Goodbye 2020. A lawyer’s guide to year-end planning

Calendar and planning

Thinking about taxes can feel like a low priority in a year when so many people were forced to deal with the fallout of an economy in flux. It’s hard to imagine anyone whose life and finances were not disrupted this year. 

Now is the time to put the lid on 2020 and get ready for the challenges of a new year. Here are three questions to ask your advisor before you get busy with the holiday season and the Dec. 31 deadline for taxes arrives. 

1.  Is this a smart time to sell the losers in my portfolio?

Divorce yourself from emotion and take a hard look at the holdings in your investment portfolio. Now might be the time to take advantage of a strategy called “tax-loss selling”. The idea is that you sell chronic losers that no longer fit with your long-term plan and have lost value. By selling an investment that has lost value, you can claim a capital loss. From a tax perspective, losses cancel out gains, resulting in a smaller tax bill. This strategy makes sense when:

  • You need to offset capital gains tax
  • You believe the investment no longer matches your investor profile
  • The cost of selling the investment is reasonable in terms of fees that may need to be paid

Your Lawyers Financial Advisor can help you calculate whether or not tax-loss selling is a good strategy for you in the 2020 tax year. 

2.  When should you take your bonus? 

If your firm is able to issue bonuses this year, it’s important to know when you will receive yours. If the bonus is paid in 2020, it becomes part of your overall compensation for the year. That results in additional Registered Retirement Savings Plan (RRSP) contribution room in 2021 if you have not yet reached the maximum contribution limit. 

But if you expect to be in a lower tax bracket next year, consider deferring your bonus until 2021 and asking your employer to deposit the amount directly into your RRSP to avoid withholding taxes. 

This strategy levels out your income from one year to the next. The result is a lower average tax bill over the two years. Your advisor can help you weigh the advantages based on your income level and how much RRSP contribution room you have. 

3.  Should you top up your income from your RRSP? 

If your income in 2020 was significantly lower than previous years and you need some extra cash to meet your needs in 2021, you can make a withdrawal from your RRSP. The amount will be added to your income for 2020 and will be taxed at your marginal rate. 

This strategy makes sense if taking some money out of your retirement plan will cost you less in the long run because you expect to pay higher taxes in the future. For example, if your retirement income will put you in the highest tax bracket, it may be relatively cheaper to take some money out now when you might pay considerably less tax. This is an approach that requires the advice of a qualified investment advisor. 

Depending on your situation, there may be other ways to lower your tax bill, find some extra spending money, and rebalance your portfolio to better match your needs. In addition to the ideas above, ask about: 

Taking advantage of any of these strategies should always be done in consultation with qualified tax, insurance and investment specialists. Speak to your Lawyers Financial Advisor about your options as we all get ready to say goodbye to 2020. 

 

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December 17, 2020