Tax tips for young professionals
Young people today face different financial pressures than previous generations. While their parents might have had jobs with defined benefit pension plans, these days, those careers are few and far between. Instead, the risk is borne by employees rather than employers, so it's more important than ever that young people become financially literate.
Granted, when you're just finishing university or college or are in the early stages of your career, it's hard to believe you'll ever get old, but the years do fly by, and Davies stresses that procrastinating won't help your financial future. "For this group, the opportunity because of their education is quite substantial."
Here are a few tax-saving and investment tips to get started:
Save automatically. "One of the most effective ways to start investing is to have an automatic savings plan," says Davies, in which money is transferred from your everyday banking account to a savings account on a regular basis via direct withdrawal. "Many people find that they don't even miss the money, because they never see it."
Start early and invest regularly. An automatic RRSP contribution program is a simple way to build your nest egg. Thanks to the beauty of compound interest, if you invest early, even a small amount will pay off in the long run.
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Splurge no more. Educate yourself about unused contribution room and top up your RRSP using your tax refund or when you receive a bonus at work. Rather than waiting for a tax refund at the end of the year, you can apply to the Canada Revenue Agency, using Form T1213, to have your employer deduct less tax from your pay cheque (Quebec residents can use Revenu Quebec's Form TP-1016).
Carry forward your RRSP tax deduction. Even if you make an RRSP contribution this year, you don't have to claim it on your tax return. You can carry it forward to a future year when you're earning more and are in a higher tax bracket. This will help maximize your tax reduction when you really need it.
Consider a Tax-Free Savings Account, or TFSA. Your money grows tax-free in a TFSA, and you're allowed to invest up to $5,000 per year. Open a TFSA now, even if don't have money to invest, because you'll start accumulating contribution room that you can carry forward to a time when you do have the money.
Give a little. A percentage of charitable donations can be deducted from your earnings. That percentage increases to 29 per cent from 15 per cent once your total donations top $200, so you may want carry forward donations (allowable for up to five years) and claim them when your income is higher.
Always file your taxes. Regardless of how much you make, it's important to file your taxes on a regular basis; if you don't, you don't accumulate unused contribution room in your RRSP, and you miss out on a load of potential tax credits.
Michelle Warren is a freelance writer living in Toronto.
