Tax-planning should be a year round activity but even if you’ve been otherwise occupied this year, you still have time to save money on your 2009 taxes by using strategies like these.Be deadline savvy:File your tax return and make tax payments on time to avoid penalties and interest. Payments that qualify for tax credits and deductions should be made by December 31.Deduct to save:Take full advantage of all tax deductions including the most important – your Registered Retirement Savings Plan (RRSP) deduction. Be sure to fill up all your RRSP contribution room.
Give yourself all the credit:Make full use of tax credits to reduce your tax bill by:
• Pooling medical expenses on the tax return of the lower earning spouse.
• Pooling charitable donations or carrying them forward for up to five years to surpass the
$200 threshold that increases your credit.
• Using the spousal credit for the higher-earning spouse.
• Transferring the age, disability, tuition and/or education credits to a spouse or supporting
relative when not used by a dependent.
• Don’t forget the first time homebuyer, home renovations and moving expenses credits.
Split to save:Income-split by sharing pension income with a spouse, through a spousal RRSP or by paying a salary to (eligible) family members. Be RRSP savvy:If you’re turning 71 this year, you must wind up your RRSP and need to decide whether to take the cash (poor choice), or transfer the funds to investments held within a Registered Retirement Income Fund (RRIF) or annuity (much better choices). If you have earned income, you can continue making contributions to a spousal plan until your spouse reaches age 71. Save tax-free:Make up to a $5,000 contribution to a Tax-Free Savings Account (TFSA). The contribution isn’t tax deductible but money and interest inside your TFSA is tax-free and so are withdrawals that you can make at any time for any purpose. Amounts withdrawn are added to your TFSA contribution room for the following year. Make down investments pay off:Plan to sell money-losing investments by the December 31 settlement date, which creates capital losses than can offset capital gains.Buy now to save:If you’re self-employed and claiming the capital cost allowance (CCA) on depreciable assets, buy them before year end to speed up tax write-offs.Move to save:If you’re moving to a province with a lower tax rate, do it before December 31 and you’ll pay the lower rate for the full year. If you’re moving to a province with a higher tax rate, try to delay until 2010.
And here’s the best tax-saving tip of all: Talk to your advisor before year-end to be certain you make the most of the other tax-reduction strategies
This column presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. Together with your financial advisor, you can explore strategies that is best suited to your financial situation.
Tax Free Savings Accounts (TFSA) - Benefits for Seniors
Tax Free Savings Account (TFSA) and Seniors
The TFSA provides seniors with a tax-efficient savings vehicle to help meet ongoing savings needs, even after they reach age 71. Whereas for RRSP, seniors when they reach age 71, are required to convert their registered retirement savings into another type of retirement income vehicle (with annual minimum withdrawal requirement), TFSA has no age requirement. Seniors can hold TFSA past the age of 71, hence the product is referred to as a savings vehicle for all Canadians above the age of 18, a Canadian resident, and with a social insurance number.
Neither the income earned in a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits such as Old Age Security, Guaranteed Income Supplement benefits and the Goods and Services Tax Credit. The income earned has no effect on federal income-tested benefits at all, in short the product may be referred to as "transparent" unlike RRSP, and RRIF wherein the withdrawals may trigger claw-backs of federal income benefits.
Scenario 1- Senior Couple:
Mark and Patricia are retired and living comfortably on Mark’s pension. Patricia also receives a small work pension based on her years of work after raising their children. They would like to save Patricia’s pension each month and use the money it to spend the winter season in Florida (the couple are snowbirds). The TFSA will provide them with an effective means to save for their trip south each year, without paying tax on the interest earned on those savings
Impact of a TFSA on Federal Income-Tested Benefits and Credits
TFSA - savings incentive for low and modest-income seniors: A TFSA improves savings incentives for low- and modest-income individuals since neither the income earned in a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security and Guaranteed Income Supplement benefits.
Scenario 2 – where the Senior Couple receives Federal Income Benefits
Walter and Mary, a modest-income couple, expect to receive the Guaranteed Income Supplement (GIS) in addition to Old Age Security and Canada Pension Plan benefits when they retire. They have saved for a number of years in their TFSA and now earn $2,000 a year in interest income. Neither this income, nor any TFSA withdrawals, will affect the GIS (Guaranteed Income Supplement) benefits (or any other federal income-tested benefits and credits) they expect to receive. If this $2,000 were earned on an unregistered basis, it would reduce their GIS benefits by $1,000.
To find out the comparatives of TFSA with an open (non-registered investment vehicle) follow this link to the TFSA calculators of Federal government website:
Tax Free Savings Account (TFSA) or RRSP, what is right for you?
Tax Free Savings Account (TFSA) or RRSP, what is right for you?
Most investors have short-term goals, which may include a major purchase, vacation or establishing an emergency fund. There are several options available for your personal Tax Free Savings Account (TFSA) depending on the “term” of short-term and the your overall plan. Explore how a TFSA can help you save for these goals faster and tax free. You can put $5000 in a variety of investment options.
Your financial advisor can help you incorporate your short-term, long-term and tax planning needs into you financial plan.
Watch your savings grow tax-free throughout your lifetime.
To analyze which savings option is right for you, there are top five differences between RRSPs and TFSAs:
1. An RRSP is a savings plan mostly aimed at saving for retirement. this savings vehicle is a tax deferral savings plan. ATFSA is for all your other savings goals. Your goal can be to save for a car, improvements for your home, a vacation, for education, and can include so many other savings goals you may have.
2. RRSP is tax deductible, you don't pay tax on the money you save in an RRSP until you take it out (fully taxable). With a TFSA, it is not tax deductible, this comes from your after tax money. You don't get to deduct your TFSA contribution from the income you report on your tax return.
3. Whenever you take money out of an RRSP, the amount is added to your income and taxed at your current tax rate. With a TFSA, there's no tax on any money you take out – not even the money you made investing, including capital gains. You put your money in, then you get your money and growth out --tax free, it is that simple....
4. You have to close/collapse an RRSP after age 71. There is no time limit for contributing to a TFSA, contributions allowed past age 71.
5. With both plans, TFSA and RRSP, you can name your spouse or common-law partner as a beneficiary. However, only the spouse or common law partner can be the successor to the TFSA plan. The money will roll over to them upon your death. But with an RRSP, after your spouse or partner dies, there will be taxes due on any money left in the account. So if your children inherited the money, they would have to pay that tax. A TFSA is different. Your children would get the whole amount tax-free. That's because you've already paid the tax on the money you contributed to your TFSA.
It's also important to note that the maximum allowable RRSP contribution may be significantly greater than the amount that may be deposited in a TFSA. RRSP limits are based on the lower of 18% of earned income or the limit for the year. By comparison, Canadians may contribute up to $5000 to a TFSA in 2009, with future increases in the yearly limit indexed to inflation. This limit is the same for everyone, regardless of income.
The easy access helps make TFSAs a good supplement to RRSPs for people who want to continue saving for retirement but have maximized their RRSP contributions or have reached the age of 71 -- the age limit for RRSP contributions. There is no maximum age for contributing to a TFSA.
Now, let us try to answer the question RRSP or TFSA, which option is right for you?
The answer depends on…
Your marginal tax rate (will your marginal tax rate be lower at retirement?)
Other RRSP opportunities
Will it be enough for you?
Flexibility versus discipline
Your primary savings goal(s)
You also can’t forget the other opportunities of RRSPs such as:
•Pension income credit, •Income splitting, •pension income splitting with your partner once you’re 65, or •Using spousal RRSPs.
If your primary goal is saving for retirement, you need to ask yourself if the $5,000 annual contribution limit that the TFSA offers will provide you with enough savings for the retirement lifestyle you desire.
TFSAs give you the flexibility to withdraw funds anytime you wish. If your primary goal is to save for your retirement, analyze your financial strategy and ask yourself if you have the discipline to put money into a TFSA and not touch it again until retirement. RRSPs have that self-imposed discipline (it is a tax deferral savings strategy – no one wants to take a tax hit if they don’t have to. A TFSA doesn’t offer you that structure/and discipline.
Or, consider that if you have other goals to save for, short term or long term, you may not want to use your entire TFSA contribution room for retirement savings.
There are other variables to consider in deciding which option is right for you. Analyse your personal financial situation, and with the advice of your financial advisor, decide on an option that is right for your financial circumstances.
This article is presented for general information only. Consult your financial advisor for advice regarding your specific financial situation.
