Given the COVID-19 global pandemic, 2020 has been a year much different than any other. However, it doesn’t mean you can just let your finances slip through the cracks and not pay any attention to finishing some vital financial things before the end of the year. So, as we get closer to the end of 2020, there are several financial things you should do. By finishing the year-end financial checklist, you can allow yourself to fully enjoy the holidays and start the New Year financially sound. For Canadians, here are the ten financial things to do before end of year.
Here’s my year-end financial checklist that Mrs. T and I go through each December.
Table of Contents
- 1. Contribute the Maximum Amount to your TFSA
- 2. Contribute the Maximum Amount to your RRSP
- 3. Maximize RESP contributions
- 4. Consider making charitable donations
- 5. Consider tax loss harvesting
- 6. Prepare all tax filing documents
- 7. Do a 30-minute yearly financial review
- 8. Create a new budget
- 9. Review estate plan, investment beneficiaries, insurance policies, etc.
- 10. Use up extended health benefits
- Summary – Financial things to do before end of year
1. Contribute the Maximum Amount to your TFSA
As we approach the end of the year, you should consider maxing out your contribution room and taking advantage of the tax-free growth in your TFSA.
If you were 18 in 2009, by 2020, you’d have a cumulative total TFSA contribution room of $69,500.
|Year||TFSA Annual Limit||Cumulative Total|
If you were to contribute $10,000 to your TFSA, at an 8% annual return, after 25 years, you’d end up with $68,484.75. This means you’d “earn” $58,484.75 completely tax-free. If you could maximize your TFSA for the entire $69,500 in 2020, then do not contribute again for the next 25 years, at an 8% annual return, you’d end up with $475,969.03! Talk about the power of compound interest!
Therefore, if you have any leftover contribution room for your TFSA, consider contributing money before the end of the year. Because in the New Year you’ll get additional TFSA contribution room.
Now, if you are considering making a TFSA withdrawal, it would be a good idea to make the withdrawal before the end of the year. Because whatever amount you withdraw from the TFSA, you can contribute that amount in the new year. For example, if you make a $5,000 withdrawal from your TFSA before the end of 2020, that means you’d be able to contribute $11,000 to your TFSA in 2021 ($5,000 withdrawal amount plus 2021 contribution room of $6,000).
2. Contribute the Maximum Amount to your RRSP
The Registered Retirement Savings Plan is another powerful savings vehicle that the Canadian government has created to allow Canadians to save for their retirement. In 2020, you can contribute 18% of your previous year’s earned income, up to a maximum of $27,230, to the RRSP.
Many Canadians think that the RRSP contributions made within the first 60 days of the year can only be used to claim the tax deduction for the previous year. But you have the choice to decide which year to claim the tax deduction. For example, if you make a $5,000 RRSP contribution in the first 60 days of 2021, you can claim the contribution for the 2020 or the 2021 tax return.
When you consider the power of compound interest, it makes sense to maximize your RRSP in the same year, then make contributions for the New Year as early as possible to allow the contributions to grow.
Another thing to keep in mind is that the CRA allows you to over contribute up to $2,000 for RRSP. This limit is there to provide some buffer in case you make an honest mistake.
I believe it’s actually a good idea to use this $2,000 over-contribution limit to take advantage of the tax-free growth and power of compound interest. But watch out that you don’t go over the $2,000 over contribution limit or you will get charged a 1% penalty tax for each month you are in excess of the contribution limit. You must withdraw the over contribution amount immediately (note: this will trigger withholding tax, double whammy!!!) then fill out a T1-OVP Individual Tax Return for RRSP Excess Contributions.
Lesson learned? Never go over the RRSP $2,000 limit. If you utilize the $2,000 RRSP over-contribution room, make sure you have some earned income in future years because if your available contribution room is a negative amount, you may have to pay tax on any excess contributions.
3. Maximize RESP contributions
Similar to the previous two things, if you have kids, consider using an RESP to help you save for your kids’ post-secondary education.
When you contribute to an RESP, the Canadian government matches 20% of the first $2,500 contributed annually, to a maximum of $500 per beneficiary per year. The lifetime maximum per beneficiary is $7,200. So, if you haven’t maximized the annual RESP contribution room, it makes sense to contribute to the RESP so you are not saying no to free money.
4. Consider making charitable donations
We are very grateful and appreciative of our dividend portfolio and that we are doing well financially. Unfortunately, there are many people across Canada and across the globe that need a helping hand. This is one of the key reasons why Mrs. T and I donate to charities every month. In addition, every year, we try to make extra charitable donations if we can. Things like sponsoring a family for Christmas brings a lot of joy to us. It is even better to get our kids involved in the spirit of giving.
For Canadians, you can claim eligible charitable donations as non-refundable tax credits when filing income tax. In any year, you may claim:
- Donations made by Dec. 31 of the applicable tax year;
- Any unclaimed donations made in the previous five years;
- Any unclaimed donations made by your spouse or common law partner in the year or in the previous five years.
You can claim eligible amounts of gifts to a limit of 75% of their net income. The charitable tax credit rates are different for the federal government and the provinces and territories.
If you donate more than $200, you’d end up with a higher deduction rate. In other words, if you have made charitable donations, make sure you donate more than $200 in a single year to get the higher deduction rate.
5. Consider tax loss harvesting
If you have made a substantial amount of capital gains during the year, it may make sense to consider doing tax loss harvesting by selling some of your money-losing investments for a tax loss. When you do that, you won’t have to pay as much capital gains when you file your taxes.
6. Prepare all tax filing documents
One of the financial things we always do before the end of the year is to prepare for all tax filing documents. This can include any charitable donation receipts, professional fees, eligible health expense receipts, etc. And if you haven’t paid for expenses that you can claim on your tax return, make sure you pay them before the end of the year and get the receipts.
Preparing all tax filing documents before the end of the year will save your time and make life easier, so you won’t end up scrambling during income tax season.
7. Do a 30-minute yearly financial review
Do you have a budget? Did you set out any financial goals at the beginning of the year? The end of the year is a great time to do an overall financial review. Now, don’t spend hours and hours doing a financial review and totally overwhelm yourself. Over the years, we have tinkered with how we do our yearly financial review and we have found that doing a quick 30-minute yearly financial review worked best for us.
So, check and see if you meet the financial goals you set out at the beginning of the year. Review your budget and see if there’s anything you need to adjust for the new year. Are there any spending categories that are trending in the wrong direction? Figure out the root cause. During this quick 30-minute review, it is also a good idea to go over what you have done well this year and come up with one or two financial things that you want to improve for the New Year.
8. Create a new budget
Once you have completed the 30-minute yearly financial review, create a new budget. Since we use an Excel spreadsheet for our budget system, we’d create new sheets for the New Year, go through the different spending categories, and make sure everything is up-to-date for the new year.
9. Review estate plan, investment beneficiaries, insurance policies, etc.
A lot can happen in a year. If there are any big changes in life, like getting married, having kids, etc., make sure all the paperwork and policies are up to date. It is also a good idea to review important things that you might miss and get them done. For example, if you don’t have a will, it would be a great idea to set one up.
10. Use up extended health benefits
If you have extended health benefits or a flexible spending account for health care at your workplace, check if you have any amount left for the existing year. If you do, it’s a good idea to use up these benefits before the end of the year. After all, you paid for these extended health benefits, so why let them go wasted?
This can mean treating yourself to a nice massage, getting a new pair of glasses, going to see a physiotherapist to fix up that nagging injury, etc. Since the benefits reset on January 1st, if you have any unused benefits, they will go wasted.
Summary – Financial things to do before end of year
It makes sense to go through and complete these 10 financial things before the end of the year to make sure you finish the year strong. This will also provide you with an idea of what you might need to improve for the New Year.
Dear readers, is there anything I might have missed for the year-end financial checklist?