Spend Wisely During the Holidays

read

Post

By iA Private Wealth, December 06, 2021

Most people look forward to the holiday season because it’s a time to shift focus from work to family and friends. Whether the holiday gatherings are in-person, virtual or a combination, it’s nice to reconnect with loved ones in a festive setting.

It’s also traditionally a time to exchange gifts, which most children – and children at heart! – anticipate well in advance of the season. If managing your bills after the holidays is a regular challenge, there are ways to keep costs reasonable while still joining in the fun.

A budget is your spending roadmap

First, create a budget for your holiday spending. Although few people enjoy going through the process of listing what gifts they plan to buy and how much money is assigned to each gift, having a budget is a practical way to keep spending under control.

If your budget starts looking tight relative to the money available, consider how to cut discretionary costs as a way to compensate. For example, if you usually buy coffee, use ride-sharing services for nearby trips or treat yourself to restaurant meals, you can brew your own beverages, walk or use public transit, and cook more often. You might even find you’re able to sustain these spending adjustments permanently! Once you’ve set a realistic budget, do everything in your power to stay within it.

Resist the temptation to overextend on credit

If you promptly pay your bills every month, credit cards are a good way to make purchases without fronting the cash. However, many people find it easy to spend using credit and then are shocked once the bloated card statements arrive.

The budget you create will cover your holiday spending, whether you use cash, credit cards or debit cards. It’s tempting to shop without keeping in mind that you’ll have to pay for your purchases at some point, and with credit cards the interest charges will add up quickly, which means more debt and more time required to pay it off. Debit cards may be preferable since you need enough money in your account to cover your expenses, so you won’t risk building more debt.

Be creative with gift giving

Many people enjoy creating their own gifts, and the recipient often treasures these homemade presents because they know how much thought and effort went into them. Think about what each person really wants or needs, and then consider if it’s something you can make. Not only does the process let you flex your creative muscles, but you’ll also save money. Buying gifts this holiday season could be more expensive than usual since higher inflation has raised costs significantly.

If you’re looking for other budget-conscious ideas, how about the gift of time? The busy people on your list may appreciate offers like free babysitting, being invited for a nice meal or relaxing at your place with popcorn and a movie. “Experience gifts” are also gaining popularity, so consider things like organizing a family hike somewhere fun that ends with hot chocolate and sweet treats, or taking a short trip with plenty of low-cost (or no-cost) activities booked.

Remember others in need

It’s easy to get caught up in the holidays and lose sight of less-fortunate people who may not be in a position to enjoy the season. Consider taking some time from your hectic schedule to volunteer at vital places like a shelter or food bank, or participate in a holiday gift-giving initiative. You may also wish to donate money or small items to organizations that provide presents for children and families in need. You’ll feel good about helping out and your efforts will reflect the true spirit of the season.

A trusted Investment Advisor can help you create a manageable and practical budget this holiday season. Find an advisor near you.

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

Related insights

Should You Rent or Own in Retirement?

read

By iA Private Wealth, May 18, 2023 If you’re approaching retirement, it can be both exciting and stressful. Sure, after years of juggling a full workload along with family and other obligations, having the freedom to set your own schedule is enticing. However, given the recent spike in inflation and subsequent high interest rates, the basic cost of living has jumped significantly. Money isn’t going nearly as far as it used to, and you might be wondering if you’ve actually saved enough to enjoy your retirement years. Running out of money is a legitimate concern. Many retirees live on a fixed income, such as government benefits, a company pension plan and maybe RRIFs or annuities. While some income sources are indexed to inflation to help keep pace with rising costs, ultimately you’re drawing down on your money in retirement, rather than growing wealth as you did when working. Nobody wants to experience a shortfall that may require amending retirement plans or result in financial insecurity. Should you sell your home? One possible solution as you enter retirement is to sell your home and rent instead. Although renting isn’t typically a goal for people who already own their home, let’s consider the potential benefits of this strategy. Real estate values in Canada have declined somewhat as higher mortgage rates dampen the enthusiasm of prospective buyers. However, if you’ve owned your home for several years or even decades, chances are you’ve built considerable equity in that property as housing prices have risen steadily over time. If you sell your home and rent when you retire, you’ll have a tidy sum of cash available. Some of it can be put toward regular living costs and discretionary expenses like a vacation, a new vehicle or pursuing hobbies. You may also wish to invest for the future. With guidance from your Investment Advisor, you can decide how to allocate your money across various investment products. Having the potential to grow your assets through investing is a proven way to extend how far your money can stretch in retirement. Over longer periods, the stock market has generated higher returns than real estate (here’s one study as an example), so relying on the value of your home might not be the best option to achieve long-term growth. Also, investing in a range of securities provides diversification as you tap into different sources of growth potential. This approach may help reduce overall risk if one (or more) of your investments declines in value at a given time. On the other hand, when the bulk of your assets is invested only in your home, you may face a sharp decline in wealth if the real estate market weakens. Three other benefits of renting Home ownership involves maintenance and repair costs, property taxes, insurance, utility bills and other expenses that add up in a hurry. The older your home, the higher the expenses could be. Also, the older you are, the less likely you’ll want to deal with the maintenance and repairs. Renting will shift the burden to your landlord. Property taxes usually increase each year, taking a bite out of your retirement savings and cash flow. If you sell your home, you avoid property taxes, plus capital gains from the sale of a principal residence are tax exempt, leaving more money in your pocket. Selling your home gives you flexibility to decide where to live. Maybe you want to move to a warmer climate or be closer to children and grandchildren. Perhaps relocating near parks, golf courses or other preferred amenities is appealing. Selling also provides an opportunity to downsize from a large house to a condo or apartment, for a more carefree lifestyle with less hassle and fewer responsibilities. Speak with your Investment Advisor for guidance on which approach is best suited to your unique needs and goals. <!-- We can help you with a wealth plan that addresses tax efficiency, so contact us today. -->
Make the Most of Your Tax Refund

read

By iA Private Wealth, April 12, 2023 When you get a tax refund, it’s very tempting to see it as a windfall you can guiltlessly spend on things you want rather than need. And while there’s usually no harm in setting at least part of it aside for such expenditures, the reality is that, for most Canadians, the lion’s share of the refund is best used in other ways. 5 ways to allocate your tax refund Pay down debt. Sending money to creditors isn’t much fun, but it may help relieve some anxiety by reducing your debt obligations (mortgage, credit card bills, car loan, lines of credit, etc.). Especially with today’s higher interest rates, paying down debt can have a huge impact on your finances, leaving you with significantly more money in your pocket. Invest for the future. Using a tax refund to invest is a proven way for money to earn its own money, which can help build long-term wealth. Your Investment Advisor can help you decide which investments are most appropriate for your objectives, risk tolerance and time horizon. Investing in a registered vehicle like an RRSP, TFSA or RESP also provides the benefit of tax-advantaged growth. Contribute to an emergency fund. Whether you already have an emergency fund or want to start one, putting away some money for a “rainy day” can be a great use of your tax refund. It’s typically recommended to have several months of expenses in an emergency fund, in case you lose your job, experience a death or major illness in the family, or need urgent home or vehicle repairs. Donate to charity. The pandemic put a spotlight on the struggles many people face, and how many organizations that commit to helping others deserve greater financial support. When you dedicate some of your tax refund to charitable causes that hold meaning for you, not only are you helping people in need, but you also earn donation tax credits that can lower your future taxes. Enjoy yourself. As mentioned, it’s often okay to spend some of your tax refund on something pleasurable, like a short trip with the family, a nice night out or a little retail therapy. Just know that your tax refund isn’t “found money.” It’s yours to start with and should be used wisely. In fact, getting a big refund may indicate that you paid too much tax during the year, such as from your paycheques. An advisor can provide guidance on how to ask your employer to deduct less tax from your pay. Sure, that’ll reduce your refund, but instead of waiting for a lump-sum amount you’ll be gaining access to your money throughout the year, which can help you invest regularly or pay down bills sooner. We can help you with a wealth plan that addresses tax efficiency, so contact us today.
New Tax-Advantaged Account for First-Time Homebuyers

read

By iA Private Wealth, March 15, 2023 It’s no secret the housing market in Canada has been overheating for years. With real estate prices remaining stubbornly high, many prospective first-time homebuyers are feeling squeezed out of the market. While there are no instant fixes for the challenges created by insufficient affordable housing, the Canadian government introduced a measure in its 2022 Federal Budget that aims to help first-timers save money to purchase a home. The government is working with financial institutions on finalizing details of the Tax-Free First Home Savings Account (FHSA), with expectations for an April 2023 rollout. What is the FHSA? The FHSA is a registered account for Canadians 18 years of age or older who have never owned a home or haven’t owned one in the past four calendar years. While the account is a bit of a misnomer since you technically don’t need to be a first-time homebuyer, nonetheless the FHSA allows eligible Canadians to contribute up to a lifetime limit of $40,000. The annual contribution limit is $8,000 and unused room can be carried forward to a future year. For example, if you contribute $3,000 in 2023 your limit for 2024 will be $13,000 instead of $8,000. The FHSA provides two notable tax benefits: Contributions are tax deductible – just like your RRSP contributions – so your taxable income for the year in which you contribute will decrease by the amount contributed to your FHSA. Any withdrawals (including investment-related gains) from the FHSA are tax free, provided that you withdraw the money to help purchase a home. Like most other registered accounts, you can hold a wide range of investments in your FHSA, from stocks and bonds to mutual funds, ETFs and more. Keep in mind, however, that your FHSA can only stay open for up to 15 years. If you invest in risky securities prone to dramatic price movements, you might not have enough time to recover from significant losses – especially if the securities decline sharply closer to the 15-year mark. The best course is to consult with an Investment Advisor for guidance on the investments that best suit your specific timeline and capacity for risk. If you don’t use your FHSA to buy a home within 15 years, you must close the account. You can move the assets to an RRSP or RRIF tax free or simply withdraw the funds, but in the latter case the amount will be fully taxable as income. FHSA, HBP, or Both? The FHSA is not the only option the government has provided for first time home buyers. The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP on a tax-free basis to purchase your first home. You’re given 15 years to repay that amount to your RRSP, based on a prescribed schedule that includes a minimum annual repayment (you’re permitted to repay a larger amount in a given year, or the entire amount any time before the 15-year period ends). If you don’t repay the full amount within 15 years, the outstanding balance is considered taxable income. Whether you should choose the FHSA, the HBP, or both will depend on your personal circumstances. Many people start contributing to an RRSP before they’re ready to buy a home, so the HBP lets you tap into money you’ve already saved. If you don’t have much cash available, it’s not feasible to open an FHSA; but if you can contribute a meaningful amount, the FHSA might serve you better than the HBP since you have no obligation to repay any withdrawals. The FHSA is also useful if you’ve maxed out annual contributions to other registered accounts and want another tax-efficient way to save for a home. Get in touch with one of our Investment Advisors today for personalized guidance that can help you achieve your dream of homeownership.
Take advantage of the TFSA

read

By iA Private Wealth, January 23, 2023 Looking for something positive about soaring inflation? Given the rising cost of many goods and services, the Canadian government has raised the 2023 contribution limit for the Tax-Free Savings Account (TFSA) to $6,500, an increase of $500 from 2022. That’s good news for people who can contribute the maximum amount this year, and it may even benefit those who can’t (more about that later). How does the TFSA work? In 2009, the TFSA was introduced as another tax-advantaged way for Canadians to save for the future, joining established programs like the Registered Retirement Savings Plan (RRSP). While both savings vehicles are valuable, there’s a big difference between them. RRSP contributions are made with “pre-tax dollars” because you deduct the amount from your taxable income. Investment growth in the RRSP is tax deferred until you start withdrawing from the account. TFSA contributions are made with “after-tax” dollars with no deduction on your income tax return. However, investment growth isn’t taxed, nor are any withdrawals you make from your TFSA. Here's another great feature of TFSAs: since income earned in the account is tax-free, it won’t affect eligibility for income-tested benefits like Old Age Security, Employment Insurance, the Canada Child Benefit and credits related to HST/GST. If you’re a Canadian aged 18 or older with a valid Social Insurance Number, you can open a TFSA at a qualifying financial institution and start contributing. The federal government sets the annual contribution limit based on several factors, including the rate of inflation. If you don’t contribute the maximum amount in a given year, you may accumulate contribution room for future years. That’s why, as mentioned above, you can benefit even if you don’t contribute the maximum in 2023. TFSA contribution room is currently $88,000 (i.e., the amount available if no contributions were made from 2009 to 2023). Let’s say you managed to contribute $63,000 to your TFSA over the years. If you have the money available this year, you can contribute $25,000 ($88,000 – $63,000) to reach the limit, or chip away at your contribution room in the years to come. Just be sure you don’t exceed the contribution limit in any given year, because over-contributions face a penalty of 1% per month. For instance, if you contributed $8,500 in 2023, that’s $2,000 above the limit. You’ll be penalized $20 per month for every month the over-contribution remains in your account. Paying this tax defeats the purpose of a tax-free account, so keep track of your contribution amounts each year. Also note you can withdraw from your TFSA without tax consequences, and may recontribute the withdrawn funds to preserve your total allowable contribution amount. The only stipulation is that you cannot recontribute in the same calendar year of the withdrawal. What’s the purpose of a TFSA? Ideally, you’d allow your contributions to grow in value over time, and then make use of your savings when you need cash flow in retirement. However, there are also shorter-term uses for a TFSA. You could use your account as a tax-efficient way to save for a vacation, auto purchase, down payment for a home or another financial goal. When you need the funds you can withdraw them tax-free and still have the option to recontribute the withdrawn amount in future years. How should you invest in a TFSA? There’s no right answer since it depends on your unique circumstances, such as time horizon, risk tolerance and financial objectives. Like the RRSP, many different investments can go into a TFSA, from stocks and bonds to mutual funds, ETFs and more. Work with your Investment Advisor to create a suitable approach to TFSAs that can meet your short-term and long-term needs. For all the reasons listed above, the TFSA is a powerful tax-free investment account, so consider making the most of it for your portfolio. We can help incorporate a sound TFSA strategy into your overall wealth plan, so contact us today.
RRSPs: Not Just for Retirement

read

By iA Private Wealth, January 20, 2023 When you think about putting away money for retirement, the tax-efficient Registered Retirement Savings Plan (RRSP) probably comes to mind – and with good reason. RRSP contributions garner an immediate tax break because you can deduct the contribution amount from your taxable income. Using spousal RRSPs, couples with significant differences in taxable income can split their income and lower the overall tax burden. Any growth in RRSP value (e.g., from dividends, interest and capital gains) will remain tax sheltered until you withdraw from the plan. For many people, withdrawals begin when the RRSP converts to a Registered Retirement Income Fund. Since that usually takes place in retirement when they’re likely in a lower income tax bracket, the tax impact of these withdrawals is reduced. Other RRSP uses While the RRSP is ideal for enhancing retirement savings, other strategies for this plan may be viable, depending on your circumstances. Let’s consider four different uses for an RRSP. Fund a home purchase. Under the Home Buyers’ Plan (HBP), you’re currently allowed to withdraw up to $35,000 from your RRSP to help buy or build your home. If you’re looking to increase your down payment – perhaps to avoid having your mortgage designated as “high ratio” – borrowing from your RRSP can help. Any down payment less than 20% of the purchase price results in a high-ratio mortgage. To protect the lender from default (since high-ratio mortgages are typically riskier), you’ll need mortgage loan insurance. The premiums for this coverage are added to your mortgage payments. Even if you’re not breaching the high-ratio threshold, increasing your down payment helps reduce your mortgage and saves on interest charges. Spouses and common-law partners can also withdraw up to $35,000 in RRSP funds under the HBP. Be sure to replace the borrowed RRSP money according to the specified schedule (currently over a 15-year period). Adhere to this schedule to avoid any tax consequences. Fund your education. The Lifelong Learning Plan (LLP) currently allows you to withdraw up to $10,000 from your RRSP in a calendar year to help cover expenses related to full-time training or other learning pursuits at a qualifying educational institution. If you continue meeting the LLP conditions, you may withdraw RRSP funds in subsequent years, up until the fourth calendar year following your initial LLP withdrawal, and up to a combined total of $20,000. Repaying these funds to your RRSP takes place over a 10-year period, typically with 10% of the withdrawn amount repaid each year. The repayment schedule begins in the fifth year after your first LLP withdrawal. Each spouse/partner may withdraw up to the maximum LLP amount, either for individual use or to help fund one spouse’s/partner’s education. Support children with a disability. The Registered Disability Savings Plan (RDSP) is designed to enhance the long-term financial future of people who qualify for the disability tax credit. An effective way of achieving this goal is to transfer an RRSP via your will to an RDSP as a tax-free rollover of assets. In addition to helping your child or grandchild with a disability who was financially dependent on you at the time of your death, this strategy may lead to substantial savings in estate taxes. Note that RDSP rollovers cannot exceed the beneficiary’s lifetime contribution limit (currently $200,000). This rollover will reduce the beneficiary’s contribution limit, dollar for dollar, but won’t impede eligibility regarding income-tested disability benefits for which they qualify. Gain creditor protection. Much like insurance policies, assets held in an RRSP are protected from creditors in the event of bankruptcy (note that this does not apply to contributions or transfers made within 12 months of declaring bankruptcy). In several Canadian provinces, your RRSP is also protected from creditors even if you don’t declare bankruptcy. Additionally, RRSP assets invested in eligible products like GICs and term deposits qualify for coverage under the Canada Deposit Insurance Corporation (CDIC), where the maximum protection is currently $100,000 per qualifying deposit category, per CDIC member institution. We can build your personalized wealth plan that includes RRSPs, so contact us today.