With another year coming to an end, and the New Year just around the corner, we’ve put together our ‘Top 3 Last-Minute Financial Planning Tips and Strategies for 2019.’ Let’s take a look at ways you can improve your personal year end:
Tip #1: Make Your RESP Contributions
Do you have a child under the age of 18? If so, and if and you’re planning to contribute to an RESP, be sure to make your contribution before December 31st. Although you can continue to contribute to an RESP after the child reaches age 18, the Canada Education Savings Grant (CESG) will no longer be available after December 31st of the calendar year in which the child turns age 17. Furthermore, if your child is age 16 or 17, special rules for the CESG will apply. If you’re concerned about how this may impact you, just ask us.
How does it work? The first $2,500 of annual RESP contribution is eligible for a 20 percent CESG matching contribution. That is, if you contribute $2,500, you will earn $500 CESG, provided that the beneficiary is of qualifying age. Further, CESG is limited to a maximum of $500 per child, per year, and a $7,200 lifetime limit per child. Although there is a carry-forward provision available for unused years, it is generally advantageous to contribute at least $2,500 each year to make sure you receive the maximum CESG matching contribution.
Tip #2: Year End Tax-Loss Selling
As there are no tax consequences of investment gains and losses in registered accounts such as RESPs, TFSAs, and RRSPs, tax-loss selling is applicable only in non-registered accounts. Recall that, in non-registered accounts, capital losses can be used to offset capital gains. Tax-loss selling is a strategy based on this fact, and provides you with an opportunity to make good use of losses – by using them to offset taxes owing on capital gains generated elsewhere. So, if you have realized some capital gains this year, and have some unrealized capital losses as well, it may make sense to sell some of those positions which have declined. By doing so, you can use the losses to offset the gains, and neutralize the taxes that would have been otherwise owing on the gains. However, be careful not to let taxes alone be the sole determinant of your investment decisions. Taxes are an important consideration, but not the only consideration – your risk tolerance, time horizon, and long-term investment goals, should also be taken into account when considering any adjustments to your investment portfolio.
What if you have capital losses, but no capital gains? In this case, you can “harvest” the losses, and use them to offset gains in another year. Capital losses can be carried backward up to three years, or carried forward indefinitely, and used to offset gains accordingly. Note that the year end deadline for tax-loss selling for the 2019 calendar year is December 27, 2019. That is, trades would have to be executed on or before that day, in order for the gains or losses to be attributable to the 2019 calendar year.
Tip #3: Year End RRSP Contributions
We include the discussion of RRSP contributions here, but unlike the RESP contributions and tax-loss selling issues mentioned above, the RRSP contribution deadline isn’t quite as urgent. That’s because contributions made in the first 60 days of 2020 can still be attributed to the 2019 tax year. Note that contributions in the first 60 days of 2020 don’t have to be attributed to 2019, and can also be attributed to 2020 – it’s entirely your choice whether to attribute those contributions to 2019 or 2020. Also, note that, because the 60th day of 2020 falls on a weekend, the deadline to make an RRSP contribution for the 2019 tax year is March 2nd, 2020.
Of course, just because you can wait until March 2nd doesn’t mean that you should. Scrambling to come up with the funds required for a last-minute RRSP contribution is all too common. For 2020, try changing your RRSP contribution strategy to a more balanced, year-round approach. Doing so has both financial and psychological benefits. Financially, waiting until the last minute simply means forfeiting a year’s worth of tax-free growth. On the other hand, making regular contributions throughout the year increases the amount of time your savings can grow tax-sheltered inside the RRSP. Over a lifetime of investing, it really adds up! By making regular contributions throughout the year, you won’t be scrambling at the last minute to find the money for your RRSP contribution. Psychologically, you can alleviate the pressure of trying to come up with the money to contribute, and also avoid the stress and anxiety of trying to decide if now is the ‘right time’ to make your lump sum RRSP investment.
Are you wondering about year end RESP contributions, whether or not you should sell assets to trigger a capital loss, or how much you should contribute to your RRSP? We can help. If you want to speak with a professional advisor, or if you have any other questions about any of our services at ModernAdvisor, just contact us.