This is the time of year that we are reminded that time flies incredibly fast. Retail stores have Christmas sales in full gear and in only a few weeks we will wrap up what has been another positive year in the world markets.
As the end of the year nears, remember that good financial decisions far outweigh good investment decisions. Here’s my last minute financial checklist.
- Convert RRSP. If you turn 69 this year, you need to convert your RRSPs into either an annuity or a RRIF. It does not matter whether you turned 69 back in January or you turn 69 on December 31. As long as your 69th birthday is in 2006, you must convert the RRSP.Most financial institutions are pretty good at letting you know that you must convert the RRSP to a RRIF. In fact, many financial institutions will automatically convert the RRSP to a RRIF to avoid taxes. However, it is better not to take a chance.
- Spousal RRSP contributions. If you are investing in spousal RRSPs and you may need to make withdrawals in the near future (for retirement for example), you might consider making the RRSP contribution in December as opposed to January or February to help get around the 3-year attribution rules.Investing in a spousal RRSP in December 2006 means you might be able to take money out of the spousal RRSP in January 2009. Deferring the contribution by only 1 month to 2007, means that you must wait an extra year (January 2010) before you can withdraw the money to avoid attribution of income. A one month difference in the contribution date can make a year’s difference in taxation of income.One word of caution is that a contribution to a spousal plan in future years will extend the attribution dates. Attribution is based on the latest contribution to any spousal plan.
- Contribute to the RESP. Unlike the RRSP deadline, which is 60 days after the end of the year, the RESP deadline is December 31. You are allowed to contribute up to $4000 to an RESP each year for a child. If this limit is not used, it is lost forever. Unlike an RRSP contribution that can be carried forward to future years, the RESP is a use it or lose it. One of the advantages of the RESP is the government will contribute up to 20% in grants on the first $2000 deposited to the RESP. Unlike the contribution room, the grant can be carried forward to a future year. If you did not make a contribution to an RESP last year, make the $4000 contribution this year and you will qualify for a $800 grant.The timing could not be better. An RESP may make the perfect Christmas gift this holiday season.
- Portfolio rebalancing. For the past four years, markets around the world have delivered positive returns. When times are good, most people tend to let good investments ride thinking that good times will continue. History has shown that everything goes in cycles and while your instinct may be to do nothing to your portfolio, it may be a good time to look at rebalancing your portfolio. Rebalancing will likely force you to take some profits on your winners and buy low on some of your underperforming assets.
- Charitable contributions. To claim your charitable contributions for a tax credit for 2006, you will need to make that contribution by December 31, 2006. There are no shortages of organizations looking to get your donation dollars. One of the best ways to contribute to a charity is to donate shares of stocks or mutual funds instead of cash. Many taxpayers are still unaware that in the 2006 federal budget, the government has eliminated any capital gains on shares of publicly listed securities or mutual fund that are donated to charity. Make sure you get a tax receipt to qualify for the tax credit.
- Defer investing in the non-RRSP. If you are thinking of putting some money away into investments but not into RRSPs, think twice. You may be better off waiting until January. For example if you are thinking about buying a mutual fund, you might be better off waiting until January to avoid the taxable distributions that are issued in December for the entire 2006 year.