With the current turmoil in the financial markets, a return to basics can reassure you.
Here is the last of two chronicles to stimulate your thinking.
Rely on a detailed cash flow projection
The choice of calculation assumptions is of the utmost importance. The main assumptions discussed are the rate of inflation, rates of return and life expectancy.
Assumptions must be realistic and seen over a long-term horizon (5 years and more).
Projection assumption standards are recommended annually by the IQPF (Institut québécois de planification financière) and its Canadian equivalent (FP Canada Standards Council), calculations must be closely based on them.
The accuracy of the calculation of taxes payable (Quebec and federal) is essential and must take into account the different tax brackets rather than an average rate.
An annual review of your cash flow projections is necessary to ensure you stay in the desired direction.
Depending on the evolution of your personal situation and the economic environment, a new cash flow projection exercise should be done every three to five years.
Choose the right investment account
Achieving your goals will only be optimal if you take advantage of the right types of investment accounts.
RRSP (Registered Retirement Savings Plan)
This account includes a tax incentive in the form of a deduction on the contribution made. You even have the flexibility to choose in which year you will use the deduction.
A second tax advantage will be to obtain annual returns without any taxation.
With exceptions (Home Buyers’ Plan or Lifelong Learning Plan), withdrawals will be taxed at your marginal tax rate. Careful planning will minimize the tax burden.
Contribution room must be acquired in order to contribute. The Canada Revenue Agency tracks your contribution room and shares an annual update on your notice of assessment.
LIRA (Locked-in Retirement Account)
This account is the result of the transfer of a pension plan from a former employer into an investment account.
Unlike an RRSP, no contributions are possible.
Annual returns are also tax sheltered.
During withdrawals, a maximum amount must be respected annually. It is therefore recommended to check the relevance of setting up an unlocking plan.
TFSA (Tax-Free Savings Account)
Since 2009, annual contribution rights have been allocated to all Canadian residents aged 18 and over. Being cumulative, these rights now total $81,500.
The advantages of this account are numerous: tax-sheltered returns, tax-free withdrawals, no obligation to withdraw, space recovery the year following a withdrawal.
RESP (Registered Education Savings Plan)
The first advantage of this account is a minimum subsidy of 30% when contributing and the possibility of obtaining a Canada learning bond of $500 when the account is opened and $100 annually thereafter for low-income families.
The maximum contribution allowed per beneficiary is $50,000.
Annual returns from this account are also tax-sheltered, earnings will be taxable in the hands of the beneficiary upon withdrawal. However, the tax rate for beneficiaries is often nil or low.
These funds will ultimately be used to finance the beneficiary’s post-secondary studies.
Take advantage of taxation
The Quebec and Canadian tax system aims to tax all our income from global sources.This same tax system also offers several savings incentives, your financial planner will help you select those that meet your goals.
The investor profile we discussed last month shows you the distribution of your investments between the different asset classes (cash, fixed income and equities).
The different taxation of the many investment accounts (non-registered, RRSP / LIRA, TFSA, RESP, holding company) and the sequence of use will explain that all these accounts will not have the same asset distribution but will respect as a whole
your investor profile.
A detailed analysis of your objectives will be necessary to fully benefit from the tax advantages.
Split your income
Eligible retirement income
When filing your income tax returns, you can split up to a maximum of 50% of your eligible retirement income between spouses.
Eligible income is only annuities from a defined benefit pension plan before the age of 65 and only in the federal income tax return (not that of Revenu Québec).
From the age of 65, the federal government and Revenu Québec will allow this splitting on annuities from a defined benefit pension plan and RRIF / LIF withdrawals (transformation of RRSP / LIRA).
This strategy could be worth hundreds or thousands of dollars in tax savings.
Divide your retirement pensions from QPP
When there is a significant difference between the retirement pensions of the spouses in the couple and the spouse with the largest QPP retirement pension is also the one taxed at a higher marginal tax rate, it is relevant to consider the division QPP pensions.
Spousal RRSP
The projection of the future cash flows of both spouses will make it possible to verify the relevance of making contributions to the spousal RRSP and thus minimize the tax burden of the retired couple.
If you have used this strategy, you will need to carefully plan withdrawals at the beginning of retirement to protect this income splitting.
Manage your debts
The first step is to establish a state of the situation by drawing up a detailed inventory of your various loans: types of loan, interest rate, payment and frequency, maturity.
Then, using your budget, you can plan the gradual reduction of your debts, starting with the most expensive ones.
Using a shorter payment frequency (weekly or accelerated weekly) will allow you to reduce the amortization period of your loan and could save you a lot of interest.
Conclusions
The most important thing in financial planning is to understand that the key to success is definitely not unique and that only the analysis of your personal situation will determine the combination that will lead to your success.
You will have recourse to several professionals (investment advisor, financial security advisor, accountant, tax specialist, notary, lawyer) in the implementation of your financial planning strategies and recommendations. Our role is to support you in the coordination of all these professionals in order to eliminate any interference and achieve the optimization of your personal financial situation.
We will be organizing one-hour webinars on the subject starting in September. Write to us at info@gaumont.ca to let us know you are interested in participating.
It will be our pleasure to prepare or update your financial planning so that you always have a clear vision of your financial destiny, even during periods of turbulence.