Money Here’s what taxes can do to your savings if you’re not careful

22:06  14 february  2018
22:06  14 february  2018 Source:   Global News

When saving into an RRSP instead of a TFSA could cost you dearly

  When saving into an RRSP instead of a TFSA could cost you dearly RRSPs aren't for everyone.It's the time of year when Canadians are bombarded with ads about filling up their Registered Retirement Savings Plans, or RRSPs. Maximizing your contribution before the March 1 deadline is simply the wise and financially responsible thing to do, the message goes.

One of the first things people do when they get a new job offer or a big raise is to try to figure out what their income taxes are going to be. Why? Because we all know that what really matters is net pay. Somehow, however, this principle tends to fall by the wayside when we deal with our savings .

Even though the tax plan provides tax savings to the middle class and lower middle class, it We overlook something very important here too- California has not conformed to many Federal tax changes in the last decade. If you ’ re taxed 50% then you gave half you ’ re working life to the government!!.

One of the first things people do when they get a new job offer or a big raise is to try to figure out what their income taxes are going to be. Why? Because we all know that what really matters is net pay. Somehow, however, this principle tends to fall by the wayside when we deal with our savings.

More than 65 per cent of Canadian households contribute either to a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), recent census data suggests. Those are the two options for sheltering your investments from tax, and it looks like most Canadians are aware of them. But what if you need to hold money outside an RRSP or TFSA?

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Yes, you will likely pay taxes on at least some of your distributions and, if you ’ re not careful , the taxes could be quite high. This can be a huge tax savings . Too many participants and advisers miss this when distributing the money or rolling over the 401(k) to an IRA.”

Deductions Even Pros Overlook. Audit-Proof Your Tax Return. What Tax Info Should I Keep? But there' s another aspect of owning a home that could really zap your finances if you ' re not careful -- maintenance. And while that lack of savings might hurt you when you ' re older, if you buy a home

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It isn't hard to imagine why you would. RRSPs are meant for retirement and generally do not lend themselves to shorter-term savings goals like buying a car or maintaining a rainy day fund. And perhaps you're already maxing out your TFSA for something else, like saving up for a down payment. Or maybe, lucky you, you max out both your RRSP and TFSA every year and still have savings to stash away.

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If you have any savings sitting outside an RRSP and TFSA, you should be aware of the tax bite. Different types of investments are taxed differently, and this can make a significant difference to your actual investment returns.

A scam artist tried to con her mom. So Sharron Matthews and her friends put their acting skills to use

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If you qualify for this last one, though, watch out — it can cost you more than it can save you if you ’ re not careful . or rather hefty expenditures (or both) and avoid the AMT to net any significant tax savings Here you have to be careful . One wrong move and you lose your home office deduction.

Audit Triggers: The Biggest Red Flags to Watch Out For Here are just a few more things you want to be careful with when it comes to taking deductions on your business taxes But to lock in your savings –by reducing your tax bill by 0 if you ' re single or 0 if you ' re married and file a joint

To illustrate the concept, let's look at a fictional example.

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Meet Jane Canuck

Jane Canuck is an imaginary Canadian based in B.C. Earning $150,000 a year, Jane is doing quite well and manages to use up all of her RRSP and TFSA contribution room every year. But Jane sets herself a goal of saving another $35,000 in a year for a large expense that's coming up.

READ MORE: Plan to use your RRSP for a down payment on a house? Don’t do it.

To meet her goal in one year, Jane needs to squirrel away just under $2,917 per month. Now let's look at three scenarios: Jane invests her $35,000 so that it only earns interest income; only earns capital gain income; or only earns eligible dividend income.

How much money does Jane go home with at the end of the year? We asked Julia Chung, a certified financial planner and partner at Surrey, B.C.-based Spring Financial Planning to do the math.

RRSP 2018: Deadline, contribution limits and other need-to-knows

  RRSP 2018: Deadline, contribution limits and other need-to-knows How to tell how much you can contribute and why you might want to postpone getting your RRSP refund.HRB

Here ' s what you need to know (e.g. lump sum vs long-term payout). In fact, your lucky day could turn into your unlucky day if you ’ re not careful . This is because the more money you have, the higher tax bracket you ’ re often in, and the more important tax deductions become.

Partnerships and LLCs. Here the situation depends on the tax rates of the partners. We'll assume the tax savings go to you alone. Will it work? The IRS has gone to court and won some and lost some. You can win if you ' re careful . First, you've got to put the child on the payroll.

READ MORE: When saving into an RRSP instead of a TFSA could cost you dearly

We're going to assume that Jane earns a three-per-cent return in all three scenarios so that we’re comparing apples to apples. However, "this means that we’re not being the least bit realistic about what rates of return are possible with different kinds of investments, and that we are not making a recommendation for how she should invest these savings," Chung noted.

Before taxes, Jane would make $574 over the course of the year. How much of that she gets to keep after tax, though, is a different story:

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Different kinds of investments come with different tax rates

Interest, capital gains and dividends are the three basic types of investment income:

Interest income: This is the interest you earn from your deposits in savings accounts, guaranteed investment certificates (GICs), or bonds. From a tax point of view, interest is treated like your regular income. In the first scenario, Jane is being taxed as if she had earned $150,574 ($150,000 + $574).

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You can find instructions for how to apply for an offer in compromise here . But before you apply, it’ s a good idea to use the IRS’ Offer in Compromise Pre-Qualifier tool to find out if you ’ re eligible. Tap into Your 401(k): There are two ways to leverage retirement savings for tax payments: borrowing from

Let' s say you want to put a down payment on a house now, and that you ' re ,000 short but are expecting a tax refund within the next few weeks. Interest-free loans are nice, but you'd better be careful Before you run out and withdraw money from your 401(k), there are a few things to keep in

Capital gains: A capital gain is an increase in the value of the investments you hold. For example, if you bought Apple shares at $100 and now they're worth, say, $170, your capital gain is $70 per share. You'd only get taxed on that $70 if you decided to sell or transfer your Apple stocks. If you did, you'd be taxed at your marginal rate, but only half of the capital gain would be subjected to tax.

With capital gains, Jane's tax bite is exactly half of what she would have had to pay by earning exclusively interest income.

Eligible dividends income: Dividends are amounts that companies pay to their shareholders on a regular basis out of their profits. Dividends from shares of taxable Canadian corporations – so-called eligible dividends – have a preferential tax treatment. How it works is a bit complex, but "suffice to say that, depending on your total taxable income, the tax rate applied is often lower than that for interest income and higher than that for capital gains," Chung said.

WATCH: RRSPs aren't for everyone – here's a look at which registered account might suit you better

Takeaways from Jane's story

There are a couple of fundamental lessons Chung sees in Jane's example:

If investing outside an RRSP or TFSA, be aware of taxes. Taxes shouldn't necessarily be the leading consideration when deciding how to invest, but they should be part of your math, said Chung.

Fire crews to work overnight to battle St. James area blaze

  Fire crews to work overnight to battle St. James area blaze A commercial building in Winnipeg's St. James area went up in flames on Monday afternoon. Flames could be seen pouring from the two-storey warehouse building in the 500 block of Roseberry Street near St. Matthews Avenue shortly after 4 p.m.Mark Reshaur, an assistant chief with the Winnipeg Fire Paramedic Service, said the fire started just after 3:15 p.m., but it's not clear yet what started it. Nobody was in the building at the time and no injuries have been reported, he said.Firefighters started with an offensive attack but had to leave the building as conditions worsened, he said.

Now you ' re spending about 0 after taxes . Did you even want two pairs? Will you wear them both? Do you even like the second pair you ' re buying? Also, be careful when exploring the sales. It' s easy to see those 75% off stickers and go crazy, thinking you ' re saving money.

The “no payment, no interest” promotion seems like a deal upfront, but it can really be a trap if you ’ re not careful . As long as you ’ re covered under a qualified high-deductible health plan, you can use this account for pre- tax savings to help you cover health care costs.

The return on safer investments could be even lower than it looks. In our scenarios, all three types of investments earn the same return. In real life, riskier investments like stocks tend to yield higher returns than safer bets like bonds and GICs. This has been especially true in the past couple of decades of very low interest rates. For example, the S&P 500 Index gained 11.2 per cent (in Canadian dollars) last year. By comparison, the best rate you can hope for in a one-year GIC held outside an RRSP or a TFSA is 2.50 per cent, according to rate-comparisons site Ratehub.ca. When you consider after-tax returns, though, the spread becomes even larger, Chung noted. Your meagre GIC return would be fully taxable, while only half of your plump capital gain would face tax.

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Different types of investments are subject to different tax rates. It's something to keep in mind if you have savings outside of an RRSP or TFSA.© Getty Images Different types of investments are subject to different tax rates. It's something to keep in mind if you have savings outside of an RRSP or TFSA.

New Survey Unveils The Dollar Amount Canadians Feel They’ll Need For Retirement .
A new survey by the Canadian Imperial Bank of Commerce (CIBC) has found the magic dollar amount people feel they will need to save in order to have a comfortable retirement: $756,000. CM

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