you assign power of attorney where to find this list.
- Review and update your plan.
Your life is not static, so it’s important to regularly review and update your estate plan.
Any time there is a major event in your life or within your family – for example, a birth, death, marriage, divorce, etc. – it’s good practice to go through your estate plan and update it as needed.
- Inform your family.
Openness and communication are an important part of estate planning. Letting your family know what you’re planning can prevent unpleasant surprises and minimize future disputes.
Ensure that your executor and power of attorney assignee know where to find all your important documents.
Navigating uncertainty with empathy and expertise
Uncertainty is a fact of life, but planning can help to mitigate risks and unknowns. In today’s uncertain world, estate planning is more important than ever to ensure that your wishes will guide the future handling of your wealth and your legacy.
To review your existing estate plan or put in place a new one, contact us at firstname.lastname@example.org or at 647.349.7070.
A well planned and executed estate plan starts with a conversation.
With the sun shining and temperatures rising, there’s a lot of incentive to head outdoors, be active and boost your fitness. As we gradually emerge from the challenges of the past several months, this is also a great time to get financially fit.
The pandemic has provided an important reminder of the need to prepare for the unexpected.
This list of 6 steps to boost your financial fitness can help you strengthen your position for whatever lies ahead – whether that’s more storm clouds or glorious summer sunshine.
Making financial fitness a priority
Just like physical fitness, financial fitness doesn’t happen by accident. You need to be proactive and make it a priority.
These steps can get you started:
- Trim your expenditures – The lockdown period has forced us to change our spending patterns. Without our normal routines, it has become easier to identify expenditures that now seem excessive or frivolous, whether that’s expensive weekday lunches or rarely used gym memberships. If you’ve been spending less in recent months, look for ways to make some of these reductions permanent.
- Leverage your registered accounts – Many Canadians have lost their jobs or seen their incomes squeezed in the past several months, providing an important reminder that we should get the most out of every dollar we earn. Registered accounts such as RRSPs, TFSAs and RESPs are powerful tools for tax-efficient saving and investment. Take this time to ensure you’re putting these accounts to optimal use.
- Reassess your life insurance – The pandemic has made it abundantly clear that life is both precious and unpredictable. Now is a good time to take a fresh look at your life insurance and ensure it will meet your family’s financial needs upon your death. Also ensure you are taking full advantage of your life insurance as a tool for growing assets on a tax-advantaged basis.
- Protect against uncertainty – Protecting yourself and your loved ones is always a top priority, and critical illness insurance and disability insurance have important roles to play in this. Ensure you have sufficient coverage to replace your income and cover your expenses in the event of an accident or major illness. Keep in mind that group benefits through your employer may be insufficient.
- Update your will – You never know when your time will come, so it’s important to have your affairs in order. Keeping your will up to date will ensure that your wishes are met and your wealth is distributed according to your preferences. Updating your will is especially important after any major life events, such as a marriage, divorce or death in the family.
- Prioritize philanthropy – The pandemic has cast a spotlight on examples of inequality and suffering in our country and around the world. The good news is that you can make a difference through philanthropy. Maximize your impact with a strategic approach to philanthropy aimed at driving meaningful, long-term improvement in the lives of others.
Growing stronger with a plan
Tackling your finances on a piecemeal basis can lead to small improvements but getting financially fit is much easier when you have a cohesive plan.
At Rubach Wealth, we guide our clients through these 6 steps and address other relevant areas as part of a strategic financial plan tailored to their needs and situation. To discuss your financial goals, contact us at email@example.com
It starts with a conversation.