Celebrations, shopping, gifting, vacations—the holidays often conjure up more reasons to spend than to save. But the end of the year actually presents a good opportunity to shore up financial goals, including your short-term savings, your child’s education, and your retirement. You could even reduce your tax bill in the process.
With the deadline for contributing to many Canadian registered savings plans occurring at year’s end or, in the case of Registered Retirement Savings Plans (RRSPs), the first 60 days of the new year, it’s time to think about how much you’ll be able to contribute. The three most common registered accounts are the aforementioned RRSPs, Tax-Free Savings Accounts (TFSAs), and Registered Education Savings Plans (RESPs). How you should prioritize these plans depends on how much money you have to contribute and your top goals. Read on to learn about these three savings vehicles and how to prepare your finances for maximum benefit.
Conduct a high-level audit of your finances.
Before you can determine the best way to invest your year-end contributions, you’ll need to know exactly how much is available. “While the idea is to put away as much as you can, it should never be at the expense of more pressing concerns like your emergency fund or paying down debt,” says Brian Mayhew, Director of Wealth Management Investments at Coast Capital Savings. First, complete a high-level audit of your financial health. Do this by examining three aspects of your finances.
1. Debt: Define what you owe.
Take stock of your outstanding debt. “Different kinds of debt will have different terms,” says Mayhew. “Paying down your credit cards, which usually accumulate interest at around 20%, should be a top priority.” Other kinds of debt, such as mortgages or student loans, are usually repaid on a longer timeline. So they may not present concerns in the short term.
If you have high-interest debt across multiple credit cards and other loans, consider a debt consolidation program that lets you group your high-interest debt and pay it off with a low-interest loan. Clearing up high-interest debt should be a priority over contributing simultaneously to all three year-end savings vehicles.
2. Emergency fund: Make sure you have one.
Job loss, a family emergency, or unforeseen expenses can all throw a financial plan into disarray. That’s why building and maintaining an emergency fund is critical. Aim to put away enough so that you can function for three to six months if you find yourself having to lay out cash for the unexpected, like car repairs or medical expenses.
Mayhew says having access to your emergency fund is important. “An investment like a GIC or a term deposit wouldn’t be suitable but your money can still work for you—and be accessible—in a high-interest savings account.”
3. Insurance coverage: Prepare for the unexpected.
In addition to having an emergency fund, review your insurance coverage, including life, disability, and critical illness, which are available through individual policies, or creditor insurance. In the event of premature death or disability, creditor insurance can help pay off or reduce the balance of your outstanding loans, or help cover your monthly obligations. Also, check to make sure your home and auto insurance policies are up to date. Before you decide to max out annual savings contributions, it’s good to know that you have coverage in place.
3 key investment vehicles for growth.
With your basic financial needs covered, it’s time to look at your savings options for your financial priorities. “The most common types of registered investments for most Canadians are RRSPs, TFSAs, and RESPs,” says Mayhew. “With these financial tools, people can save for retirement, for expenses like a down payment on a mortgage or vacations, and for their children’s education.” Here’s a rundown of what you need to know:
1. RRSPs: Establishing your retirement.
RRSPs are commonly used investments for Canadians who want to save for their retirement. At its simplest, an RRSP allows you to put away up to 18% of your savings to be accessed after retirement, like a personal pension. The deposits aren’t taxable until withdrawal, so RRSPs can reduce your annual taxable income while saving for the future.
There are many ways to make your RRSP work for you and it involves when and how you contribute. “An RRSP contribution is the only contribution that will impact your taxes in the current year,” says Robb Engen, a fee-only financial planner and blogger at Boomer & Echo. That said, you can contribute to your RRSP in the first 60 days of the next calendar year. “If your income is high enough, say over $50,000, depending on your province of residence,” says Engen. “Then you should typically prioritize your RRSP ahead of your TFSA and RESP.” This is especially true if your RRSP contributions attract a company match.
“Making monthly contributions is an excellent way to stay on track,” says Engen. “The maximum RRSP dollar limit for 2022 is $29,210. If equal payments are out of reach, don’t give up altogether. A small contribution that’s within your budget is better than none.” Deposits before March 1, 2023—or 60 days after the turn of the year—are eligible as a tax deduction on your 2022 tax return.
2. TFSAs: Utilizing after-tax dollars and flexible withdrawal.
TFSAs allow Canadians over the age of 18 to invest their money without having to pay tax on their gains. They are suited for short- and medium-term savings like buying a new car or taking a family vacation.
Each year, Canadians receive a certain amount of TFSA contribution room (it varies year to year). Any unused room rolls over into the future. For instance, the annual TFSA limit for 2023 is $6,500 but if you’ve never invested in a TFSA since the program’s introduction in 2009, you’d have room to invest $88,000.
The TFSA program follows the calendar year, so your yearly contributions stop on December 31. “The year-end deadline plays a factor when it comes to withdrawals from your TFSA,” says Engen. The room vacated by withdrawals is added to your lifetime contribution limit at the beginning of the next calendar year so you need to stay aware of your balances. “The lesson here is not to over-contribute before the end of the year if you happened to have made a TFSA withdrawal this year,” he continues. But if you anticipate needing some of your TFSA savings, it’s wise to withdraw the money before the end of the year, so you can re-contribute from the first day of the following year.
Finally, it’s usually not a bad idea to max out your TFSA. “The account has extremely flexible withdrawal rules, and your TFSA contribution room carries forward indefinitely,” says Mayhew. In the case of lower-income earners (those making less than $50,000), it might even be smart to prioritize TFSA contributions over RRSPs because the front-loaded tax break of an RRSP is likely unnecessary.
3. RESPs: Putting education first.
An RESP, similar to a TFSA, is an account where you can deposit money to grow, tax-free. However, the funds in this account are earmarked for a child’s post-secondary education. The goal is for your contributions to reduce financial pressure later.
The RESP program started in 1998. Each year, individuals received additional contribution room. But in 2007 the program changed. Now, there is no annual contribution limit and the lifetime limit remains at $50,000. “RESPs are a great way to save for a child’s education,” says Engen, “but parents shouldn’t prioritize education savings ahead of their own retirement savings or near-term financial goals.”
It’s important to be mindful of the rules in order to collect what’s called the CESG, or Canadian Education Savings Grant: When contributors deposit $2,500 in a year, they can receive $500 for the fund from the government. “If your budget doesn’t allow you to contribute to an RESP this year, know that you can contribute $5,000 in a future year to catch up and take advantage of $1,000 worth of CESG.”
Rules governing the RRSP, TFSA, and RESP programs make it possible to invest in your goals. “Understanding the rules of these savings vehicles and exercising a bit of discipline can put you on the path to savings success,” says Mayhew. And while it does make money sense to maximize your savings at year-end, modest contributions are also a benefit. So, don’t be daunted. In the midst of giving to others this season, consider putting some cash into any of these vehicles as a little gift to yourself.
Book an appointment with a Coast Capital financial adviser to discuss the best ways to invest your year-end savings.
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This article is provided for general information purposes only. It is not to be relied upon as financial, tax, or investment advice or guarantees about the future, nor should it be considered a recommendation to buy or sell. Information contained in this article, including information relating to interest rates, market conditions, tax rules, fees, and other investment factors are subject to change without notice, and Coast Capital Savings Federal Credit Union is not responsible for updating this information. All third-party sources are believed to be accurate and reliable as of the date of publication and Coast Capital Savings Federal Credit Union does not guarantee the accuracy or reliability of such sources. Readers should consult their own professional advisor for specific financial, investment, and/or tax advice tailored to their needs to ensure that individual circumstances are considered properly and action is taken based on the latest available information.