In a few more hours, it will be January, time to face the spending music. But the new year also marks the start of another investing season, for those still solvent enough to take advantage of new contribution opportunities for RRSPs and tax-free savings accounts.
For those who overspent in December, the first order of business is to pay off high-interest credit-card debt or clear balances on overextended lines of credit. No registered investment beats wiping out high-interest debt.
But the sooner you’re clear, the earlier you can get back to the discipline of adding to taxadvantaged investments. The first opportunity is almost here. As of Jan. 1, any Canadian 18 or older can add another $5,000 to TFSAs. That brings the cumulative contribution room since the program commenced (in January 2009) to $20,000, plus any investment growth.
The second big opportunity also comes in the first quarter. This year’s RRSP contribution deadline is Feb. 29, since 2012 is a leap year. Procrastinators take note: Unlike prior years, March 1 will be too late in 2012. Get the money in there by midnight, Feb. 29.
There are significant differences between RRSPs and TFSA contribution rules. TFSAs are straightforward: You get $5,000 contribution room whether or not you earned taxable income the previous year.
2012 is a leap year so RRSP deadline is Feb. 29th this year
RRSPs are trickier. Feb. 29 is the contribution deadline for the 2011 tax year just ending. Tax returns must be filed for calendar 2011 by April 30; making an RRSP contribution in calendar 2011 or the first 60 days of 2012 is an excellent way to reduce tax owing. For those in the top 46% tax bracket, a $10,000 contribution will save you $4,600 in tax payable.
Unlike TFSAs, there’s no one amount all Canadians can contribute to RRSPs. The maximum is 18% of the prior year’s earned income, to a limit of $22,450 (for the 2011 tax year, up from $22,000 in 2010). This is reduced for members of employer-sponsored registered pension plans. How much less is set by the PA or pension adjustment detailed in the T4 slip issued by employers early in 2011.
After you filed your 2010 taxes on or before April 30, 2011, the Canada Revenue Agency should have sent you the precise amount you can contribute to your RRSP in 2011. If you don’t have the information, guestimate it and contribute the same as the previous year.
How to get 14 months ahead of yourself with RRSPs
The other tricky thing about RRSPs and the new investing season is that once Jan. 1 arrives, you can also contribute the full amount for the 2012 tax year about to commence, not just the 2011 tax year now ending. In other words, you can get 14 months ahead of yourself by contributing an amount on Jan. 1, 2012, even though the RRSP deadline for the full year won’t occur until late February of 2013. The maximum RRSP contribution amount for calendar 2012 is $22,970.
Why do this? Anyone who believes in the time value of money and the power of tax-free compounding will tell you that, other things being equal, the sooner money is tax-sheltered and growing, the bigger the ultimate sum will be. It’s good discipline to maximize tax-sheltered savings as soon as you’re allowed to.
Because the new investing season is heavily loaded to the first two months, those conflicted between debt repayment and investing can adopt one of two strategies. Knowing we can dump tens of thousands of dollars into registered plans every January, our family starts accruing for this the previous summer, building up cash in non-registered accounts ready to transfer in January.
For those who find it hard to build up large lump sums in advance, the alternative is to set up pre-authorized chequing arrangements of 12 equal monthly payments into both your RRSP and TFSA. A $416.67 monthly payment maximizes the $5,000 annual allotment to TFSAs, while a whopping $1,914.17 a month is needed to get to the top RRSP limit of $22,970.
IMPORTANT 2012 TAX DEADLINES
Jan.1 First day you can contribute $5,000 to a TFSA for calendar 2012
Feb.29 RRSP deadline for 2011 tax year
April30 Tax filing deadline for 2011 tax year
Jan.1,2013 First day you can contribute $5,000 to a TFSA for calendar 2013
March1,2013 RRSP deadline for 2012 tax year
Stuck for a last-minute $30 gift idea? Give the gift of financial literacy with one of these 13 financial books
Story appeared Wednesday in the FP here.
There are a dozen suggestions, plus of course the book to which this web site is devoted, making it a Baker’s Dozen.
Four are American titles, the other nine Canadian. Don’t hold me to the $30 price: that seems to be about the average these days. That happened to be the original retail price of Findependence Day in the book stores. The good news is the price is now $16 (tax and postage included) but the less-good news is it’s primarily available through this web site.
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How ironic that as criticism of high Canadian mutual fund fees focused on Investors Group the last week — see Do We Really Care About Fees? — Tuesday marked the first day of trading of the first six ETFs from Vanguard Canada on the TSX.
The six ETFs average fees of 0.24%, according to Vanguard Canada managing director Atul Tiwari, who briefed financial advisors at a session at the Royal York in Toronto Tuesday afternoon. That’s roughly eight times less than the MER of the average mutual fund sold in Canada, he said.
There are three ETFs providing exposure to the U.S., EAFE and Emerging Markets, plus three domestic ETFs built expressly for Canadian investors covering Canadian equities and fixed income. All six can be considered “core” ETFs for portfolio construction.
For now, there are no plans to provide Vanguard index mutual funds in Canada, Tiwari said. Distribution appears to be the challenge there.
Pictured is Charles Ellis, author of Winning the Loser’s Game, who addressed advisors with a talk similar to one he delivered to portfolio managers in November, reported in this blog here. In an interview, Ellis told me he’s personally invested mostly in Vanguard ETFs, except for a small position in Berkshire Hathaway. He also told the audience that going back a decade, he was mostly invested in Emerging Markets, a trade that worked out well until his wife said she wasn’t comfortable with the risk. He switched to large household name American blue chips and he remains happily married, he quipped.
For more details, see Vanguard Canada’s web site here.
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Thursday’s Financial Post and subsequently on my Wealthy Boomer blog, a controversy arose over articles I’ve written about the financial industry’s true commitment to financial literacy, or what some call FinLit.
In the course of revisiting this topic, I linked back to a little “fable” I wrote about a year ago after the Investment Funds Institute of Canada (IFIC) announced what it was doing to “promote” financial literacy.
I was skeptical then, just as I’m currently skeptical about Investors Group’s wrapping itself in the FinLit flag even while its fees remain near the highest in the country that studies have shown have pretty much the highest MERs (Management Expense Ratios) in the world.
For those who missed it first time, here is the fable about FinLit Frank and his efforts to instill financial literacy in his daughter, MERry. Who knows, maybe Frank is an Investors Group executive?
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