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Make TFSA withdrawls before Dec. 31 and other tips to start the New Year with the best financial footing
With 2014 destined for the record books at midnight Wednesday, there’s not a lot of time left to optimize your investing and tax health. As noted here a week ago, it’s already too late to benefit from tax-loss selling, which had to be executed by Christmas Eve.
Even so, if you’re reading this on Dec. 30 or even Dec. 31, there are still a few actions you can take to maximize your wealth or at least minimize tax due in April but you’ll have to complete them well before you start singing Auld Lang Syne.
A big one is donating to charity, as outlined in Evelyn Jacks’ column in the latest print edition of MoneySense. One of several useful tips she highlights is the First Time Donor’s Super Credit, which became available 2013 and will be around until 2017. Instead of the normal tax credit of 15% of donations under $200, the Super Credit boosts this to 40% for first-time donors. And between $200 and $1,000 the Super Credit boosts the tax credit from 29% to a whopping 54%.
If you don’t qualify for the Super Credit, Jacks reminds investors who own stocks in non-registered accounts that instead of donating cash, they can donate securities that may have embedded capital gains in the last year. You can of course avoid tax by not converting paper gains to actual gains that would be incurred by selling; however, if you plan to give to charity anyway, consider transferring some winners to your favourite charity and thereby avoiding paying capital gains tax on the donated shares. Instead of the normal 50% inclusion rate, you’d have zero capital gain tax liability on the securities transferred, plus you will get a charitable donation tax credit.
Another great way to save tax is to invest in RRSPs. Fortunately for most people, Dec. 31 isn’t the deadline: for the 2014 tax year, the RRSP contribution deadline is March 2, 2015. The exception is those who turn 71 in 2014: if that’s you, you must convert your RRSP to a RRIF or life annuity before the year officially ends. Jacks also cites an interesting number that may interest business owners. To get the maximum 2014 RRSP contribution of $24,270 you’ll want to create earned income of $138,500 in 2014.
From CIBC comes a useful tip for those in their early 60s and who are planning on collecting early CPP or QPP. If you’re between 60 and 64 in 2014 and plan to start receiving benefits before the normal retirement age of 65, CIBC suggests applying by Dec. 31, 2014. This will forestall a slight “downward monthly adjustment” factor used to calculate reduced early CPP/QPP benefits. In the case of the CPP, in 2014 this factor is 0.56% a month but rises to 0.58% a month once 2015 arrives; that will result in a slightly lower benefit payout. Of course, if you plan to do the opposite and wait till 65 or even 70, you can just sit tight.
If you’re planning to withdraw funds from a Tax-Free Savings Account (TFSA) in the near future, CIBC suggests doing so while it’s still 2014. If you wait till the new year you won’t be able to recontribute the amount withdrawn until 2016.
Of course, we would prefer NOT to withdraw money from a TFSA if at all possible and ideally recommend contributing another $5,500 early in 2015: preferably on Jan. 1 or Jan. 2 to maximize growth (depending on whether you can find a bank open on New Year’s Day, which is doubtful; alternatively you can use online banking and make a contribution through a discount brokerage).
Note that there may be some preparatory action you can take here in 2014 even if you plan to invest in a TFSA once the new year actually arrives. Our family, for example, parked $11,000 in a short-term savings vehicle back in the summer so we could top up our TFSAs as soon as 2015 arrives. While you can transfer securities in-kind to TFSAs, that may entail crystallizing capital gains. It’s cleaner to use cash, so you may wish to sell a money market fund or near-liquid savings vehicle (like a cashable GIC) in order to have cash at the ready for the actual TFSA contribution. More on that once the new year actually arrives!
Jonathan Chevreau is editor-at-large for MoneySense and recently launched the Financial Independence Hub. He can be reached at [email protected].
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