Retirement planning is a life-long process that ideally begins when we get our first job, and ends… well, it doesn’t actually end until the end.
As we head into the close of the 2014 trading year, there are a few simple tax moves that senior investors should keep in mind to help manage the tax side of the investing process.
1. Converting the RRSP to the RRIF
Investors who turned 71 in 2014 have until the end of December to make final contributions to their Registered Retirement Savings Plans (RRSP) before converting the investments into a Registered Retirement Income Fund (RRIF) or annuity.
If you have income in 2014 that will give you added RRSP contribution room in 2015, it could be worth making a one-shot overcontribution to the RRSP before December 31. You pay a 1% tax penalty for December 2014 for any investment that exceeds the allowed limit, but the new RRSP room opens up in January 2015, eliminating the penalty tax.
The overcontributed amount can then be deducted on the 2015 tax return, or even in a later year.
This has to be thought out carefully and it is best to talk with your advisor before you go ahead and make the contribution.
2. Contributing to a younger spouse
The overcontribution might not be necessary if you have a younger spouse or legal partner because you can use the contribution room you have generated in 2014 to make contributions to a spousal RRSP until the end of the year your significant other turns 71.
3. Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) benefits
For people who are between the ages of 60 and 64 in 2014, and are considering tapping their CPP/QPP pension benefits before reaching the age of 65, it might be worthwhile to apply before December 31, 2014.
By starting the benefits in 2014, the pension is reduced by a “downward monthly factor” of 0.56% (as much as 0.53% for the QPP) for every month you receive the payment prior to hitting the age of 65.
Beginning in 2015, the downward monthly adjustment factor will increase to 0.58% (as much as 0.56% for the CPP). This means your CPP or QPP pension will be reduced.
4. Where to invest the money?
Whether it’s the RRIF, CPP or QPP, some retirees are not going to need the money for day-to-day expenses and will have to sit on the cash or invest it. One option is to invest in dividend-paying stocks like BCE Inc. (TSX: BCE)(NYSE: BCE) inside your tax-free savings account (TFSA).
Picking the right dividend stocks can be challenging right now, but the following free report gives investors a few good ideas of where to start.
