January 21, 2023 by David Christianson
Yes, I realize that the third week of January is a little late for New Year’s resolutions. But I think that’s good…
Research has shown that resolutions, made with good intentions in the spur of the moment and often helped by distilled spirits, tend to go off the rails pretty quickly. Evidence is the thousands of people who show up at the health club in the first few weeks of January, and the empty exercise machines in February.
Those good intentions have to be followed up with an executable plan. That’s what we’ll talk about today.
This will include some reminders of the basics, but we all meet those reminders. I admit that I forgot in early January that it was time to make my 2023 TFSA contributions. Luckily, I have a wealth management advisory team to remind me about these things, which they did.
You may still have a chance to reduce your taxes for last year, by making RRSP contributions within 60 days of year-end. That’s deductible on your previous year’s taxes or the current year.
Step one is to ask if you are eligible to make a contribution and how much. Look at your 2021 CRA Notice of Assessment for that number. It is based on 18% of your net income for 2021, reduced by any pension adjustment, pension contributions and RRSP contributions, and increased by any unused contributions carried forward.
You must also be under 71 years old. If you were 71 in 2022, then you would’ve been able to make your contribution only prior to December 31, as we pointed out in our year-end tax tips.
Next, estimate your taxable income for 2022. This includes all sources of income such as employment, net self-employment, pension, interest, dividends, and half of any realized capital gains, reduced by any deductions such as pension and RRSP contributions made during the year.
If your taxable income will exceed $100,400, then make maximizing your RRSP contribution a priority. Any income above this figure will be taxed at 43.4% to 50.4%, and that’s also the tax saving you will achieve with any qualified deposit to your RRSP.
These are the combined federal and Manitoba tax rates for 2022. Good planning includes increasing your knowledge about tax brackets and tax rates. Here is a good place to look…www.taxtips.ca/taxrates/mb.htm
Taxable incomes lower than that suggest more deliberation. If you will be in a lower tax bracket after retirement, then the contribution is likely worthwhile. Recall that every future withdrawal from RRSP or RRIF will be fully taxable, and also increase your net income for the calculation of things like the age credit, OAS supplement and OAS clawback.
We mentioned TFSAs. For 2023 the annual limit is increased to $6,500, plus any unused room from the past and any withdrawals you have made from TFSA prior to the end of 2022.
The TFSA does not give you any deduction for contributing, but all future withdrawals are tax-free, including all investment income and growth earned along the way.
We have many clients whose TFSA values exceed $100,000 (and some much, much more) who are earning investment income which is compounding each year tax-free.
Future withdrawals will have no negative effect on government retirement benefits or the future tax bill. That makes the TFSA a great source of lump-sum withdrawals in retirement, emergency funds or simply an income supplement.
Make that’s one of your priorities for the future, as well.
Let me know if you would like more detail on the TFSA or RRSP rules and strategies in future column. The best question will receive a free copy of my Canadian bestseller book Managing the Bull.
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Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Senior Wealth Advisor and Portfolio Manager with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.