What are the most commonly overlooked financial planning strategies? We asked four veteran financial professionals.
Hone your savings skills
An ability to save is the foundation for achieving any financial goal, but too many families haven’t developed the necessary skills, says Doug Mushka, a Calgary-based financial planner with National Bank. “We’ve become something of a ‘buy now, pay later’ society; our desire for instant gratification is a big problem.”
Financial planning is proven to help create a sound savings discipline, and through it many families find out they are closer to achieving their goals than they think. For example, “a lot of people have a mortgage, and as they get closer to retirement, they pay it off, freeing up cash flow,” says Mr. Mushka. “Their children move out; they no longer have to save for education. When I do retirement plans for people, they often realize they’ll be spending a lot less in retirement than they are during their working years.”
Maximize tax advantages of charitable giving
A financial planner can also help point out opportunities to leverage tax savings that might otherwise be missed.
For example, “many people sell securities in order to make a charitable gift, triggering a capital gain they have to pay tax on,” says Susan Stefura, a senior consultant at National Bank in Toronto. “It’s better to make the gift in kind – that is, give the asset itself. It’s still a disposition for tax purposes, but the capital gain isn’t taxed. On some securities, that can mean a huge tax savings.”
Many generous Canadians also neglect to maximize their charitable giving tax credit, she says. “The charitable donation tax credit is a direct offset to any taxes that you owe in a given year, but it is also a very flexible credit,” explains Ms. Stefura. “You can claim it on your tax return or on your spouse’s return, or you can carry it forward to future years.”
Focus on income
Claude Deslauriers, a financial planner with National Bank in the Ottawa area, says that income-splitting strategies are effective at reducing taxes for families in retirement, but are often overlooked. “Spouses with a different level of income can now split pension income up to a certain extent, reducing their overall tax,” he explains, adding that spousal RRSPs are still very useful.
In addition, Canadians often pay more tax than they have to, because their assets are held in the wrong types of accounts, says Mr. Deslauriers. “Dividends and capital gains are taxed at a lower rate than interest income. But most people seem to be more comfortable holding securities paying dividends and capital gains in their RRSPs, and more secure investments outside of RRSPs.”
When capital gains and dividends are earned within an RRSP or RRIF, however, those gains are taxed as income at a higher rate when withdrawn.
Another common mistake is withdrawing funds from registered savings plans before necessary, he says. “Many people like to withdraw funds from their registered plans first when they retire. But by doing that, they no longer benefit from the deferment of taxes.”
The later you withdraw your registered investments, the later you pay the taxes, he says. In the meantime, “that money continues to work for you, by earning income.”
Plan for your goals
According to Martin Hofgartner, a personal banker with National Bank Wealth Management in Windsor, the single most common oversight is failing to have any financial plan at all. “When I ask people if they will have enough income during their retirement years, for example, the answer is invariably ‘we have no idea.’ We often hear that Canadians spend much more time planning their vacation than they do their own retirement.”
A financial plan encompasses both long-term goals, such as a comfortable retirement, and short-term goals, like trips. “A plan makes it possible to achieve the things that are important to you: looking after your kids, enjoying your working years and having the lifestyle you want in retirement,” he stresses.