Canadian retirees have some simple tax moves they can make when it comes to year-end financial planning.
1. RRSP to RRIF conversions
Retirees who celebrated their 71st birthday in 2015 have until December 31 to wrap up their last Registered Retirement Savings Plan (RRSP) contributions before converting the RRSP into a Registered Retirement Income Fund (RRIF) or a registered annuity.
For people in this situation who have income that will give them added RRSP contribution room in 2016, it might be worthwhile to make a one-shot overcontribution to the RRSP before December 31 of this year.
Why?
If you don’t contribute by December 31, you won’t get the tax benefit for the 2015 tax year because your RRSP will no longer exist next year.
You pay a 1% per-month tax penalty for December 2015 on any investment that exceeds the contribution limit (plus the $2,000 lifetime overcontribution allowance), but the new RRSP room for the 2015 income becomes available in January 2016, which would cancel the penalty tax. You can deduct the overcontributed amount on the 2016 tax return.
This should be discussed with your advisor before going ahead because it might not be necessary if you are older than your spouse.
2. Contributing to your younger spouse
The overcontribution might not be required if your spouse or legal partner is younger than you. Instead of making the overcontribution, you can simply allocate your contribution room after 2016 to your significant other’s RRSP until he or she turns 71.
3. Taking CPP early
Some retirees choose to start receiving their Canada Pension Plan (CPP) as early as age 60 instead of waiting until age 65. There are a number of reasons for doing this, and the decision should be considered carefully because the earlier you take the money, the less you get per month.
One strategy is to take the CPP early and invest it in your TFSA. Any dividends and capital gains on the money are tax free and the funds are always available if needed.
Where should you invest?
Fixed-income investments don’t pay much anymore, so retirees are turning to dividend-growth stocks for higher returns. This option carries some risk, so it is important to choose companies that are leaders in their industries and have strong track records of earnings growth.
Toronto-Dominion Bank (TSX:TD)(NYSE:TD) is one example. The Canadian operations are extremely profitable and continue to generate solid results despite some challenging economic conditions. The company also has a large U.S. division, which helps diversify the revenue stream while providing exposure to the strong U.S. dollar. TD pays a quarterly dividend of $0.51 per share that yields 3.8%.
