62. What you need to know going into 2023
What you need to know going into 2023
Thanks to all of you for listening in 2022! This year end episode covers a few things you need to know going into the new year related to TFSAs, CPP, tax bracket changes and the upcoming First Home Savings Account.
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Transcript:
Hello and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld. Today we got the last episode of 2022, so I'm going to spend some time explaining a few things that you should be aware of as we go into the new year.
Well, we made it to the end of the year and it was quite the year actually. It was pretty wild as far as the highest inflation we've seen in 40 years and a down market in both stocks and bonds. And boy there was a lot to talk about here on the podcast. And on that note, I got some interesting info from Spotify. I'm sure everybody has seen everybody else's wrapped from what songs they listen to and artists they listen to, but they also do it for podcast creators. So as far as some of the stats that they've shared with me, go. One thing that I thought was really interesting is that 92% of listeners to this podcast discovered the show this year in 2022 and we've been around since 2020. So hello to 92% of you. That's pretty awesome. And along with that, our podcast is shockingly in the top 5% of most followed and most shared podcasts in the world. Maybe that just shows you how many podcasts there are out there, but I would lean into the fact that there are a lot of you out there and a lot of you sharing it with your friends. So thank you so much for that. It's really humbling and pretty cool to see that this is actually valuable for you and that it's time well spent for me. So anyways, I love doing this and I'm really excited for what 2023 has to offer.
So on that note today, we are going to talk about a few things to be aware of going into 2023 as far as changes to tax and a few accounts and things like that. But let's start with the Tax-Free Savings Account. This is my favorite account as far as what I would typically recommend to clients. And I think it's one of the most underused and misused accounts that we have available to us. But the big news for TFSAs for this coming year is that the contribution room is increasing. So in January, instead of the 6,000 that we've been able to do for the last few years, next year we'll be able to do $6,500. I know that's not huge, but again, this is just a reminder that the TFSA room is indexed to inflation.
So when inflation goes up, and this year, of course, it's been higher than expected, the contribution room will adjust but not perfectly. So it adjusts kind of in the background, and it then gets rounded up to the nearest $500 and so now we might end up seeing a few increases a little bit more often now that the dollar amounts are larger. And a smaller percentage on a higher dollar amount still means a higher dollar amount. And so there might be more years where we actually have these $500 increases in TFSA room going forward from here. So again, last year you could do 6,000. In 2023 starting in January, you can contribute $6,500. So for those of you that are contributing to your TFSAs on an automatic basis, this is as good a time as any to re-evaluate how much you're contributing there. If you're doing it monthly, biweekly, weekly, take a look and see what you're doing there. Make sure that your new contributions are able to take advantage of the full $6,500 if that's something that you are able to do. So that's good news.
Now, next one that I wanted to talk about was changes to Canada Pension Plan. For those of you that are young, don't check out, because this applies to you too because there were changes to the CPP on both the front end, meaning when you contribute and the back end, when you withdraw. There's a few changes that have happened in relation to something called the enhanced CPP. I'm not going to get into that, but these are just some of the basic changes that will affect everybody, either on the front end or the back end.
So because of the changes to the CPP program, meaning that your benefits in the future are going to be higher, the contributions to the plan now are going to be higher as well. So next year, your contributions to CPP are going to be 5.95% of your income and your employer kicks in 5.95% of your income as well, and so there's a pretty significant amount that you're contributing to this plan. I'm a big believer in the CPP. I think it's a well-managed plan. Again, it is completely separate from the government. If you're someone that doesn't like having your money apart of the government, it is managed independently. And so, anyways, we could have a whole episode on that maybe, but I really am confident in the Canada Pension Plan on a go forward basis.
So that means your costs are going to increase for contributing to it. So that means your take home pay will probably be a little bit lower. Now there is a maximum that you can contribute to the CPP, and that is based on something called the Yearly Maximum Pensionable Earnings or the YMPE. Here's another acronym that you might not have heard of before. So the YMPE is also going up. So in the past let's just say this last year, the YMPE was 64,900. So that means that you would contribute to CPP up until the point where you earned 64,900. For some of you that might have happened in the middle of the year. Three quarters of the way through the year, something like that, and then you would see a little bit of a bump up on your take home pay because you're no longer contributing to CPP. Now for 2023, the YMPE goes up to 66,600. So you'll have to make contributions to the CPP for a little bit longer than you have in previous years. This is typical. But anyway, it's just something to be aware of.
So for those of you that are listening that are on the other end of CPP and you are receiving your benefit, The thing to be aware of now is your inflation adjustment. So the inflation adjustment for CPP happens once a year and it happens in January, and it is not the most recent monthly inflation or the CPI number. Again, the CPI is the consumer price index, and that's usually the number you see quoted in the news. So because it's an annual adjustment, what they do is they actually take an average over the last 12 months. So it's the November, October, 12 month period where they look at the average inflation during that period of time and they compare it to the same period of time the year before.
So even if December's inflation ends up being say 6.9%, it is really unlikely. that the CPP adjustment will actually be 6.9% because the annual inflation number will probably be lower than that. But just so you know, kind of how the calculation works and you can expect anyways that your income will increase from CPP come January.
The next thing I wanted to talk about is the tax bracket thresholds. So at the federal level, at the very least, I believe most of the provinces would follow suit here, but the federal tax bracket thresholds, they are going to be adjusted in 2023 by 6.3%. What does this mean? Okay, so for those of you that are in what I call the middle tax bracket, last year, that bracket went from 50,000 to a 100,000. I'm rounding here a little bit, but 50 to a hundred. Now with the increase of 6.3%, that middle bracket goes from 53,000 up to 106,000, little over 106,000. So what does this mean for you? Well, if your income didn't change, that means that you are going to pay less tax on average. That's a good thing. However, if your income didn't change, the only reason the tax brackets went up is because inflation is higher, and so your actual purchasing power is lower. So I wouldn't cheer too hard for the lower tax, however, it would soften the blow if you are in that camp where you didn't have an increase in your income connected to inflation this year. So what does this actually mean for you from a planning perspective for investment purposes? Well, if you've listened to any of my previous episodes about RRSPs and when to best utilize those, my recommendation is to usually use RRSPs when you're in the higher tax brackets.
So for those of you who are making over, just over a hundred thousand last year and contributing to an RRSP to get yourself below that next tax bracket. Well now there's quite a bit more room in that middle tax bracket. So if your income is still, say, hovering around 105,000, well now you find yourself in the middle instead of 5,000 above the middle. And so if that's the case for you, you might want to consider whether RRSPs still make sense for you, given where your tax situation is.
Let's kind of bring some of these things together. If you were making just over a hundred thousand and you're contributing, say, $6,000, and now your tax bracket went up by $6,000, probably doesn't make as much sense to contribute to an RRSP. But now you have $6,500 to use in your TFSA. That might be as good a time as any to start prioritizing that.
So for retirees and people that are on more of a fixed income, when the tax brackets increase, typically speaking, your average tax paid will decrease. This is good. Again, keeping in mind that if your income doesn't increase, that means your purchasing power just in general has decreased. So there's some blessings in the curse there, but the big thing with increasing tax brackets is the lower average tax that you're going to pay.
Now, the last thing for 2023 that's going to be a big deal is the first home savings account, FHSA. This is likely to come out sometime in the first quarter, early part of the year. And I'm going to do a full episode on this, but essentially it is a new plan, specifically for people who are buying their first home. There's a lot of details and a lot of intricacies, but the main takeaways here is that it acts as an RRSP on the way in, meaning you get a tax deduction on the way in, and then it acts like a TFSA on the way out. So even if you have investment growth or dividends or interest or things like that within the plan, you won't pay tax on any of it on the way out. On the way out is designed to be for a first home. However, there appears to be some options where if you don't use it for that purpose, you can transition the account over to your RRSP. Even if you don't have RRSP room. So it's a way to essentially double up on your RRSP contributions. There's going to be some pros and cons here for sure, but for those of you who don't have a home yet and you would be saving for your first home, it appears that this is going to be a pretty good option and there are going to be some strategies that can be employed to use this properly. Keep an eye out for that one sometime in the new year.
There's lots of other things we could have talked about. We could have done a news roundup here at the end of the year, but I wanted to keep this episode short and actionable for people just so you kind of have an idea of what you can do in the new year. And along with that many people, especially those of you who listen to financial podcasts, are people that are goal setters and people that want to improve your financial life. And what happens around January is the New Year's resolution for your finances is typically something that people take a look at. Health and finances are the two big ones, and my challenge to you would be to slow down when you're making your financial goals for the year. Just like any other goal, if it's too audacious, it's too big. You know the whole idea of I'm going to get my financial stuff together this year, I’m going to budget, I'm going to build assets, I'm going to pay down debt, I'm going to do all these things. Chances of you actually accomplishing all of those at pretty low. So if you're looking to make significant changes to your financial situation in the new year, I would say pick one. Pick one thing. If it's growing your assets by saving more, focus on that. If it's paying off debt because it's more expensive now do that. If it's building a down payment, perhaps through the FHSA, maybe do that. I'm a big believer in doing a little bit of everything. If you're deciding between good choices, do a little bit of all of them. But in this case, if you're looking to make significant changes to your financial life this year, or you're just kind of getting started or trying to pull yourself out of a bad situation, focus on one thing at a time. It's going to feel better. It'll be easier to take action and there's fewer variables involved, and it'll be easier to calculate your benefit to doing your one action that you want to improve on for this coming year. Or not! If you're the type of person that wants to do a little bit of everything, I find myself in that camp too. Bless you. But going into the next year, we have lots of opportunity to improve our financial life and keep listening to the podcast for ways that we can do that.
Thanks so much again, for all of you who've listened to the podcast this year, and have shared it, I didn't realize how many of you are sharing this podcast with your friends and family. It really means a lot that this actually has an impact for you. If you have a chance, if you wanted to give the podcast a rating on either at Apple Podcast or on Spotify, that would be awesome.
Apple lets you put a comment in there or a review if you wanted to do that. That means a lot and it helps people find the podcast too. Thank you so much. Happy New Year and we'll see you in 2023.
Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical, and are intended to be used for educational purposes only. You should always consult with your financial, legal, and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial Planner and registered investment fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.