Category Archives: Personal finance

How to save tax dollars

By Sheryl Smolkin

We all know we ought to maximize Saskatchewan Pension Plan and other retirement savings plan contributions so we can retire comfortably sooner rather than later.

But the fact that your SPP contribution is deducted directly from your income for tax purposes and lowers the total income taxes you pay not only makes saving easier – it makes you feel like you’re getting a break!

You must have available RRSP room to make an SPP contribution. SPP contributions should be reported on Schedule 7 of your income tax form and claimed on line 208. Both your application and your contribution must be received by SPP before a tax receipt will be issued. SPP contributions will also be taken into account in determining RRSP over-contributions.

Spousal contributions are also permitted and if you have available RRSP room, you may contribute and receive a tax deduction for both your personal account and your spouse’s account.

Reduce taxes at source

Although you may look forward to getting money back after you file your income tax return in April, let’s face it — where possible, the best strategy is to avoid paying unnecessary taxes in the first place.

If you contribute to SPP by payroll deductions your employer can reduce the income tax you pay at source. But if you make regular monthly contributions which have not been automatically deducted by your employer, a letter of authority from a tax services officer must be provided in order to reduce income taxes deducted.

To get this letter you have to complete a Form T1213 Request to Reduce Tax Deductions at Source and provide documentation showing you are making regular SPP contributions to support the request for a tax deduction at source. It may take four to eight weeks for the Canada Revenue Agency to process the request.

Tax treatment of benefits

When your spouse has been named as beneficiary, death benefits from your account can be transferred directly to his/her SPP account or to an RRSP, RRIF, or guaranteed life annuity. Tax-deferred transfer options are also available if the beneficiary is a financially dependent child or grandchild.

All annuity payments from SPP are taxable in the year received and are eligible for the $2,000 pension income credit and for pension income splitting. Each year you will receive a T4A for the benefits that you have received in that year. Withholding tax is determined using a schedule prescribed by Canada Revenue Agency (CRA).

Your SPP account is also tax sheltered. You may continue contributing to your account until the end of the year in which you celebrate your 71st birthday or until you begin receiving a pension from SPP, whichever is earlier. You can continue contributing to the Plan if you are receiving SPP survivor’s benefits.

Key SPP tax benefits

  • Personal tax deduction available.
  • Spousal tax deduction available.
  • Contributions and earnings are sheltered from tax until received as income.
  • SPP annuity income is eligible for the pension income credit and for pension income splitting.

  

Also read:

RRSPs and related plans

RRSP myths are just that

Why you should never borrow for RRSPs

Deductions at tax time make RRSPs popular

Sheryl Smolkin is a Toronto lawyer, writer and editor. She blogs for the Toronto star on moneyville.ca and can be contacted through her website. You can also follow her on Twitter @SherylSmolkin.

Pay yourself first

By Sheryl Smolkin

Saving for retirement is hard. You fully intend to put away a percentage of every paycheque but mortgage payments, car payments and new shoes for your children get in the way. When you have a few dollars in your pocket after paying the bills, travel and the latest tech toy are powerful magnets.

But you can make saving much easier, by adopting one simple financial planning principle: “Pay yourself first.”

“Pay yourself first” as a cornerstone of investment philosophy was popularized in this country by David Chilton, the renowned author of The Wealthy Barber. Simply put, it means that before you pay your bills, before you buy your groceries, before you do anything else, set aside a portion of your income to save. The first bill you pay each month should be to yourself.

Decide on the purposes for which you want to save and the amount you want to save each pay period. Then arrange for automatic withdrawals by your bank or other financial institution.

Here are three reasons why paying yourself first makes sense:

  1. You are making savings a priority. You are telling yourself that your future is just as important as all of the current expenses you are responsible for.
  2. You are developing sound financial habits. Most people spend money in the following order: bills, fun, savings. By putting savings first, you put the money aside before you find reasons to spend it.
  3. You are building a cash buffer. Regular cash contributions are an excellent way to build a retirement nest egg. You can also allocate a portion of your savings for an emergency fund or to purchase a home. Paying yourself first gives you the freedom to choose.

You can even use the tax system to “Pay yourself first” and get a raise. If you are saving regularly in the Saskatchewan Pension Plan or a registered retirement savings plan, you can complete a T1213 form and request permission for your employer to deduct a lower amount of taxes at source,

By reducing your withholdings at source, you are paying yourself and not the Canada Revenue Agency first, and increasing your net take home pay. You are effectively giving yourself a raise all year long, not just once at tax time.

You can contribute up to $2,500/year to the Saskatchewan Pension Plan and contribution options include directly contributing from your bank account on a pre-authorized contribution schedule.

Developing the “Pay yourself first” habit can help you build up a substantial retirement nest egg. For example, if you deposit $2,500/year in the SPP and earn five percent over a 40 year career (age 25 to 65) you will have a lump sum of about $317,000 in your account.

For additional retirement or other savings, you can also direct your financial institution to transfer regular amounts to savings vehicles like tax free savings accounts and registered retirement savings plans.

Also read:

The Wealthy Barber

The Automatic Millionaire

The Richest Man in Babylon

Pay yourself first

Pay yourself first?

Pay yourself first

Sheryl Smolkin is a Toronto lawyer, writer and editor. She blogs for the Toronto star on moneyville.ca and can be contacted through her website. You can also follow her on Twitter @SherylSmolkin.

Millionaire teacher’s first rule of Wealth

By Sheryl Smolkin

High School English teacher Andrew Hallam started investing when he was 19. In an excerpt from his book Millionaire Teacher published on moneyville.ca, Hallam talks about the benefits of starting to save early and the power of compound interest:

“…Buried in the dull pages of most school math books is something that’s actually useful: the magical premise of compound interest.

Warren Buffett applied it to become a billionaire. More importantly, so can you and I’ll show you how.

Starting early is the greatest gift you can give yourself. If you start early and if you invest efficiently (in a manner that I’ll explain in this book) you can build a fortune over time, while spending just 60 minutes a year monitoring your investments.”

Read more

Save early, save often

By Sheryl Smolkin

You are 26 years old and at the end of 2009, you completed your first year of full-time work, earning $50,000. Your 2010 tax assessment form said you have $9,000 in Registered Retirement Savings Plan room for 2011. You know saving for retirement is a good idea, but it seems so far away.

Why start saving early for retirement?

Government benefits like Canada Pension Plan and the Old Age Security currently pay about $18,000/yr. These amounts will increase by the time you retire but so will your income. If at the end of your career you are earning $150,000/year you will need about $2 million in tax-assisted savings to buy a pension equal to 60 per cent or 70 per cent of your final earnings.

But if you start saving a small amount each month now, you will have a substantial chunk of retirement savings available to you when you need it. As long as you have sufficient RRSP room, the Saskatchewan Pension Plan (SPP) allows you to contribute $2,500/year. You can also transfer in an additional $10,000 each year from your RRSP.

The following example show how much money you can accumulate by saving regularly in the SPP.

Example:

You begin saving at age 26, with 39 years until you retire at age 65. You contribute $2,500 yr. and your retirement savings earn an average of 5%* each year.

Retirement savings at age 65: $299, 499.44

Starting at age 45, you also transfer in $10,000/yr. from your RRSP, which earns an average of 5% each year until retirement at age 65.

Additional retirement savings: $347,192.52

Total retirement savings:         $646, 691.96

You can easily join by filling out a form on our website and providing a photocopy of your birth certificate or passport. Anyone ages 18 to 71 is eligible, whether or not they are Saskatchewan residents.

SPP also makes it simple to contribute to your account by allowing you to choose from any of the following methods:

  • By mail.
  • In person or by telebanking at your financial institution.
  • By phone using your credit card.
  • Online.

On the long and winding road to retirement you will encounter many detours including raising a family, buying a house and contributing to the cost of your children’s education. However, by joining SPP at an early age and saving regularly, you can look forward to a more secure retirement.

For more information, check out our website, RSS savewithSPP.com, “like” us on Facebook or connect with us on Linked in.

*The SPP average rate of return over 25 years has been 8.2%. All calculations are approximate and do not in any way warrant future returns.

Also read:

Invest early, invest often 

Planning your RRSP contributions: Gary, Kevin and Judith’s story

How saving early in your RRSP helps: Amy and Amanda’s story  

Is it easier to save for retirement if you start earlier in life?

Millionaire teacher’s first rule of wealth