The new year is a great time to review and potentially reset your financial goals. Just as we often set health and career targets in January, we should also review our financial objectives, both wants and needs for the year ahead — and beyond.
“Staying on top of your finances should be a key new year’s resolution to make sure you’re making progress towards your long-term goals and objectives,” says Mark Chan, vice-president of wealth planning at Gluskin Sheff.
A year-ahead review is particularly important if your life circumstances have changed, such as a new job, a new child or grandchild, a marriage or divorce. Or, perhaps you’re looking at making a large purchase or investment, such as a home, vacation property or sending a child to university. Events like these require some financial planning, “and that takes time,” says Tiffany Harding, vice-president and head of wealth planning at Gluskin Sheff.
“The new year is the right time to review your personal circumstances to see if changes are needed in your wealth management or estate plans,” Harding says.
Reviewing your finances at the start of the year can also help to ensure you meet different deadlines, such as when to file your taxes, the deadline for contributing to a Registered Retirement Savings Plan (RRSP) and, for those eligible, when to pay interest on a prescribed rate loan. Missing these and other important financial deadlines can result in monetary penalties.
A check-in also ensures you’re taking full advantage of any tax strategies you may be eligible for, such as income splitting, says Mark Skeggs, vice-president of wealth planning Gluskin Sheff.
Plus, updating your wealth plan in January can be a good way to start the year.
It starts you off on the right foot and can motivate you to make good financial decisions for the rest of the year
Here are some strategies to consider when assessing your wealth plan in the new year:
Review your savings and investments
As wealth management professionals, we suggest starting a financial analysis by ensuring your savings and investments are aligned with your short, medium and long-term goals, in addition to your risk tolerance profile.
For example, you may wish to review your risk tolerance and asset allocation, depending on what has changed over the course of the previous year. As we get older, the amount of investments we put in more volatile assets may decrease, while our percentage of more stable, income oriented investments, such as corporate bonds and dividend oriented equities, may increase as our goals shift from capital growth to capital preservation. A review of your asset allocation should also include a review of how your assets are structured in order to achieve tax efficiency, which can result in a significant enhancement to your net worth over a long-term horizon.
Also, market fluctuations may create an imbalance in our asset allocation, either by sector or geography. For instance, 2020 was a strong year for technology stocks and some investors may have a higher percentage of holdings in that one sector than their plan calls for. A portfolio review ensures you have the right mix of assets based on your stage of life and investment goals, Jim Bantis, executive vice-president and head of Client Wealth Management at Gluskin Sheff, says.
Ensure your estate planning documents are up to date
The new year is a good time to revisit your will and power of attorney (POA) documents to ensure they still reflect your current wishes. A POA will ensure someone can manage your property or personal care affairs if you can’t due to a serious illness or incapacity. A will ensures your assets are distributed the way you want after your death.
In reviewing these documents, Harding says it’s important to ensure your beneficiaries are up-to-date and that your current assets are accounted for, especially if there have been major life changes. For instance, a recently married person may wish to add their spouse as a beneficiary.
Updating a will and POA documents can also help to avoid any family disagreements that might arise if there’s no clarity on how you want your affairs to be managed, Harding says.
Review registered accounts
The new year is also a good time to contribute to registered accounts, such as an RRSP, a Tax-Free Savings account (TFSA), or Registered Education Savings Plan (RESP). Generally speaking, the earlier in the year you put money into these registered accounts, the longer you benefit from their tax-advantaged growth, says Skeggs.
For instance, he says many individuals contribute to their RRSPs in January and February, and apply the deduction to their income in the prior year. While that is a good strategy, especially for those who may receive bonuses at the end of a year or early in the new year, contributing earlier in the year even though you cannot claim the deduction until you file your taxes for the current year, which could be more than 12 months away, can increase your savings long term.
While you don’t get the deduction as close to tax time, at least you’ll get the income into the plan
For older Canadians, the new year may also be a good time to decide whether to convert your RRSP to a Registered Retirement Income Fund (RRIF) before the required year that you turn age 71. Some Canadians choose to convert their RRSP to an RRIF earlier, usually at or after 65, either to avoid withdrawing larger amounts in their 70s and older, or to take advantage of certain tax strategies. For instance, if you convert some of your RRSP to an RRIF in the year you turn 65, you can take advantage of pension income splitting with your spouse or the pension income tax credit.
Review income-splitting opportunities
The start of the year is also a good time to review income splitting strategies where appropriate.
“Income-splitting is particularly effective for couples, either married or common law, where one spouse is expected to have a lower income for the year,” Skeggs says.
An example is a spousal loan, which allows a high-income earning spouse to lend money to their lower-income earning spouse to invest and take advantage of the lower-earning spouse’s marginal tax rate.
The loan must be made at the Canada Revenue Agency’s prescribed interest rate, which is currently 1%, and the interest on the loan must be paid within 30 days of the end of the calendar year (for example, interest on prescribed rate loans outstanding in 2021 must be paid by January 30, 2022). The higher-income earning spouse has to pay tax on the interest income received on the spousal loan, but the investment income earned on the loan proceeds net of the interest paid on the loan is taxed in the hands of the lower-income spouse.
A family income-splitting trust can also be set up: Similar to the spousal loan, which would involve a prescribed rate loan being made to a trust, often with a spouse, children and/or grandchildren as income beneficiaries. The income earned in the trust, net of the interest paid on the prescribed rate loan, is then allocated to the beneficiary and taxed in their hands, which traditionally would be at a significantly lower marginal tax rate. The income generated from this strategy is often used to pay for a child’s expenses, such as private school or post-secondary tuition.
With a spousal RRSP, the higher-income spouse (often with more RRSP room and in a higher tax bracket) contributes to the spousal RRSP and receives the tax benefit against his or her income. The investment grows in the lower income spouse’s RRSP on a tax-deferred basis and, provided certain conditions are met, the RRSP withdrawals are taxed in the hands of the lower-income spouse. Couples can also take advantage of pension income splitting; a strategy where the higher-income spouse transfers up to 50 per cent of their eligible pension income to the lower income-earning spouse. The goal of these strategies is for couples with varying incomes to save for retirement and split income to reduce taxes.
Talk to a wealth management professional
Setting and updating a wealth plan is an effective way to ensure your wealth and estate plans are on track. The new year is an ideal time to check-in, to set targets for the weeks and months ahead.
“Having a plan is always a good idea,” Chan says. “It gives you something to work towards and something to measure your progress against throughout the year.”
Having a plan can also help you remian calm in times of economic turbulence and uncertainty.
“A plan gives you peace of mind that you’re going to be OK and your financial goals are achievable if you take the right steps to get there,” Chan says.
Review insurance needs
The new year is also a good time to look at your insurance coverage to determine there are any gaps in your planning depending on your stage of life. There are two main categories of insurance to consider as part of wealth planning: Living benefits—including disability, critical illness and long-term care protection—and life insurance, including term and permanent coverage.
Living benefits insurance provide an income stream and helps to protect the depletion of retirement assets in the event of an unexpected illness, injury or long-term care need. Life insurance, including term life insurance and permanent life insurance, helps protect assets and provide liquidity after you pass away. Life insurance is also a common tool used in estate planning to provide liquidity to pay tax liabilities, equalize assets for beneficiaries, and to fulfill philanthropic wishes.
For more on year-ahead planning, please download our guide and checklist.
* Please note there are references to employees who are no longer with the firm, but were as of the date of publication.