Weekend Reading – Important numbers for 2023 edition
I hope you are having a happy and enjoyable holiday season…
Welcome to my final Weekend Reading edition for 2022 – a look ahead at your important numbers for 2023 and other saving and investing tips to consider.
New Year Financial Checklist
As you can appreciate, there is a lot of financial ground that any new year can cover.
So, consider this new year and this Weekend Reading edition a decent starting point for some financial checklist items, including the important numbers for 2023 that follow.
To keep you focused and organized this new year:
- Revisit your cashflow. Understand where your money is coming in from and where that money is going. Where possible over the coming year, try and grow the gap between income earned and expenses. (We’ll try and do that more often in 2023 ourselves as we strive for semi-retirement in the coming year or so…)
- Set up automatic savings for investment purposes. Assuming you have the aforementioned positive cashflow gap, invest for long-term wealth-building (as you pay down any remaining debt). Ideally, you aspire to be out of debt sooner than later since debt obligations unfortunately pay other people first. (We hope to be out of mortgage debt in the coming 15-16 months.)
- Consider investing inside your TFSA, first. You’ll read why more on that below, but the start of any new year is a great time to add more money and invest long-term in a tax-free investment account. (We’ll be maxing out contributions to our TFSAs next week!)
- Consider investing inside your RRSP after your TFSA is maxed. In doing so, you can lower your taxable income AND defer taxation for further wealth-building over time. (We’ll contribute to our RRSPs this spring, with the goal to max out those accounts before the summer.)
- RESP contributions are amazing as well. If you have kids, after your own TFSA is maxed out at least for your financial future, it’s tough to beat the RESP (Registered Education Savings Plan) to support their financial needs for higher education. A reminder that with your annual contribution the government will chip in an additional 20% up to a maximum of $500 per year per child ($7200 total per child over the RESP lifetime).
- Revisit Wills and life insurance needs. These are not sexy personal finance topics like juicy compounding dividends and distributions garner every month but these are foundational, very important personal finance *matters that should never be overlooked! (*I have a standing discount with LegalWills to consider that gives you 15% off any product with my personal promo code.) (We need to do this ourselves.)
Alright, let’s get into some important numbers and some calls to action for this upcoming tax year.
Weekend Reading – Important numbers for 2023 edition
1. Contribute to your Tax-Free Savings Account (TFSA) this new year
You might already know by now that a Tax-Free Savings Account is not just a savings account – even though I personally hate the name.
(I even suggested some name changes to various financial accounts 10 years ago…)
Thankfully for all adult Canadians, the TFSA can hold stocks, low-cost Exchange Traded Funds (ETFs) and more. The beauty of this account: all the gains you make inside this account are tax-free and should you want to make any TFSA withdrawals, well, that happens tax-free too!
TFSA limit: The 2023 TFSA contribution limit increased for the first time since 2019 to $6,500 (from $6,000). The cumulative TFSA limit is now $88,000 for someone who has never contributed to a TFSA, and has been a resident of Canada and at least 18 years of age since 2009.
Here are the dollar amounts by year:
|For 2009, 2010, 2011 and 2012:||$5,000|
|For 2013 and 2014:||$5,500|
|For 2016, 2017 and 2018:||$5,500|
|For 2019, 2020, 2021 and 2022||$6,000|
Assuming you have the contribution funds available, early each year, I believe it makes great sense to strive and max out your TFSA contributions in January to get your money compounding away early and throughout the year.
Sure, you can DCA (Dollar Cost Average) but statistics tell us that historically Lump Sum Investing (LSI) works out for us more often than not.
A nice reminder there is this comprehensive post about TFSAs so you can take full advantage of its power over time!
2. Contribute to your Registered Retirement Savings Plan (RRSP) this new year
Regardless if you prioritize your TFSA over your RRSP like I do, the facts are – saving and investing inside your Registered Retirement Savings Plan (RRSP) remains one of the best ways to fund your retirement.
RRSP dollar limit: The registered retirement savings plan dollar limit for 2023 is $30,780, up from $29,210 in 2022. Of course, the amount you can contribute to your RRSP is limited to 18 per cent of your 2022 earned income, which includes (self) employment and rental income, less any pension adjustments, up to the current annual dollar limit.
If you do choose to max out your RRSP contributions over your TFSA, that’s fine, just remember this:
From my article:
“If you’re going to put money in a registered retirement savings plan and “blow the refund on something stupid,” then a major advantage of the RRSP – the immediate tax benefit – is lost…”
3. Be mindful of the inflation adjustment factor for taxation this new year
Most (but not all) income tax and benefit amounts are indexed to inflation. In November 2022, our Canada Revenue Agency announced the inflation rate to be used to index the 2023 tax brackets and amounts would be 6.3 per cent.
This inflation factor might have a few implications for you:
3a. Increases to the tax-bracket thresholds and various amounts relating to non-refundable credits take effect on Jan. 1, 2023. But increases for certain benefits, such as the GST/HST credit and Canada Child Benefit, only take effect on July 1, 2023. This coincides with the beginning of the program year for these benefit payments, which are income tested and based on your prior year’s net income, to be reported on your 2022 tax return due this spring.
3b. All federal income tax brackets for 2023 have been indexed to inflation using the 6.3-per-cent rate.
3c. Each province also has its own set of provincial tax brackets, most of which have also been indexed to inflation, but using their respective provincial indexation factors.
4. Be mindful of new CPP and OAS contributions and limits this new year
For this year:
CPP (QPP) contributions: The contribution rate for 2023 is 5.95 per cent (6.4 per cent for the Quebec Pension Plan) with maximum contributions by employees and employers set at $3,754.45 ($4,038.40 for QPP) in 2023, based on the new yearly maximum pensionable earnings of $66,600 (with a $3,500 basic exemption.)
Old Age Security (OAS): If you receive OAS, the repayment threshold for 2023 is set at $86,912, meaning your OAS will be reduced in 2023 if your taxable income is above this amount.
In running hundreds of cashflow and retirement income planning scenarios for Canadians, link below (!), I’ve found that depending on income needs and wants of course, the “sweet spot” for many Canadians to enjoy retirement spending while keeping taxation consistently low is around an average monthly spend of about $5,000 – $6,000 (after-taxes).
You can read some related retirement income case studies here:
Want any help with your retirement income planning?
This is a great time to remind you I run a very Helpful Site called Cashflows & Portfolios that can help answer retirement income planning and cashflow management questions.
Subscribe for free and hit me up with a comment on one of our case studies!
5. Consider using the First Home Savings Accounts (FHSA) this year
Legislation to create the new tax-free FHSA was recently passed, and this account could be ready for use early next year.
In Budget 2022, the government proposed the introduction of the Tax-Free First Home Savings Account (FHSA). This new registered plan would give prospective first-time home buyers the ability to save $40,000 on a tax-free basis. Like a Registered Retirement Savings Plan (RRSP), contributions would be tax-deductible, and withdrawals to purchase a first home—including from investment income—would be non-taxable, like a Tax-Free Savings Account (TFSA).
The government expects that Canadians will be able to open and contribute to an FHSA at some point in 2023. No matter when this happens in 2023, Canadians would be allowed to contribute the full $8,000 annual limit in that year.
To open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, an individual must be a first-time home buyer, meaning that they have not owned a home in which they lived at any time during the part of the calendar year before the account is opened or at any time in the preceding four calendar years. For this purpose, ownership is defined broadly and includes beneficial ownership, but excludes a right to acquire less than 10% of a qualifying home.
An FHSA of an individual would cease to be an FHSA, and the individual would not be permitted to open an FHSA, after December 31 the year in which the earliest of these events occurs:
- The fifteenth anniversary of the individual first opening an FHSA; or
- The individual turns 71 years old.
Any savings not used to purchase a qualifying home could be transferred on a tax-free basis into an RRSP or Registered Retirement Income Fund (RRIF) or would otherwise have to be withdrawn on a taxable basis. Individuals that make a qualifying withdrawal could transfer any unwithdrawn savings on a tax-free basis to an RRSP or RRIF until December 31 of the year following the year of their first qualifying withdrawal.
The lifetime limit on contributions would be $40,000, with an annual contribution limit of $8,000. In other words, individuals would be subject to the lesser of their annual limit and remaining lifetime limit. The full annual limit would be available starting in 2023.
Like a RRSP, contributions to an FHSA will be tax deductible, but withdrawals to purchase a first home, including from any investment income or growth earned in the account, will, like a TFSA, be non-taxable. The new legislation confirms that a first-time homebuyer can use both the FHSA and the existing Home Buyers’ Plan to purchase their first home.
More Weekend Reading…
Ben Carlson offers up some reminders why you (and I) should invest in the stock market this year.
“Owning shares in the stock market gives you access to the profits, dividends, sales, growth, innovation and ingenuity of the biggest and best companies in the world.”
In case you missed it, you can learn how to skim the index and build your own fund of stocks here.
Want diversification? A reminder that Canada owns just a very small portion of the world of stocks – a great visual from the folks at Visual Capitalist in this link.
“Just five countries make up more than half of the world’s entire GDP in 2022: the U.S., China, Japan, India, and Germany. Interestingly, India replaced the UK this year as a top five economy.”
I’m putting the keystrokes on my final 2022 dividend income update tally in the coming days, but before that post, check out my November income update below. Our goal is to surpass $30k per year in annual dividend income (from a few key investment accounts) in just a few short months. I will keep you posted of course!
A reminder about my upcoming event with TD! Free!
Check out my upcoming chat with the folks at TD Bank where some of these Laws of Wealth factor into my retirement income drawdown plan.