Good uses for holiday cash
TODAY, let’s look at how best to utilize some of the extra cash earned during this holiday season.
First, whenever you get around to considering and weighing investment options, also consider the tax implications. December is the last month of the fiscal year of personal income tax reporting.
All your tax-planning actions must be completed by December 31, 2012. Some people may actually be starting to consider the tax implications for their income for the first time during December, if at all. That is because some people confuse tax planning and tax avoidance with the illegal act of tax evasion.
In addition, some people feel helpless in controlling the onslaught of taxes. Others feel embarrassed about asking basic questions regarding their earnings and possible tax-saving strategies. Asking about details of your pay is an old-fashioned taboo, and good riddance.
Just remember that whatever your situation, December is the most critical month to review, refine and act on your tax-avoidance plans.
The more taxes you pay, the greater is the potential for savings.
Currently, the highest personal income tax bracket is 35 per cent. Another way of looking at this rate is to note that on purchasing an item for, say, $6.50, it is actually costing you more like $10 of gross income. That should be enough incentive to pursue tax savings.
Reducing the effective cost of living and leveraging the return on investment on tax-free or tax-deferred investments, voluntary contributions to your employer company pension plan, a deferred registered annuity, or a registered retirement savings plan within specific limits are among the few remaining ways of investing funds free of tax.
However, it is not always possible to afford the additional investments that will effect the tax savings. After all, the basics of life must be in place first – particularly in December, Christmas should still be special.
So, for those who may just be saving some of their Christmas cash as a liquidity hedge for contingencies, they can try an enhanced interest account or a fixed deposit. If they need to ensure that these funds still remain available to them at a day’s notice, then Government saving bonds are a good option.
This is a useful way to save contingency cash, as interest will be earned on a prorated basis for every complete three-month period identified on the back of the bond document up to the time the bond matures or the time it is cashed.
A registered deferred annuity, RDA, is in effect a private pension plan. Once funds have been committed to the annuity, it is not possible to withdraw them before retirement.
If the investor dies before retirement, the value of the annuity becomes part of the estate. An RDA is established by purchasing a suitable insurance policy that is accepted and registered by the Inland Revenue Department.
The main difference with a registered retirement saving plan, RRSP, is that it is possible to make one $25 000 withdrawal under special conditions. In addition, the funds contributed to an RRSP can be invested various ways, including in mutual funds and deposits.
The two plans are currently linked in terms of the tax-deferral benefits. Contributing to pension funds, although tax-efficient, severely limits the investor’s access to and flexibility in the use of the funds.
• Louise Fairsave is a personal financial management advisor, providing practical counsel on money and estate matters. Her advice is general in nature; readers should seek personal counsel about their specific circumstances.