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Friday, April 25, 2014

Maxed Out

Posted by Tim Stobbs on April 9, 2014

While I was having coffee the other day with some co-workers it came out that I was maxed out…no, not on credit cards, but rather RRSP contribution room and last year my wife and I maxed out of TFSA contribution room.

Until that moment I had forgotten how unusual that state of being is for most people.  The older people around the table all had unused RRSP contribution room of $30,000 to $50,000 and all of them make an healthy salary.  So it wasn’t the fact they couldn’t save, but rather they had chosen not to.

In total Canadian’s have $600 billion in unused RRSP contribution room, which is a lot of tax savings people are leaving on the table. Put it another way, if everyone used that up in a single year at a mere 26% tax rate the government would be out $156 billion in revenue.  That doesn’t even touch the used TFSA contribution room out there as well.

So why is saving such a difficult thing to do?  After all the amounts aren’t huge in the case of RRSPs it is 18% of your previous year income (less pension adjustments).  So if you had a defined contribution pension you could likely get 5 to 10% there, which leaves anywhere from 13 to 8% left to be saved.  Yet you get a tax refund on that money, so as long as you keep putting your refund back into RRSPs you really only have to save around 10% or less.  Can you not live on 90% of your income?

Granted if you don’t have a pension plan this takes a bit more planning to really pull off.  18% of your income can seem a big difficult, but that is why you need to get the tax refund at once rather than waiting until tax season.  How? You can use that handy tax form T1213 Request to Reduce Tax Deductions at Source.  By having a regular contribution plan setup, you can fill this out and send it in then a few weeks later you can start getting your refund on each paycheck rather than waiting the full year.  This helps keep your cash flow up while saving.  The downside of this trick is you do have to file it every year (in most cases).

I should also point out I also had extra RRSP contribution room for a number of years (~$30k).  It was only between some planning and adding extra money for years that we managed to catch up.  Yet it can be done and when you put your mind to it.

So have you ever maxed out some contribution room?  If so, how did you do it?  If not, what is preventing you?

RRSP Over Contribution

Posted by Tim Stobbs on March 19, 2014

I finished a draft run on my taxes from last year for both my wife and I and realized I have a small problem.  I did much better on contributing to our RRSPs than I thought I did.

On the plus side I should be getting back over $4000 in a refund.  On the down side I believe I have burned through all my backlog of RRSP contribution room and then some.  At first I thought I was fine and then I realized if I claimed all the contribution in the first 60 days of this year on my 2013 taxes I would end up over contributing by just under $200 than my limit.

Now I have two potential solutions to this RRSP over contribution issue:

  1. Don’t claim $200 of RRSP contribution in 2013 and carry it for use in 2014 or
  2. Do nothing and realize I can over contribute by $2000 in an RRSP for a given year.

I had forgotten option #2 existed until I was reviewing some tax websites, so I tempted to just do nothing and take the refund.  After all it will balance out next year anyway.

In the longer term I now have to look at potentially doing something, but I’m not 100% sure I can.  I’m out of back contribution room in my RRSP, but my wife has about $20,000.  Yet she earns so little she doesn’t pay any income tax.  So I’m looking into if she contributes lets say $10,000 to her RRSP that would drive her income to zero and then does that trigger the transfer of her basic income deduction to me?  Thus giving us a tax savings at my marginal rate.  That is all in theory, I need to confirm we could do it.

Yet that plan would have a downside of introducing a zero income year on my wife’s CPP calculation.  Which would be fine if that occurs during a year when she could claim a child rearing provision to her CPP calculation, but otherwise may lower her CPP benefits in the long run. Ah choices in life.

So have you run into any odd situations with your income taxes this year?  If so, please share what it was and how you dealt with it.

My 2014 Target

Posted by Tim Stobbs on January 20, 2014

That’s it…I’m flushing any goals for my retirement plan for this year.  Not one single goal…instead I’m planning a rough target of contributing $50,000 to our various investments.  Why only a rough amount?  Because I already have a longer term target of hitting $350,000 by Jan 1, 2016.  So if I increase my investment net worth by about $50,000 in 2014, I should be well on my way to my longer term target (which again is completely picked out of thin air).

You see I’ve hit the point in my savings routine where I no longer have to try all that hard to do it.  I’m just used to saving a lot of money and not spending a whole lot.  Also I’m not particularly interested in trying to save more.  I’m happy with our current savings rate and I rather focus my energies on other projects.

Although I have to admit that my overly analytical brain really likes having targets of some kind to gauge my progress…hence a rough target for the year.  I’m giving a little ground here to prevent part of my personality from having a crying fit over having no numbers to look at.

Would I recommend this idea for most people? Certainty not.  It’s that making me a wee bit of a hypocrite? Yes, I can see that point of view, but you have to recall I’ve been at this saving for retirement aggressively for over seven years now.   For me saving is so ingrained into me now that spending my full salary in a given year is nearly incomprehensible.

When you are starting out I would map the goals right down to a given month.  You need that goals that detailed because it is very easy to fall off the wagon.  So having a monthly goal and then meeting it gives you a little rush which is helpful to keep you motivated.  At month number 85, it ceases to be helpful, now it is merely a habit.

Do you bother with yearly goals?  Or do you prefer monthly?  Why?