Couples And Money- Work Together To Make The Most Of Your Money (Part 5)
Sarah and Andy earn a better combined salary than many young couples their age yet they certainly don’t feel very well off. “Being salaried employees, there is only so much we can do to reduce our income tax burden” says Sarah. While that’s true, it’s still important to take advantage of every opportunity available.
Last week, Andy and Sarah discovered new ways to maximize their retirement investments as a couple. Another strategy to grow their wealth is to find opportunities to pay less tax together (not just as individuals).
Sarah is in the top tax bracket while Andy is in a lower tax bracket. Andy has maximized his RRSP contribution but Sarah has not. “We want to have some extra cash available to pay down our mortgage faster” says Sarah. “We used our tax refunds last year to reduce our mortgage balance”. While this is an excellent strategy, they can do even better.
One option is to make the same combined RRSP contribution, with more going towards Sarah’s plan and less to Andy’s. This revised allocation achieves two things. First, the couple gets a larger company match from Sarah’s plan. Second, their combined income tax bill is less because Sarah is in a higher tax bracket (and gets a better tax deduction). Together, we determine this strategy improves the couple’s overall wealth by an extra $2,000 per year. “That’s money that we wouldn’t otherwise have” says Andy.
Alternatively, they could both contribute the maximum to their RRSP’s and get an even better (combined) company match and tax deduction. “Perhaps, in the long run, it makes sense to have a more balanced approach to our mortgage and retirement savings. We don’t want to neglect one at the expense of the other” observes Andy, wisely.
“While we’re on the topic of taxes, we’ve never opened tax-free savings accounts (TFSA’s). After buying our house, we figured it didn’t really matter” mentions Sarah. As outlined in Part 1 of this series, Sarah and Andy have multiple bank accounts each with some available cash. “In essence, our emergency funds” suggests Andy. The couple was surprised to learn how much cash they had together and realized the benefits of consolidating and putting this cash to work. Holding emergency funds or short term investments inside a TFSA allows tax-free, forever growth and easy access to money– a “win win” situation for anyone.
People often forget that income taxes are one of the largest expenses of any family. Tax saving opportunities for couples are best when one spouse earns more than the other or has a different employment arrangement/entitlement. Ways to divide income, defer taxes and increase deductions are important for building wealth as a couple. So, too, are ways to optimize and reduce your lifetime income tax burden. These strategies, taken over a 40 year working life and 30 year retirement, make a big difference to a family’s overall wealth. It’s never too early or late to put tax-saving ideas into practice!
Next Week: RECAP: Andy and Sarah’s Lessons Learned
Image courtesy of business.financialpost.com