Families that Save Together are Powerful

Comedian Ray Romano once said, "Having children is a lot like living in a frat house – nobody sleeps, everything’s broken, and there’s a lot of throwing up.”  But aside from being highly amusing calamities at times, families are also powerful economic unions which are subject to fairly complicated tax rules.

Those that master the art of saving together become powerful economic units. There is no better time than post tax-filing season to review your opportunities and become important savings role models for your kids. Here are three teaching tips to help:

Four family members each earning $11,000 would pay no federal tax but if one parent earned the full $44,000 then their federal tax would be $2,070. This example illustrates the progressivity of our tax system well: no tax on the first $11,038; income above this is taxed at 15%. Now add the provincial tax to this to fully understand the tax picture.

Families that encourage each family member to be productive and earn to the top of their tax free zone, and/or the top of their current tax bracket, get a more powerful economic result. Income splitting, mindful of the Attribution Rules, can help, too. If these terms are unfamiliar to you, take a basic tax course. . .it can help you become wealthier over time. Not for you? Then use the “offseason” to visit with a tax professional for the purposes of tax planning for investment, retirement and estate purposes.

1. Maximize Your Tax Free Zones. Canadians are taxed as individuals on worldwide income using progressive tax rates. Each individual is entitled to a "tax free zone” or “Federal Basis Personal Amount" of $11,038 in 2013, and the federal tax brackets and rates are the following:
   
   

   2013 Federal Brackets	2013 Federal Tax Rates
   Up to $11,038	0
   $11,039 to $43,561	15%
   $43,562 to $87,123	22%
   $87,124 to $135,054	26%
   Over $135,034	29%

   
   
   
2. Minimize Family Net Income. The exception to the “individual taxation” rule is that "family net income" is used for the purposes of claiming many refundable tax credits. This includes the net income of both spouses, which includes those who live common law, as well as same-sex couples. At stake is the size of the Canada Child Tax Benefit and GST/HST Tax Credit.
    
3. Invest for Family Net Worth: Today, it's also not unusual for everyone in the family to participate in the economy in a significant way: the money the kids earn at babysitting, doing lawn care, or working at the local hamburger joint; mom and dad at employment or self-employment activities; in the case of stay-at-home parents, the raising of children; caring for the vulnerable; studying for self-improvement; or the home-based entrepreneurial activities which all grow into enormous economic contributions.

   It’s important to teach your children to save 18% of their earned income for retirement purposes within an RRSP as a solid savings habit. This is a great family investing rule as the deposit can increase tax refunds, earn deferred investment income, and be withdrawn tax free to buy a home or fund education as well as to bridge income gap periods during maternity, illness, or retirement. In fact, net family assets will grow exponentially because of the tax sheltering in the plan. Once your child turns 18, the TFSA is a “must-do” as well, and is a great way to split family capital on a tax-efficient basis.

Here's the tax secret: families that are focused on reducing taxes on income and increasing  access to refundable tax credits, need to reduce family “net income” first. One of the best ways to do that is with an RRSP contribution for each eligible member of the family. This is someone who has unused contribution room, is age-eligible and expects to be taxable in 2013. After this, shore up everyone’s TFSA contribution to maximize the growth of family net worth.

It's Your Money, Your Life. Look carefully at your Notice of Assessment from CRA to find every family member’s unused RRSP contribution room. Then, discuss a monthly savings plan to increase the economic power of your family unit by making tax-efficient investments. Like going on a diet, making the decision to sock away money systematically will have more impact when you have a defined financial plan, and save as a family. 

Evelyn Jacks is President of Knowledge Bureau and author of 50 books on tax and personal wealth management. She is also the founder and director of the Distinguished Advisor Conference (DAC). The theme of this year’s three day think tank in Ojai, CA Nov 10-13 will be “Back to the Future – Collaborative Wealth Management.”  Follow Evelyn on Twitter at @EvelynJacks.