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Financial planning tips

April 27, 2016

4 smart ways to use your middle-class tax cut

Per paycheque, the money from the middle-class income tax cut may not look like much. But it can add up to enough to do your finances some real good.

The Trudeau government made good on an election promise when it passed legislation in December to reduce the federal income tax rate for the middle-income bracket to 20.5% from 22%. That means almost one-third of Canadians will pay less tax this year – about $679 less tax per year for someone at the top of the bracket (about $26 per biweekly paycheque), or $1,358 a couple.

It would be very easy to just let that new-found money slip through your fingers, but while it’s hardly a windfall, it is enough for you to do your finances some real good. How? By using the increase in your take-home pay to reduce your debt, save for the future or protect yourself and your family.

Here are four ways to do it:

1. Pay down credit card debt

With many credit cards charging around 20% annual interest these days, it can take almost 21 years to pay off a debt of just over $2,600 if you pay only the minimum every month – and that’s not including any additional debt you might run up.

“My first recommendation to anybody is to pay off debt, credit card debt specifically,” says Heather Freed, CFP®, CLU®, CHS, an independent, Toronto-based Certified Financial Planner. “If you put $679 a year toward your credit card debt, you can take years off those payments.”

2. Protect yourself and your family with critical illness insurance

Research reveals a 79% chance that at least one member of a 50-year-old Canadian couple will develop a critical illness at some point. And the 2014 Sun Life Canadian Health Index report found that most Canadians who’ve suffered a serious illness have also suffered financially as a result.

If you have a benefits plan at work, you may have group disability insurance, but you may not have critical illness insurance. Disability insurance will only cover a portion of your income while you’re recovering. Critical illness insurance can protect your savings and help cover the costs associated with recovery from a range of serious illnesses, including cancer, heart attack and stroke. If you become sick with an illness covered by your policy and satisfy a waiting period, you’ll receive a lump-sum cash payment.

You choose how to spend the money. You can:

  • Replace reduced or lost income for you and your spouse (if he or she takes time off work to care for you)
  • Bring in extra help at home for you and your family
  • Consider medical treatments and medications not covered by government health insurance plans
  • Reduce debt and other financial concerns while you cope with your illness

Instead of worrying about your finances or the plans you have for your family, you can focus on getting better.

Sun Life Financial advisor Lynn Liu Guo says $679 a year can buy a $150,000 critical illness insurance policy for a 38-year-old man or woman.*

3. Buy life insurance

Your employer might provide group life insurance, but it might not be enough to cover your needs in the event of your death, such as helping support your family for years to come, sending your children to college or paying off your mortgage.

Depending on your age and health, that tax cut can pay for all or some of the premiums for a life insurance policy that will provide a tax-free payout following your death.

4. Invest for the future

Depending on your tax bracket and age, you might want to consider investing the money in a tax-free savings account (TFSA) or a registered retirement savings plan (RRSP). Putting money into an RRSP may help reduce your taxes now, but whenever you take it out – even after you retire – you will have to pay that tax. If you expect to be in a lower tax bracket after you retire than you are now, you can benefit from putting your money in an RRSP. If you’re in the early stages of your career and you have contribution room, however, a TFSA might be a better choice.

“With a TFSA, while you don’t get a tax break now, all the money in there grows tax-free and there is no tax to pay whenever you take it out,” says Freed. “But every single penny in your RRSP will be taxed eventually. So my recommendation is usually to put any ‘extra’ money into your TFSA, if you haven’t maxxed it out yet.”

Deciding what to do with the money from your tax cut is important, but it’s only one piece of a much bigger picture. To create a plan for your financial future that will work for you, talk to an advisor.

* Male, age 38, non-smoker, T10 coverage $150,000    $676.50
Female, age 38, non-smoker, T10 coverage $150,000    $670.50
Using rates in effect in April 2016 for Sun Critical Illness Insurance. No optional benefits were selected.

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