As we near the end of the 2021 year and life winds down for the year, we find ourselves with time to reflect on what we’ve accomplished and what we still have left to do on our perpetual to do list.
Let’s call this our new years checklist, and by this I don’t mean menial superficial new years resolution announcements like wanting to eat more kale, achieving a different hue of hair color, or make 3 extra friends. In this checklist, we are going to focus on our financial health and things to consider and keep front of mind when entering the new year.
We are going to break up this checklist into 3 parts: RRSP Contributions, Filing Taxes, and Reviewing Retirement Goals. There may be others that are more pertinent to some, but these are the primary 3 that I think are applicable to the majority of folks:
RRSP Contributions
If you feel like you haven’t contributed enough to your RRSP accounts during the year, do not worry because you have until the end of February to contribute in order to receive a tax credit for the prior year. Because RRSPs are registered tax deferred accounts, the money you contribute is treated as “before tax”, and any money pulled out of an RRSP is treated like taxable income.
However, when we initially contribute to an RRSP, we are using our paychecks, or post tax, money to do so. As a result, the government provides you with a tax credit for RRSP contributions as way of making your contributions seem “pre-tax”. The tax credit received will depend on your current income level. Think of it as receiving what you would be paying in taxes in the future when you do have to pull out your RRSP monies. I’ve included a link to a RRSP tax credit calculator here for reference.
Al contributes $3,000 to his RRSP in 2021. He will receive a tax credit of say $1000 in his 2021 tax return (effective tax rate of say 25%). The idea would be to take out this sum of money (hopefully grown since initial contribution) from the RRSP in the future in which would be taxed at Al’s income level during that year of removal.
Folks should review how much they have contributed to their RRSPs during the year, and figure out whether they want to contribute more before the end of February. As reviewed in Lesson 18, folks should also consider reinvesting the tax credit received from making RRSP contributions to further compound their returns to fully stretch that dollar amount.
Filing Taxes
I think it’s a fair statement to say that most people hate the thought of, or the process of, filing taxes. And yes, I’m including accountants in this group of people! However, filing taxes can seem exciting especially if you are expecting a net positive tax return. However, keep in mind that if you are receiving a tax credit, it usually means that you simply paid too much tax last year, and you are just getting back what you should have pocketed already. It’s easy to do mental accounting and treat a tax credit like a bonus to spend on frivolous things, but keep in mind it’s money that you should have already had.
As much as I think filing taxes is a redundant exercise that we all have to do considering governments already have a rough idea of how much we paid or should be paying, filing taxes is inevitable and we all have to do it. With that said, it’s important to make sure you have and receive all your relevant tax documents. Not only that, make sure you keep record of your tax documents and tax filings for at least 7 years (digital and paper copies). This includes Notice of Assessments and completed tax filings. Canadian tax documents will typically include statements of income (T-4 form), realized gains and dividend income in non registered accounts (T-5 form), RRSP contribution slips, donation tax credit slips, to name a few.
On a related note, another item to consider that falls under the “filing tax” checklist item is whether you will be needing an accountant or not. Tax software like Turbo Tax is an easy and affordable way to self file taxes. However, if you are filing taxes for multiple people in your household, or have tax filings that are going to be more complicated in nature (i.e. business income, cross border or foreign income and investments, etc.), then consulting a tax accountant is highly recommended. Paying a few hundred dollars in accounting fees is definitely worth the piece of mind and avoiding the headache of trying to go through all of the complications of filing taxes yourself and making sure you don’t screw up and having to owe more money to the government. Yes, the CRA may actually phone you if they find an egregious error on your tax filing… (speaking from experience admittedly). There are many small business or personal tax accountants that are out there that can help you with filing taxes. Make it easy on yourself!
Review Retirement Goals
The end of the year is a good time to reflect on your current financial situation, and reflect on the progress made over the year towards your retirement goals. Setting up an appointment and speaking with a financial advisor may be timely heading into the new year to review whether your prior retirement, savings, and investment goals are still achievable and realistic, or whether there needs to be adjustments made to these objectives. Through this retirement goal review, you may find yourself in a position to add new goals to your list of financial objectives. Maybe you have a little bid of extra side savings that you want to use for vacation, or to put towards a principal payment on your primary residence. A year end review can also proactively look at any anticipated increases in income and expenses throughout the next year, and proactively plan around these regarding leveraging effective tax strategies and realizing of capital gains/losses to offset future financial burdens.
Think of this retirement goal review as a checkup appointment that you would normally be doing with a physician or mental health expert for your personal health. Similar to meeting with a health professional, ultimately you want to ask yourself… How am I doing? What should I continue doing to achieve my goals? What should I be doing differently to achieve my goals?
Making this proactive nature about your financial health a habit will ensure that you are better positioned and ready for any disruptions, unplanned events, and other unavoidable financial burdens that one may encounter multiple times over your lifetime. Additionally, I think personal year end reviews about your financial well being are much more enjoyable (and valuable) than trying to come up with some inspirational quote and hallmark photo to post on social media to the world that encapsulates your overview for the year and what’s to come for future years ahead… yuck!