Happy New Year!
Here are a few thoughts I’ve put together to help you make your 2017 a great financial year:
- Hedge your currency bets. Here’s a great way to make sure you don’t get a shock when you buy U.S dollars. Say you need $5,000 U.S. for a vacation. You can set up a program to dollar cost average by buying $600 Canadian worth of U.S. funds each month. That way you will buy more U.S. dollars when the exchange rate is favourable, and fewer when the exchange rate is unfavourable – and you take the risk out of paying for your vacation. This hedging strategy can work for the currency of any country to which you want to travel. Lots of financial pundits are predicting a lower Canadian dollar in 2017. The same was said about the dollar in 2016 but it didn’t happen. It cost about $1.45 Canadian for a U.S dollar last January, reached a low of $1.25 and as of this writing is $1.35 Canadian for a U.S. dollar.
- Maximize the value of your tax-free savings account (TFSA). Contribute the 2017 maximum of $5,500 to your TFSA now. That way, all of the income you earn inside it will be sheltered from tax this year and for all the years you keep the money in there. The lifetime maximum for those who were age 18 or older in 2009 is $52,000. You can have more than one TFSA but you have to respect the limit of $52,000 in total contributions. There are no taxes payable on withdrawals from your TFSA when you take money out in the future.
- RRSP vs. TFSA. You get a tax deferral on the amount you contribute to an RRSP. Not so with a TFSA. So which you contribute to depends on your current income and the income tax bracket you are in. It also depends on how much you will be withdrawing and when. Just based on your current income, it might make sense to contribute to your TFSA first if your taxable income is below $46,000. That’s because the marginal tax rate is quite low below $46,000 (about 24%). It jumps to about 30% between $46,000 and $84,000 in Ontario. Above $84,000 in taxable income you may wish to max out your RRSP first, because your marginal tax rate jumps again at that level and so, therefore, does the amount of tax you will defer by contributing to your RRSP.
- Online banking vs. branch banking. Because banks that operate only online do not have the overhead expense of branches, they are often able to offer much better rates on your savings, and more importantly, lower monthly fees. My personal favourite is Manulife Bank. You can do pretty much everything online that you can do at a branch, but you get higher interest rates and lower fees.
- Credit Card Rewards. Make sure you are getting your just rewards for the money you spend. My personal favourite is the MasterCard that gets me free groceries . I put all of my bills and monthly expenses on it and pay it off in full every month. As a result I collect points and average about $40 a month in free groceries. It suits me because it’s practical and immediate and I use it for groceries, which I have to buy anyway. Another side benefit of using my credit card and paying it off in full each month is that it is easy to track my expenses so I know where my money is being spent.
- RRSP to RRIF or Annuity. If you are turning 71 in 2017, you have to convert your RRSP to a RRIF or an annuity. Locked-in RRSPs must be converted to LIFs or annuities. You must take at least the minimum income prescribed by the government from a RRIF or LIF starting in the year after you convert. There is no maximum withdrawal amount on RRIFs but there is a maximum you can withdraw from a LIF. An annuity provides an income guaranteed for life but is also locked in for life and the principal cannot be accessed once purchased. All income from a RRIF, LIF or annuity where funds come from a registered plan is taxable as regular income but is eligible for the pension deduction if you are over age 65. You can fully or partially convert an RRSP to a RRIF or annuity any time before age 71 as well. Locked in funds usually have an earliest conversion age of 55.
- Prepare for the unexpected. You insure your house and your car. There is a 1 in 1200 chance of having a house fire and a 1 in 240 chance of having a catastrophic car accident. Did you know that there is a 1 in 14 chance that an individual age 40 dies before age 65, a 1 in 5 chance that an individual will have 90 days or more of disability that will not allow him/her to work, and a 1 in 3 chance of having a critical illness in your lifetime (such as cancer, heart attack or stroke)? Are you adequately insured, and for the most likely risks?
If there is any further information you would like on any of above tips, please do not hesitate to get in touch. Tim Weichel, firstname.lastname@example.org, 705-798-0062, 416-230-2703 timweichel.ca