It’s easy to be short-sighted in these uncertain economic times. Each day, you scan the business section of your newspaper or look online for concrete signs that the recession is receding. And even though the market now seems to be having more good days than bad, it still has some climbing to do. Which means that investment returns and interest rates continue to lag – and that makes it too easy to take a narrow focus on the short term and lose sight of your overall financial objectives.
It’s important to hold fast to the fundamental rules for a successful financial plan because they are proven principles for weathering any economic storm. Among the most important are:
• Smooth out market cycles by staying invested for the long term.
• Diversify your investments using effective asset allocation techniques.
• Select investments that match your appetite for risk and take maximum advantage of the ‘miracle of compounding’.
• And practice tax-efficient investing – an investing rule that assumes even more importance when returns and interest rates are low.
That’s why you should …
• Make the most of your Registered Retirement Savings Plan (RRSP). Your RRSP is an exceptional tax-saving, nest-egg building investment – and you’ll get a maximum tax reduction by making your maximum RRSP contribution each year. Fill up unused past contribution room for even bigger tax savings this year and a much larger nest-egg over time.
• Reduce taxes generated by your non-registered investments by selecting investments that benefit from lower tax rates – for example, investments that generate capital gains or dividends eligible for the enhanced dividend tax credit.
• Make an annual $5,000 contribution to a Tax Free Savings Account (TFSA). Your contribution isn’t tax deductible but money and interest inside a TFSA is tax-free and so are withdrawals, which can be made at any time for any purpose.
• Make the most of your spouse. Look into income-splitting with your spouse, having the higher-earning spouse contribute to a spousal RRSP, and/or having the spouse with a higher marginal tax rate make a prescribed rate loan to the other spouse in a lower tax bracket. When used correctly these ‘spousal options’ can effectively reduce a family’s taxes.
There may be other tax-reducing strategies that will work for you. A truly effective tax plan must be an integral part of your overall financial plan, investment program and life goals. Your professional advisor can help you put it all together in the best possible way for your unique situation.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact Marilyn Giesbrecht, Senior Financial Consultant.