2014: A fresh start for the frugal

There were two types of holiday shoppers this season: The first took the sign-now-pay-later route with credit cards and financing plans. It was a field day for retailers with easy-credit deals.

The second type of holiday shopper paid as they went by using cash and debit cards. Interac struck a chord for financial responsibility with its campaign stressing the advantages of paying with a debit card. A series of clever ads featured unwanted guests dressed as bills hanging around long after the holidays.

If you’re the first, the best advice is to start digging out by paying the highest interest debt first.

If you’re the second, and you’re starting 2014 with a clean slate, the future starts now.

Freedom from the tax man

Effective immediately the contribution limit on your tax free savings account (TFSA) has been extended by $5,500.

Not many people are in the position to take advantage of the total $31,000-cap, but it is a reminder that there is a place for your hard-earned dollars to grow without any level of government reaping the gains.

You don’t need to risk it all. A TFSA can hold just about any investment from risky penny stocks to secure high interest savings accounts.

Reclaim what is yours

There is also an opportunity to trim your tax bill from last year.

The deadline to contribute to your registered retirement savings plan (RRSP) doesn’t come until March, and that provides plenty of time to get the biggest bang for your RRSP buck.

Start by determining your total taxable income and total income tax collected by the Canada Revenue Agency during the 2013 calendar year.

That information normally comes in late February in the form of a T4 statement, but that could be cutting it too close to the RRSP deadline.

Employers often tabulate total income and deductions on the final pay stub of the year. If you have more than one employer it’s important to determine all income and taxes paid during the year.

To figure out the most effective amount to contribute you need to determine what level your income is taxed at on a federal and provincial level. You can find both on the CRA website and, with some basic math, determine what you owe.

It’s important to know any amount you contribute to your RRSP is directly deducted from your taxable income. That means the amount that lifts you into a higher tax bracket provides the biggest refund. If you contribute more, the refund on the additional amount is smaller.

Remember, the objective is to reduce your tax bill at the highest rate when you contribute and pay the government back at the lowest rate when the funds are withdrawn in retirement.

There are limits on RRSP contributions, but you can roll over extra contribution room to a new tax year. If you’re not sure how much you can contribute check the bottom of the final statement that you received from the CRA after it processed last year’s tax return.

Coming up with the cash

Getting an early start on your RRSP contribution is good for more than just tax planning. It gives you nearly two months to raise the cash.

The new year is a perfect opportunity to set up a regular and automatic withdrawal plan with your financial institution.

The amount can be whatever you’re comfortable with – whether it’s monthly deductions or timed with your regular pay days.

Once the RRSP deadline has passed the deductions can go toward reducing your 2014 taxes.