Time to tidy up your finances.

As the tax-filing season ended on April 30th after a year that was upended by the pandemic, financial pros suggest investors take stock of their financial position and do a little spring cleaning.

While portfolio and financial management is a year-round endeavor, with various deadlines and periodic reviews to conduct, such as beneficiary designations, the next few weeks offer an opportune time to prune redundant holdings and rebalance out-of-whack allocations, readjust spending or savings, or reconsider goals and priorities.

Spring is an excellent time to review the past year carefully, take profits and rebalance portfolios, and prepare portfolios for the coming year.

Here are four things to consider when spring cleaning to tidy up your finances:

Tax Planning 

Reviewing your 2020 income taxes once tax season is over could spur investment changes to help minimize next year’s tax bill.

This is the time of year to start positioning for major taxable events. For example, if you have lost a job and will have a meager income this year, you may want to realize more capital gains or consider a TFSA conversion.

On the other hand, if you expect a windfall, say from the sale of a building or a business, you can use strategies to reduce your taxes. Some of these may take time to execute. 

In parallel with such a review, we recommend identifying specific tax and investment goals for the year. Those may include a charitable spending plan that allows maximum use of the charitable deductions and a plan for RRSP contributions that will help to reduce your tax liability for the coming year.

Streamline and Simplify

If you have got a Group RRSP, you have got an individual retirement account someplace and maybe another brokerage account with some mutual funds; you need to look at those in combination and consider, ‘Am I investing in the right places, or am I overinvested?’.

A growth fund in each account could leave you with substantial exposure to some specific technology stocks. You might own way more than you thought you did and want to be more diversified.

On the other hand, you may be over diversified, with so many investments that you’re not reaching your goals. A broad stock portfolio holding more than 30 to 40 holdings may mean losing some diversification benefits.

Candidates for removal typically include funds that have undergone management or ownership changes and those with expense ratios that are no longer competitive due to new entrants in the category.

Investors should weigh an investments’ performance against an appropriate benchmark, is a large-cap growth fund outperforming a large-cap growth index, for example?

Considering how your fund performed on the upside and the downside will help you decide. For example, the S&P 500 lost 20% in the first quarter of 2020; if a fund you measure against the index lost 15%, it outperformed its index.

Funds that have underperformed on a risk-adjusted basis for six quarters should at least trigger a thorough review. Once a fund has underperformed for that long, you really need to understand why that will drive your decision about what to do with it.

Consider Consolidation

If you have changed employers — as many have during the pandemic — and now have a few Group RRSP accounts, it may make sense to consolidate them.

Sometimes it makes sense to keep an account because you may have access to certain investments” that you wouldn’t otherwise have. “But continue to assess if it makes sense” because rolling your old Group RRSP into your new one or a TFSA could greatly simplify your financial life.

Savers generally have more investment options and more estate-planning strategies available with a TFSA. In addition, some people prefer to leave a Group RRSP plan once they have left the company.

However, most employer-sponsored retirement plans, such as Group RRSPs, are protected from creditors, while TFSA doesn’t offer the same level of protection. In addition, you may be able to take out a loan from your Group RRSP, a benefit you won’t have with a TFSA.

If you do consider a rollover, weigh your options carefully and compare costs. Your Group RRSP charges fees, including management fees and costs for fund investments. If you choose an adviser to manage your TFSA investments, be sure to take their fee into account. Some brokerage firms offer cash incentives for rolling over to a TFSA.

Budgeting and Savings

Whether you lost your job or thrived during the pandemic, the things you spend on will change as normalcy returns. It is important to evaluate your budget and goals and get your financial plan ready now.

If you have been using delivering services, for example, you may want to reconsider whether you still need them. There will be costs for travel and new outfits for those returning to work, and new expenses will be coming up – camp for kids, summer vacation, increased pricing for flights and hotels.

Replenishing depleted emergency funds should be paramount.

A change to your retirement account contribution or distribution may also be in order. Some people received bonuses early this year, and many have spent less over the last year. After reviewing their cash flow, a retiree may decide they don’t need to take their regular monthly distribution for the next three months, or they may want to splurge. Either way, you do not want to drive without making a thoughtful decision.

Source: barrons.com