Working more because of COVID-19? Things to think about with the jump in earnings

During the COVID-19 pandemic, we have seen an unintended but monumental imbalance in workload among physicians. Some have had to work long, gruelling extra hours while others have had to reduce their hours or close their practice entirely.

If you’re in the first category (working more than usual), here are some financial considerations to be aware of and opportunities to explore. 

  1. Review your goals

In the short and medium term at least, the COVID-19 outbreak will cause some practical changes: plans for travel and for large gatherings like weddings may be impossible or less appealing. However, your primary financial goals will likely remain intact — for example, saving to buy a house, for your children’s education or for your retirement.

At the same time, working with patients during the pandemic may be affecting you deeply and impacting your goals. For instance, there is a lot of need out there and this may move you to think more about charitable giving.

  1. Minimize your taxes

Your increased earnings might move you into a higher tax bracket, but there are ways to avoid this. If you’re incorporated, the extra earnings could simply be retained in the corporation and used to increase pre-authorized contributions to your investments, or your accountant might take advantage of reduced prices for an estate freeze.

If you’re not incorporated, you may want to increase your RRSP contributions (provided you have the contribution room). There are other strategies such as prescribed rate loans that take advantage of income splitting, and charitable gifting that could help minimize your taxes. Please speak to your accountant and tax advisor.

  1. Pay down debt

If you have debt, now might be a good time to step up repayment. Follow the general rule of paying your highest-interest debts (credit cards) first. If you have debt that’s interest-free during the current crisis, like Canada Student Loans, these can be paid last. See Which debt should you pay first during the COVID-19 crisis?

Another factor: if you have two kinds of debt at similar interest rates but one is tax-deductible, pay the tax-deductible debt last. Tax-deductible debt would be, for example, a loan for generating investment income, or a line of credit to operate your business.

  1. Be ready for your own COVID-19 emergency

If you’re working more, you’re likely at a higher risk of being exposed to the coronavirus. Setting aside the extra income you’re earning now might be wise, in case you become sick or quarantined. If you’re incorporated, you can retain the funds in the corporation for future payout.

A line of credit is another good contingency plan, in case you can’t work. If you don’t already have a line of credit, getting one now while your income is healthy will be easier.

  1. Invest the extra money

You can use your extra income to invest for the medium or long term. How did you react to the market decline in March? Perhaps it’s time to review your risk tolerance.

With the stock markets having declined 20%–30% from the peak (depending on when you read this), you generally should be buying equities to get back to your investment target. Doing so creates a tendency to acquire assets at relatively lower prices. If you have a long-term view, you could benefit. This may also help you achieve your goals (retirement or otherwise) sooner.

While you’re at it, revisit your account strategy. Have you been holding off on consolidating your accounts between institutions due to accrued gains and tax consequences that would arise from selling investments? With the market correction, now might be a good opportunity to do so and thus reduce your fees.

  1. Spare your retirement savings

If you are ready to slow down and retirement is imminent, this increased source of cash may be exactly what you need to counteract the volatile markets. It means you don’t have to draw from your portfolio yet and can still add to it to help secure your retirement future.

If you had retired and are now back to work, you may want to adjust withdrawals from your corporation and portfolio. If you’re already drawing from your registered retirement income fund (RRIF), the government has reduced the minimum withdrawal requirements by 25% for 2020.

  1. Help family

If you have family you are supporting through this crisis, this may be the extra income you need to continue doing so. For example, you may have children in university who have lost their summer job opportunities, or a sibling whose work or business is shut down. 

If you have any questions about your financial plan and which options are best for you, talk to an MD Advisor*.

* MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.

The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.

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