At Anchor Pacific, we believe that the path to achieving a successful outcome begins with building a long-term plan for your wealth and investment goals. With March 2nd marking the deadline for 2019 RRSP contributions, here we highlight six important financial steps you can take to begin 2020.
This checklist will help you focus on some of the key financial matters to consider:
1. CONTRIBUTE TO YOUR TFSA
The Tax-Free Savings Account (TFSA) is one of the best vehicles we have in Canada for saving money. For 2020, the TFSA contribution room remains at $6,000. If you have been eligible to contribute to a TFSA since it was introduced in 2009, your total contribution room is now $69,500. A TFSA account is very flexible. You can use it to save for anything – wedding, home down payment, vacation, emergency fund, etc. You can withdraw your funds whenever you want and re-contribute the amount you withdrew in a future year. No taxes are due on earnings generated by your account unless you run afoul of the rules put in place by the government. The sooner you start contributing to your TFSA, the faster it will grow.
2. CONTRIBUTE TO YOUR RRSP (including Spousal contributions)
RRSP contributions are tax-deductible and will save you on taxes today while allowing you to grow your retirement pot. For 2020, your RRSP contribution limit is 18% of your earned income, up to a maximum amount of $27,230. If you have not yet maxed out your contributions for the 2019 tax year, you can still do so up until the end of the RRSP season, which is March 2, 2020. Contributions made until the deadline can be used to claim a tax deduction for the 2019 or 2020 tax years. It can also be carried forward to future years. If you are turning 71 in 2020, you can make your last RRSP contribution before December 31, 2020. By next year, you will be required to close your RRSP and do one or a combination of the following: withdraw cash, convert to an RRIF, or purchase an annuity. Your RRSP is not only for retirement. You can also withdraw funds tax-free to buy a house or go back to school.
3. CONTRIBUTE TO AN RESP (or start one)
College tuition keeps rising and a Registered Education Savings Plan (RESP) is one way to provide your children with an opportunity to obtain post-secondary education without the debt. Contributions you make to your children’s RESP qualify for matching government grants at 20 cents for every $1 of contribution, up to $500 in grant money per year (i.e. grant on $2,500 in annual contributions). You can place up to a lifetime maximum of $50,000 per child in an RESP account that qualifies for a maximum Canada Education Savings Grant of $7,200. Low-income families may qualify for additional grant money (a-CESG and Canada Learning Bond). As funds within an RESP are tax-free, it is advisable to start contributing to RESPs early so that compound interest and earnings can accumulate within the account on a tax-free basis over as long a period of time as possible.
4. PAY OFF DEBT
It is never too early to start thinking about paying off loans, particularly credit cards and other forms of high-interest debt. Create a budget that allows you to set aside specific amounts of money every month to settle your debt obligations. Consider paying off credit card debt before saving/investing in a TFSA or RRSP. This is because interest rates on credit cards can reach 20% or more, exceeding any realistic returns you can expect on your investments.
5. TAX FILING FOR 2020
The tax-filing season will soon be upon us. For most Canadians, the deadline for filing your 2019 taxes is April 30, 2020. For self-employed individuals, the filing deadline is June 15, 2020. Discuss a tax planning strategy with your financial advisor and your tax advisor. Make sure to utilize all the tax deductions you qualify for and don’t leave money on the table. There are many free options for filing your taxes in Canada and you should do so early so you can put your refund money to work right away!
6. AUDIT YOUR INVESTMENT PORTFOLIO.
If you forgot to audit your investment portfolio at the end of last year, it’s time to get on it. Two important things to note:
Re-Balancing. If you are a DIY investor and invested in ETFs or index funds, you will need to re-balance your portfolio 1-2 times a year. This is to ensure that your asset holdings are still in line with your investment goals and risk tolerance.
Fees. Fees matter and can cut into your investment returns. However, not all fees reduce your long-term returns. Understanding and peeling back the layers of fees paid for investments is of extremely high importance. Advisor fees that provide financial and tax planning advice, and portfolio construction and risk management have been demonstrated to benefit individuals. At the implementation level, active managers who add value through quantifiable higher returns, diversification benefits, or access to otherwise inaccessible investment opportunities may justify the fees. Auditing your portfolio to understand and take advantage of these benefits is an essential annual task.
When you start the new year by charting your financial goals and how you aim to reach them, chances are that when you do your end-of-year financial review, you will have met most (if not all) of them.
Anchor Pacific Investment Management Corp. (“Anchor Pacific”) is a Vancouver, BC-based portfolio management firm, which leverages process, technology, and infrastructure to democratize the process of managing endowment and pension style investment portfolios to deliver innovative, high-touch, and transparent investment programs across the full spectrum of asset owners and investment consumers.