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Saturday, November 28, 2015

The Game Changer – Expanded TFSA

Posted by Tim Stobbs on April 22, 2015

With the cat finally out of the bag we now know a few details of the much rumoured expansion of the TFSA contribution limits from yesterday’s Federal budget (page 232 if you want to read the official text). First off it isn’t a actual doubling of the limit rather it is rising up from the current $5500 per person per year to $10,000.  Still that is a huge increase in room, and it takes effect this year.  The only downside of the announcement was the fact that they stripped out the inflation adjustment on the accounts contribution room.  So enjoy that increase because we are likely not going to see another one for a VERY long time.

Of course a change in Federal government leadership might also trigger this to be a single year event with a roll back in the plan down the road.  But for now it is going to happen this year, so let’s look at the potential implications for this in your retirement plan.

To say this is a game changer for some people is a bit of an understatement.  A couple can now put away $20,000 per year in TFSA and never pay a dime of tax on growth in those accounts.  So the holy grail of retirement planning just got a bit easier: the zero income tax retirement. I’m not sure if you realize this is about your life, but your single biggest bill is likely not your mortgage, but rather your tax bill.  Your income tax portion of it can often be a big chunk of change so if you can reduce that in your retirement years you can often speed up your retirement date.

The trick has often been that while the TFSA’s are great ways to invest they don’t often have enough contribution room to make them your sole retirement investment account.  For example, if you made $75,000/year as a family your RRSP limit is 18% of your previous year’s income or $13,500.  So while the old TFSA limit was close at $11,000 for a couple, now it becomes possible to skip the RRSP entirely for most people and pour everything into a TFSA.  (For those with math inclined minds, if your family makes $111,000 per year you can shelter the same amount in your TFSA as your RRSP now).

But what about the RRSP tax refund?  Well while that is a nice thing to get you do still have to pay tax on your growth of your RRSP at the other end when you take the money out.  While a TFSA you can shelter all the growth from getting taxed.  So imagine you have saved well in your life and have a cool $1 million in retirement savings and a paid off house.  Now imagine never having to pay a dime of tax on that and not having it reduce your Old Age Security benefits.  Cool eh?

So to compare you take our $40,000 a year of income from that in an RRSP you would have to pay tax on that money.  The final amount will vary by province but if only one of you take the money out you would lose anywhere from $5800 to $7700 in income tax for 2015.  Leaving you with a net spending amount of $32,300 to $34,200.  Or you could have put it all in a TFSA and got $40,000 to spend.

In our particular case this means I will likely skip putting money in taxable investing accounts and instead just shelter everything in RRSP and TFSA accounts.  While I might need to keep some contributions aside for the last year or two I can then stuff it all in get caught up in no time (ie: likely two years after retirement).

All in all, there is a fair amount of potential in this announcement for your retirement plans.  Of course, you should still do some numbers for your particular case to ensure it would be worth it to you.  So are you making any changes your plan because of this change?  Or you don’t think it will last?

Dreading Taxes

Posted by Tim Stobbs on March 16, 2015

You look at the form and turn away, but then look again anyway.  Your mind screams for you to stop this madness but your press on away just to finish up this section of the form.  Then it is over for today, you rest and regain your strength to face the beast that is your taxes.

The above paragraph is a bit exaggerated but not by much for some people.  Dreading your taxes is a fairly common event, but what various is the amount of procrastination that goes with it. I should know as I am a bit of expert of avoiding doing my taxes.

I’ll clean the house, fix something, play with the kids, read a book, cook something all to avoid doing my taxes for a few more minutes.  Yet the reality of the situation is my taxes are actually not that difficult anymore.

In the beginning taxes were drop dead easy.  Input T4, add in a few deductions and file it.  Done.  Then we started adding things over the years like kids and all those possible deductions, a home based business and all those fund calculations and eventually taxable investments with all that tracking that goes along with that.  Eventually my taxes expanded from 30 minutes to several hours and finally half a day to prepare.

So for number of years my taxes got progressively more difficult to do by myself, but in the last few years they have turned into something that is fairly stable.  So now I don’t have to learn an entire new section each year, but rather just spend my time double checking everything rather than spending hours on CRA’s website reading tax bulletins trying to understand some detail of if a deduction applies to us.

This stability has allowed my wife and I to do some minor adjustments to our organization to make things a bit easier such as:

  • We track all our house bills (water, heat, power) in a spreadsheet to allow easy roll up at year end when we calculate business use of the house.
  • My wife tracks her business accounting with a little program that allows her to assign tax categories during the course of the year.  So come tax time she prints out a report with the totals for me to review.
  • I created a file folder each year and put any tax related slips I may need in it starting with the notice of assessment from the previous tax year.  That way I don’t have to look around for the various paperwork when I start entering in information.

Each of those are fairly minor items, but they all help to make filing our taxes a bit easier at the end.  I’ve come to realize that I actually don’t dread my taxes…I dread all the organization that I have to do to get ready to file them.  So by spending a bit of time during the year to make things easier eventually pays off to make filing our taxes just a bit easier.  It isn’t perfect by any measure, but I’ve managed to shift a dreaded task into something tolerable.

So do you dread preparing your taxes?  Have you found any tricks to make it easier on yourself (other than the obvious of paying someone else to do it)?

How Not To Spend Your Tax Refund

Posted by Tim Stobbs on April 24, 2014

*click* “Oh wow, that’s my account balance?!? I’m pushing almost $10K. I must have got my tax refund.”  That was me a few days ago on the computer.

I really do like that feeling of getting my money back from the government.  There is something nice about getting a bit of extra cash that you previously weren’t planning on.  In my case, I normally owe a small amount of tax each year so getting a refund over $4000 was unusual. Yet I had managed to put a lot of money in a spousal RRSP and thus got a extra big refund because of it.

So for about a few seconds I ideally wondered what I could spend the money on.  A nicer summer vacation could be fun or perhaps a break from winter later this year.  Or perhaps I could start that kitchen renovation that we keep talking about?  Yet in the end I did what I had already planned.  I moved every dime of the refund I got (plus a little extra) over to my TFSA and maxed out my contribution this year.

How did I managed to do that?  It’s called planning ahead.

The day I filed our taxes I knew I had a bit of time until my refund was put in, so I started thinking about what to do about that money then…before I ever had it.  That way I could go through every idea in my head and sleep on it before making a decision.

So yes I did consider spending my tax refund on other things like a vacation or kitchen reno, but ultimately I just loved the irony of using a tax refund to invest without paying any more tax on that money.  I can’t say everyone should do that since if you have lots of debt you might want to pay that off first.

In the end the only really bad way to spend your tax refund…is on an impulse buy.  After all what might seem like a good idea at the time could end up being a waste of money.  I think everyone has gone through buyer’s remorse at some time or another.  So right after you submit your taxes sit down and start dreaming.  Then after a few days of sleeping on the idea you will really know if it is a good one or not.

What did you do with your tax refund this year?  Or what do you plan to do?