It’s a new year – be sure to adjust your financial planning strategies

By Tore Corrado, Advisor, Ciccone McKay Financial Group

With the arrival of 2023, it is likely there are financial opportunities you can take advantage of. You may be a young investor, future homeowner, parent, empty nester approaching retirement, or already a retiree. Whatever category you fit into – perhaps more than one! – the New Year provides a chance for positive action.

The young investor

During your 20s, 30s and 40s, building wealth is likely your main objective. You work hard for your money. Make sure you are maximizing your growth potential by effectively and efficiently incorporating the appropriate accounts for your future plans.

• Based on your income for 2022, contributions to your Registered Retirement Savings Plans (RRSPs) in the first 60 days of 2023 can aid you in saving for retirement. RRSP contributions will also reduce your taxable income for last year. RRSP deadline date: March 1.
• Your allowable Tax-Free Savings Account (TFSA) contribution is reset each January 1. TFSAs’ versatility makes them one of the most attractive investments for any short-, mid- or long-term objectives. Now that we are in the new calendar year, not only are you able to take advantage of the new contribution limit of $6,500; you can also replenish any withdrawals made from the plan in the previous year.

These opportunities require you to be strategic about what assets go into each account type. Asset allocation, that is, determining which accounts hold your various assets, enhances your tax efficiency.

 

The future homeowner

If your main goal is to purchase your first home, 2023 brings an exciting opportunity in financial planning. As you may have heard, there will soon be a new account to help you save.

• The First Home Savings Account (FHSA) will be implemented in April 2023. FHSAs will allow Canadians looking to buy their first home a tax arbitrage scenario aimed at making real estate more attainable. Each year, the plan will allow for deposits of $8,000, which reduce your taxable income in a manner similar to an RRSP. If you purchase an eligible home within 15 years – note that you must intend on living in this home  – the withdrawal from this account is completely tax-free.

Decide whether you should be saving in an RRSP, TFSA or the new NHSA. Map out: when you plan to purchase a home; your current income versus future income projection; and whether you plan on living in the first home you buy.

It is also important to note that there will be a maximum lifetime deposit limit of $40,000. So, if you are planning to buy this home in the next five years, each year you delay could have significant impact on the tax-saving benefits you experience before the purchase.

The parent

Like many other parents, you view saving for your child’s future education as a priority. Ensuring appropriate planning for this objective can save you tens of thousands before that all-important postsecondary education begins.

• The Registered Education Savings Plan (RESP) is yet another account that resets each calendar year. RESPs allow individuals to receive a government-sponsored grant that matches a portion of deposits. Although there is no annual contribution limit for this plan, 20% of your deposits each year will be matched in grants, up to a maximum annual contribution of $2,500. If as a parent you have not yet taken full advantage of this plan , you may be eligible to make catch-up contributions as well (there is a maximum of two years’ worth of grants in any one year).

The RESP is a great tool for saving toward your child’s/children’s education. However, before establishing or funding this plan, there are rules you should be familiar with. Also, be sure to plan which account’s capital could be deployed when comparing an RRSP, TFSA or RESP.

The empty nester/approaching retirement

If you are in your 50s or 60s, retirement may be right around the corner. You have put your energy and resources toward getting yourself to where you are today, whether that be: funding your real estate ownership; paying down your mortgage; dealing with the expenses that come with being a parent; or putting money into growing your career.

This is the time to focus on yourself and your own objectives. And, to prepare for the time when you can shift your income from active employment to passive-income endeavours.

• RRSP and TFSA deposits become even more important in the remaining 10 years of your career, as you are very likely to be at your peak earnings. Tax-deferred growth as you approach retirement, and also as you move into retirement, is a way to allow your assets to compound. Be aware of your available contribution room, as well as when certain deadlines are for these accounts.
• Every January is an opportunity to check how close you are to your goals, and what you need to accomplish in the year ahead.

Often people approaching retirement feel there is still work to be done before transitioning to that next stage of their lives. If this applies to you, do not worry. There are still actions you can take to relieve the financial concerns that arise as you approach retirement.

The retiree

Already transitioned away from working? Whether you retired recently or several years ago, 2023 brings some resets that should inform your financial decisions.

• Taking stock of your income sources, monthly expenses and future plans: These are exercises that you should do each year to maximize your net income.
• Minimize the ways you might experience either: a tax drag, that is, reduction of potential income due to taxes; or reductions to your Old Age Security (OAS) through OAS clawbacks.
• Review how much money you require each month to pay your bills over the next 12 months. Ensure that this aligns with any projections your advisor made as you approached retirement.
• Determine the minimum required withdrawal amounts for each of your registered retirement accounts. These will be based on your age, as well as the market value in your accounts at the start of the year. Remember, these withdrawals are fully taxable as income, so there is an art to determining how much to take each year.
• If you are able, make sure to tax-shelter the maximum amount possible in your TFSA, and to recoup the room you may have temporarily lost by making withdrawals last year (you get that room back as of January 1). This will allow you to have a non-taxable source of funds, which is especially important for those with retirement income mainly derived from taxable sources (rent, government pensions, work pensions, etc.).

These actions will provide you peace of mind, knowing that you are able to live your desired retirement lifestyle in the most tax-efficient method possible.

Key financial dates in 2023

No matter what your stage in life, each year brings with it the opportunity to revisit your financial strategies. Here are some of the most noteworthy dates you should be aware of for 2023:

• January 1:
• New TFSA contribution limit of $6,500 applied.
• Withdrawals from a TFSA made last year can also be applied to your contribution room.
• RESP grant eligibility reset.
• March 1:
• RRSP contribution deadline to reduce your 2022 taxable income.
• April 1:
• FHSA comes into force, allowing you to save up to $8,000 in 2023 toward your first home.
• April 30:
• For most Canadians, the deadline to file income tax and benefit return for 2022.
• December 31:
• The last day you can contribute to your RESP for that grant to count this year.
• If you turn 71 this year, you must convert any retirement accounts you own to retirement income accounts.

Tore Corrado is an advisor with Ciccone McKay Financial Group. Tore provides financial advice and direction, specializing in creating a collaborative approach to building and implementing long-term planning initiatives for his clients. Contact Tore at Salvatore@ciccone-mckay.com or 778-945-2651.