Money Here’s what taxes can do to your savings if you’re not careful

22:06  14 february  2018
22:06  14 february  2018 Source:   globalnews.ca

Fire crews to work overnight to battle St. James area blaze

  Fire crews to work overnight to battle St. James area blaze A commercial building in Winnipeg's St. James area went up in flames on Monday afternoon. Flames could be seen pouring from the two-storey warehouse building in the 500 block of Roseberry Street near St. Matthews Avenue shortly after 4 p.m.Mark Reshaur, an assistant chief with the Winnipeg Fire Paramedic Service, said the fire started just after 3:15 p.m., but it's not clear yet what started it. Nobody was in the building at the time and no injuries have been reported, he said.Firefighters started with an offensive attack but had to leave the building as conditions worsened, he said.

One of the first things people do when they get a new job offer or a big raise is to try to figure out what their income taxes are going to be. Why? Because we all know that what really matters is net pay. Somehow, however, this principle tends to fall by the wayside when we deal with our savings .

If you qualify for this last one, though, watch out — it can cost you more than it can save you if you ’ re not careful . or rather hefty expenditures (or both) and avoid the AMT to net any significant tax savings Here you have to be careful .

One of the first things people do when they get a new job offer or a big raise is to try to figure out what their income taxes are going to be. Why? Because we all know that what really matters is net pay. Somehow, however, this principle tends to fall by the wayside when we deal with our savings.

More than 65 per cent of Canadian households contribute either to a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA), recent census data suggests. Those are the two options for sheltering your investments from tax, and it looks like most Canadians are aware of them. But what if you need to hold money outside an RRSP or TFSA?

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WATCH: Do you have savings outside of an RRSP or TFSA? Here are the types of taxes you might face. And perhaps you ’ re already maxing out your TFSA for something else, like saving up for a down payment. Or maybe, lucky you, you max out both your RRSP and TFSA every year and still

READ MORE: Here ’ s what taxes can do to your savings if you ’ re not careful . Avoiding filing your taxes at the last minute also gives you more time to review the rules and make sure you do it right. Still, make sure you’ve received all the paperwork you’ll need before setting out to fill up your return.

READ MORE: How much do you really need for retirement? We did the math

It isn't hard to imagine why you would. RRSPs are meant for retirement and generally do not lend themselves to shorter-term savings goals like buying a car or maintaining a rainy day fund. And perhaps you're already maxing out your TFSA for something else, like saving up for a down payment. Or maybe, lucky you, you max out both your RRSP and TFSA every year and still have savings to stash away.

READ MORE: Money123 – the easy way to be smart with your money

If you have any savings sitting outside an RRSP and TFSA, you should be aware of the tax bite. Different types of investments are taxed differently, and this can make a significant difference to your actual investment returns.

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READ MORE: Here ’ s what taxes can do to your savings if you ’ re not careful . But wait, it gets even worse. Some provinces – namely Saskatchewan and Ontario – got rid of their own education-related tax credits in the middle of the year

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To illustrate the concept, let's look at a fictional example.

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Meet Jane Canuck

Jane Canuck is an imaginary Canadian based in B.C. Earning $150,000 a year, Jane is doing quite well and manages to use up all of her RRSP and TFSA contribution room every year. But Jane sets herself a goal of saving another $35,000 in a year for a large expense that's coming up.

READ MORE: Plan to use your RRSP for a down payment on a house? Don’t do it.

To meet her goal in one year, Jane needs to squirrel away just under $2,917 per month. Now let's look at three scenarios: Jane invests her $35,000 so that it only earns interest income; only earns capital gain income; or only earns eligible dividend income.

How much money does Jane go home with at the end of the year? We asked Julia Chung, a certified financial planner and partner at Surrey, B.C.-based Spring Financial Planning to do the math.

When saving into an RRSP instead of a TFSA could cost you dearly

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Yes, you will likely pay taxes on at least some of your distributions and, if you ’ re not careful , the taxes could be quite high. Here ’ s how it works: The distributions on a regular 401(k) are taxed as ordinary income at the same income tax rate as your paycheck.

Even though the tax plan provides tax savings to the middle class and lower middle class, it We overlook something very important here too- California has not conformed to many Federal tax changes in the last decade. If you ’ re taxed 50% then you gave half you ’ re working life to the government!!.

READ MORE: When saving into an RRSP instead of a TFSA could cost you dearly

We're going to assume that Jane earns a three-per-cent return in all three scenarios so that we’re comparing apples to apples. However, "this means that we’re not being the least bit realistic about what rates of return are possible with different kinds of investments, and that we are not making a recommendation for how she should invest these savings," Chung noted.

Before taxes, Jane would make $574 over the course of the year. How much of that she gets to keep after tax, though, is a different story:

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Different kinds of investments come with different tax rates

Interest, capital gains and dividends are the three basic types of investment income:

Interest income: This is the interest you earn from your deposits in savings accounts, guaranteed investment certificates (GICs), or bonds. From a tax point of view, interest is treated like your regular income. In the first scenario, Jane is being taxed as if she had earned $150,574 ($150,000 + $574).

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Although everyone' s tax situation is different, here are some of the things that might happen if you don't submit your 2017 tax returns by the filing deadline, which this year In short, even if you ' re only a couple of months behind on your taxes , the consequences can pile up, thanks to fees and interest.

Paying Taxes . So by now you ’ re dutifully putting 21% (or 25%, or whatever percent) of your income in savings each time you get a paycheck, and watching the balance grow After using the information form here and calculating tax percentages, I feel confident on what I am going in and asking for.

Capital gains: A capital gain is an increase in the value of the investments you hold. For example, if you bought Apple shares at $100 and now they're worth, say, $170, your capital gain is $70 per share. You'd only get taxed on that $70 if you decided to sell or transfer your Apple stocks. If you did, you'd be taxed at your marginal rate, but only half of the capital gain would be subjected to tax.

With capital gains, Jane's tax bite is exactly half of what she would have had to pay by earning exclusively interest income.

Eligible dividends income: Dividends are amounts that companies pay to their shareholders on a regular basis out of their profits. Dividends from shares of taxable Canadian corporations – so-called eligible dividends – have a preferential tax treatment. How it works is a bit complex, but "suffice to say that, depending on your total taxable income, the tax rate applied is often lower than that for interest income and higher than that for capital gains," Chung said.

WATCH: RRSPs aren't for everyone – here's a look at which registered account might suit you better

Takeaways from Jane's story

There are a couple of fundamental lessons Chung sees in Jane's example:

If investing outside an RRSP or TFSA, be aware of taxes. Taxes shouldn't necessarily be the leading consideration when deciding how to invest, but they should be part of your math, said Chung.

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In such cases, you may want to time your retirement distributions so that you ’ re not pushed into the next bracket, or to use taxable income such as savings or brokerage accounts, which are taxed on capital gains not as income.

For those who plan ahead, there can be significant tax savings . Here are five steps to consider: 1. Know your residency status: While this may seem straightforward, you And pay careful attention to how U. S . tax planning interacts with tax treaties and the tax and property laws in other countries.

The return on safer investments could be even lower than it looks. In our scenarios, all three types of investments earn the same return. In real life, riskier investments like stocks tend to yield higher returns than safer bets like bonds and GICs. This has been especially true in the past couple of decades of very low interest rates. For example, the S&P 500 Index gained 11.2 per cent (in Canadian dollars) last year. By comparison, the best rate you can hope for in a one-year GIC held outside an RRSP or a TFSA is 2.50 per cent, according to rate-comparisons site Ratehub.ca. When you consider after-tax returns, though, the spread becomes even larger, Chung noted. Your meagre GIC return would be fully taxable, while only half of your plump capital gain would face tax.

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Different types of investments are subject to different tax rates. It's something to keep in mind if you have savings outside of an RRSP or TFSA.© Getty Images Different types of investments are subject to different tax rates. It's something to keep in mind if you have savings outside of an RRSP or TFSA.

A tax cage match: government vs your savings .
How Ottawa and the provinces are making it harder for us to saveReaders might be Liberal, Conservative, or a member of the resurrected Rhinoceros party; partisan identities don’t matter to taxpayers and savers (the same people, incidentally, if politicians need the reminder).  What does count is if actions taken by a government make it easier for Canadians to save: For their kids’ next amateur sports adventure, the family summer holiday or their own retirement.

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