How a financial advisor can help you manage your taxes this year
Reducing your tax burden can help you manage your wealth and free up money to meet your financial goals and build your legacy. But tax rules are complicated, and you may need help understanding all the methods you can use to minimize your tax burden. Your financial advisor is one resource you can tap to help you develop strategies that fit your plan and reduce your tax exposure in 2021. Here are four ways they may be able to help.
Tax-sheltered saving accounts
To help you save for retirement, your financial advisor can help you set up and manage a tax-deferred investment vehicle known as a registered retirement savings plan (RRSP). These are one of the most powerful tools you can use to minimize your tax burden. Contributions are made with pre-tax income, which means they lower your taxable income in the year you make them, providing immediate tax savings. Earnings inside the account grow tax-free until retirement. Withdrawals are taxed as income, and you must start making them in the year you turn 72. In 2021, you can contribute up to 18 percent of your income or $27,830, whichever is less, to a RRSP
Another option for saving for retirement and more is a tax-free savings account (TFSA). Contributions to a TFSA are made with after-tax dollars. They are not tax-deductible, but they grow tax-free, making them another powerful savings tool. For 2021, the TFSA contribution limit is $6,000, and you may withdraw funds at any time tax-free.
Giving gifts
Giving away your money can help lower your tax burden as well, and a financial advisor can help you navigate your options. If you support a charity or other nonprofit, you can receive a tax credit that reduces the taxes you owe. In 2021, charitable givers can get a 15 percent tax credit from the federal government on their first $200 of donations and another 29 percent on donations beyond that amount. Provincial governments also offer donation tax credits, which when combined with federal credits could amount to 50 percent of the value of your donations. You can claim eligible amounts up to 75 percent of your net income. Be sure to get receipts documenting your contributions and save them for your records.
You may receive tax credits by donating to qualified organizations, such as national arts services, housing corporations that provide low-income housing, registered charities, and Canadian amateur athletic associations.
Registered Education Savings Plans
A registered education savings plan (RESP) is a government-sponsored plan that allows you to save for a child’s post-secondary education. There is no annual limit for RESP contributions, but there is a lifetime limit of $50,000. The federal government will pay a grant equal to 20 percent of the first $2,500 of RESP annual contributions. You cannot deduct RESP contributions, but savings grow tax-free inside the account. Withdrawals of contributions made by individuals are not taxed, though withdrawals of government grant money are treated as taxable income. A financial advisor can advise you on how best to take advantage of this tax-deferred savings vehicle.
Tax-loss selling
When you sell a stock and make money, you realize a capital gain, and you’ll owe capital gains tax. But if you lost money, that’s a capital loss, which you can use to offset other taxes. Tax-loss selling is a strategy by which you sell off investments that have lost value and replace them with similar investments. You can then use your losses to offset capital gains from other investments. You may carry any net losses you cannot use in the current year forward to offset net capital gains in future years, or use it to offset capital gains in the previous three years. A financial advisor can help you track your gains and losses throughout the year and use this strategy to lower your taxable income.
Work closely with a financial advisor throughout the year to minimize your tax burden and boost your savings in 2021 and beyond.
Sources:
http://www.rbcroyalbank.com/student-solution/articles/6-common-questions-about-withdrawing-money-from-an-resp-answered.html#:~:text=This%20money%20can%20be%20withdrawn,(if%20any%20at%20all).
