Year end tax tips and financial housekeeping
Jingle bells…jingle bells…jingle all the way…
Geez, right around the corner isn’t it?
The holiday season signals the end of something old and the beginning of something new. It’s a great time of year to spend time with family and friends, after you check off these year-end tax tips and complete these financial housekeeping chores.
Realize capital losses – I’ve sold some investments over the years in my taxable account to offset some capital gains. I believe “selling losers” can be a good tax management strategy, it can make great sense if you reported capital gains during the year or in recent years. You can read up about net capital losses in other years here.
Make charitable donations – We contribute to a few charities throughout the year and this year was no exception. We consider ourselves very lucky and want to help others that are less fortunate or in need. A reminder you have until December 31st to make your charitable donations to qualify for this tax year.
Get your small business income and taxes organized – Running My Own Advisor takes some work but there are some benefits as well. I’ll be looking at tallying some of the following in the next few weeks to review tax implications for this year:
- Business-related meals and travel.
- Mortgage interest.
- A portion of the property taxes.
- A portion of the heat, hydro and utility bills.
Review your insurance – I recently got a letter from my home and auto insurance company that indicated my premiums for home insurance are climbing higher. I’m going to look into what’s going on and negotiate where I can. I suspect it has to do with our property value moving higher over the last year.
Revisit your portfolio – Asset allocation is important (the mix of stocks, bonds, real estate and other investments) but investors often overlook asset location; what investments go where. Disregarding what should go where can be costly from a tax perspective if not done properly.
For example, I keep U.S.-listed dividend paying stocks and Exchange Traded Funds (ETFs) in my Registered Retirement Savings Plan (RRSP) only.
Why?
U.S-dividend paying stocks and ETFs do not receive any favourable tax treatment from our Canadian government. By keeping U.S. stocks inside my RRSP I avoid paying any withholding taxes. This means I keep Canadian dividends stocks spread around other accounts, including a non-registered one for the friendly dividend tax credit.
Set some new financial goals – Every year we post a few of our key financial goals and next year will be no different. Stay tuned to read those.
Contribute to your RRSP – Although you usually have until about March 1 next year to make a contribution to your RRSP consider putting more money into this account before that date – to maximize contributions. Recall RRSP contributions will entitle you to a deduction on this year’s tax return. It’s a nice government loan that you can grow tax-deferred.
Make TFSA withdrawals – We consider our Tax Free Savings Accounts (TFSAs) like another retirement account (the RRSP) so we don’t touch the money that goes into it. We make contributions every new year and let the money grow tax-free. However, if you’re using your TFSA as truly a saving account, and you need the money soon, consider making TFSA withdrawals before the end of December. If you withdraw funds from your TFSA before the end of this year you’ll be entitled to re-contribute the same amount beginning January next year.
Review your will – Times flies when you’re having fun but it’s very important to ensure your wishes and financial affairs are always up to date for your loved ones. Review your will. If you don’t have a will for your family, don’t be an a$$ and get one already.
Withdraw RRSP or RRIF funds – We remain in our asset accumulation years but if you’re retired, or you have little to no income this tax year, consider withdrawing funds from your RRSP or RRIF to minimize the tax hit on these tax-deferred accounts.
Get the pension credit – Government rules dictate you can get a pension credit to offset tax on the first $2,000 of eligible pension income annually; income that also includes any withdrawals from an RRIF if you’re 65 or older. Don’t forget this credit!
Convert your RRSP to a RRIF – If you turned age 71 this year, you may wish to establish a RRIF from your RRSP. One of the benefits of the RRIF? You can keep the same assets inside your RRIF that your RRSP has, when you move assets over.
Year-end provides us all with opportunities to revisit the past and look forward. I hope these year-end tax tips and financial housekeeping reminders provide you with opportunities to save more, invest more, so you can prosper well into next year and beyond.
What year-end financial plans do you have?
Scotia iTrade charges $50 per withdrawal from an RRSP. Regardless of your account holdings.
Seems inline with BMO and other brokerages Jambo – thanks for the information.
LOL, I think this might be a more accurate representation:
Gov’t to retail investor: We gave you an incentive to save and look after yourself instead of being on the government dole.
Retail investor: Oh, right, but I expected my taxes to be less when I take it out since I am earning 50% less.
Gov’t: Hell no. We charge withholding taxes at the same rate as when you contribute which is our way to ensure we get “our” money back at some point. The sooner the better, and since you’ll get a refund at tax time that’s good enough.
Retail investor: Damn. Since you guys have all the information you know that few retirees with a 15K RRSP or RRIF ever pay taxes that high, and I wish you would stop the bureaucratic nonsense and games with people who actually did something good to look after themselves …”
Gov’t: Hell no. Too many of us would be out of jobs and you’d get an even bigger refund then.
I think most of us always expected to pay tax, just not 30% on a small amount like $15K. 30% applies to someone making $105K in retirement!! More than 95% of all retirees! Tax free wasn’t even around for years when I stopped contributing in 2004!
Addendum –
Govt: Besides we need all those people to administer more hair brained ideas like the RRSP first time home buyers plan that directly conflicts with the idea of saving for retirement.
Another interesting note on RRSP withholding rates:
If I were to convert all of my RRSP to a RRIF at my age the minimum withdrawal would exceed the 15K highest tier 30% RRSP tax withholding rate. Staying at this minimum means zero tax is withheld (even with a 15K+ lump sum withdrawal) vs 30% lump sum from RRSP =$4500.
end rant~!
Prior to posting I had no idea that there is zero withholding tax on minimum withdrawals from RRIFs. Good to know! I like the option of “playing with the government’s money” before settling up at tax time the following spring. By all means I will get the details in writing, as Barbara suggests, later in 2017 before I do decide which route to take.
Thanks again for the replies to my queries regarding RRSP/RRIF withdrawals!
Good stuff Bernie…yes, keep RRIF withdrawals to a min. – set that up with your bank – and as you say…”play with some government money” until they come get you at tax time 🙂
Again, you can always keep some RRSPs and some RRIFs, before end of the year age 71.
Since posting I found some conflicting info on the BMO RRSP withdrawal fees. They might be $100 if balance is under $25K. An account holder can find out easy enough.
Bernie, you’re mostly right. However you can make multiple withdrawals from your RRSP and only pay the applicable tax for each lump sum. This is what I do.
ie your example – 4 x $5K = withholding tax of 10% each time = 4 x $500
RRSP withdrawal fees vary at different institutions. BMO is $50 (which is most common) and free if your balance is over $25K
Also to be clear the withholding tax is not necessarily your final tax, which would be calculated when you do your tax return. You may owe or you may have a refund depending on your income and tax rate.
I agree with Barbara the withholding tax rates are too high. $15K is not a large amount and its unlikely someone taking that amount out is going to pay a tax rate anywhere near 30%
Stated another way…withholding tax is really an immediate “grab” until you do your final taxes no?
So, you can do multiples of $5,000 during the year from RRSP, take the 10% hit, so $500 each time correct? Again, haven’t done it yet but this is my understanding.
Pretty much. Yes, I take it out in 5K amounts to reduce taxes initially, but ultimately end up paying more at tax time (but much less than 30% than I would otherwise be charged initially). It works because I don’t have fees involved and it’s the exact same procedure as transferring money between chequing and saving. Log on, a couple of mouse clicks and done.
Just my opinion but I think the $ tiers should be expanded- maybe double+ would be more reasonable.
VERY few people I know of pay 30% tax in retirement and a 15K withdrawal is too low to charge that much. 20% on a 6K withdrawal??? If most people had to actually pay that much in tax there would little/no benefit to contributing in the first place.
Some rough numbers: Our combined household taxable income would need to be 210K+ to pay 30% tax in retirement with income splitting and minimal dividends and no capital gains. At a 20% tax rate our combined household taxable income needs to be $105K. We also live in a highly taxed province and most Canadians pay less. This helps put these rather low RRSP/RRIF tax tiers in perspective.
OK, that’s what I thought…small amounts of $5k get hit with $500 (10%) withholding each time.
“VERY few people I know of pay 30% tax in retirement” – I suspect that’s because of lower income (lower than working income, taxed at highest marginal rate) or splitting pension income though?
“At a 20% tax rate our combined household taxable income needs to be $105K.” Geez, good tax rate retirees…I would like that tax rate now 🙂
Yes, it’s due to the factors above, which furthers my suggestion that the 2 top withholding rates are too high. Retirees generally make significantly lower incomes than when working, and in some cases can income split which is also beneficial to lower tax rates. We can split income so it is easy to make our incomes equal and I expect your DB pension will also allow you to be in the same boat. The reality is the government has set these rates to ensure they will get all and likely more than their share upon withdrawal, unless someone gets more creative such as making multiple RRSP withdrawals, sometimes with fees. It’s harder to do with RRIF or LIFs.
LOL, yes you would and so would I have, although your pension/RRSP has to be considered too.
I also suspect you make much more working now than half of the $105 = $52.5K taxable income annually hence the higher rate!
Yes, that has been my understanding as well…
Gov’t to retail investor: We gave you a tax-deferred loan.
Retail investor: Oh, right, I thought it was a tax-free account, this RRSP thing?
Gov’t: Hell no. The withholding taxes are our way to ensure we get our money back at some point. The sooner the better!
Retail investor: Damn. I wish I knew how RRSPs work…
🙂
You still pay no withholding tax on the minimum withdrawal. On the extra amount, if you set up the payments all at one time, they will calculate the rate on that total extra amount. However, if you do ask for an extra payment, you will pay the rate applicable for the one time payment. Aside from that aspect, I had to pay a $100 fee for every RRSP withdrawal–too much.
Also, you can have two or more RRIFs at different institutions, take lower amounts from each and pay lower withholding taxes as there would be zero paid on the separate minimum withdrawals. In the end you pay the same income tax. But I was annoyed to pay 30 percent tax and have to wait to have it refunded many months later. The rate is too high, imo.
Barbara,
That is crazy that you have to pay fees on your account like the $100 for RRSP withdrawals! Is this policy with a discount broker? Is it because your account size is small? All my investments are with BMO InvestorLine. I’ve never had to pay any account fees in the past but perhaps I should inquire if any fees are involved before making any withdrawals.
No, my RRSP account is not small, but most of it was held with a financial advisor (kinda a long story how it ended up there….). I thought all places had a similar fee, because it had to be de-registered?? But just had a look and I see that they can vary quite a bit between places, I only did one large withdrawal a year. I have limited income (I own a rental property) so have been doing withdrawals for a few years now, to hopefully smooth out the taxation, and then re-investing the amount.
In any case, I moved all my holdings from my advisor and his firm into two different discount brokerage during this past year. I had wanted to do that for awhile, but I had a RESP which incurred no fees, even for withdrawals, and it was more tricky to move that account, so I waited until I closed that out. My son got the last money this summer. It was kinda like breaking up with a friend…but my old advisor was very nice about it all. The transfers all went very smoothly.
You should be able to find the fee schedule for BMO online, or phone them if you prefer. I like to have everything in writing, so don’t do much on the telephone. Even in emails they make mistakes about things.
OK…but I was always thinking RRIF min. withdrawals have no withholding tax.
RRSPs have withholding tax, for sure, although I haven’t experienced that yet but there is a scale, 10%, 20%, 30%, etc., different rules for Quebec.
Yes, you can have a number of RRIFs just like you can have a number of RRSPs. The RRSP withholding tax is very high over $5,000. Totally agree.
RBull & Barbara,
Thanks for your replies. I’ve looked at the links provided and it appears I would be better off to convert to a RRIF ONLY if I were to withdraw the minimum required amount. If I withdraw more than the minimum, I would be subject to the same withholding tax for either account. For example if my minimum RRIF withdrawal requirement was $10,000 but I wanted to withdraw $20,000 via $5,000 quarterly payments I would be subject to the full 30% withholdings taxes whether my account was an RRSP or a RRIF.
Bernie, the pension income tax credit is a consideration for choosing to convert a RRSP to a RRIF when you are ready to make withdrawals (if you are already not aware or using this) that must continue for life at a set minimum rate or higher (as you choose). You can set up only a portion of your RRSP in a RRIF or have numerous RRIFs, if this works better for you, meaning it doesn’t have to be just one or the other situation. Some institutions charge for each RRSP withdrawal but not for RRIF withdrawals, which can be set up with many optional payment schedules such as monthly or annually etc.
http://www.advisor.ca/tax/tax-news/understanding-the-pension-income-tax-credit-141669
It’s hard to answer your question without knowing more about your situation. Some factors I can think of are tax smoothing, income splitting, spouse income/pension, timing/need for income, inheritance, health/life expectancy.
Withholding tax rates are the same for RRSP & RRIF’s although a minimum RRIF withdrawal has no tax withheld.
http://www.taxtips.ca/rrsp/withholdingtax.htm
I am in the process of converting some of my RRSP to a RRIF, I am a lot younger than you. As I am making withdrawals every year due to my low income, it is beneficial to convert. I will not have to pay that large fee which is charged on RRSP withdrawals and I can do several smaller withdrawals if I want, thus the withholding tax will be much lower or zero on the minimum withdrawal amount. When I am 65, I will be able to use the pension income tax credit. I should have converted it a few years ago.
Barbara,
I wasn’t aware withholding taxes are lower with RRIF withdrawals than with RRSP withdrawals. Can you explain further please.
The larger your withdrawal, the higher the withholding rate is, I have typically had 30 percent withheld until May when it is refunded. With an RRIF I could do many $4000 withdrawals at a lower rate.
Are you sure there are withholding taxes for RRIFs? It’s only in effect if you take out more than the min. I think. Extra reference:
http://www.taxtips.ca/rrsp/withholdingtax.htm
You’re savvy so you know what to do with your RRSP – withdraw in your lowest income years if you can. I recall if you have a RRIF there is no longer any withholding tax because the government is guaranteed to get some of their money back via your forced min. withdrawals. Yes, that pension credit is likely very valuable. I hope to get it in another 25 years but who knows what the tax laws will be then!
Good common sense advise Mark!
! have a question regarding converting an RRSP to a RRIF. I’ve been retired for about 5 years and have yet to withdraw from my investments but plan to start in 2018. I’ll be 67 later in 2017. Is there any advantage to converting my RRSP over to an RRIF when I start withdrawing or should I wait until 71? Minimum required withdrawals isn’t a factor in this decision as my wife is much younger than me.
Hey Bernie,
My thinking on RRSP to a RRIF is to smooth out taxes and provide a predictable cash flow. I’m not “there” yet but I think starting at least part of your RRIF (from RRSP) where you are now is a good idea. You can always take out more than the minimum but in the early years you can at least start with that – as you wind down the RRSP.