RESP

Well, it’s that time of year again, when almost everybody has made New Year’s resolutions.  Soon, most will break a resolution or two (perhaps more) and many will just give up trying all together.  It generally takes about 28 days for a new habit to become relatively permanent.  It’s important to keep trying for at least a month to get on track towards a goal, and that’s exactly what a new year’s resolution is – a goal.  It may help to understand the effect of certain actions on our financial resolutions:

If you carry a balance on a credit card, then you will pay much more for the item than you intended.  Most credit cards have an annual interest rate charge in the neighborhood of 20%.  Any new purchases while still carrying a balance from a previous month will also incur that interest charge.  That sale price may not look so good after all.

If you do not have the right kinds and amounts of insurance, then you could face financial ruin.  Even though auto insurance is required, most people wouldn’t dream of taking the risk of driving without it.  However, many Canadians fail to adequately insure their most valuable asset – their ability to earn income.  Without sufficient accident and sickness insurance, even a short absence from work due to illness or injury can wipe out any savings you have.  Most mortgage foreclosures start this way.

Inadequate life insurance protection can mean serious financial upheaval for your family.  Their lifestyle depends on the income you bring into the household.  Without it, they may be forced to sell the family home or liquidate RSPs at an inopportune time making the financial hit even worse.

If you don’t save adequately for retirement, then you may not be able to retire when and how you want to.  You have the young you and the old you money in your wallet.  If you don’t send the old you money ahead, then it just won’t be there when you need it.

The Federal Government has several incentives to encourage you to save for your retirement.  The main two are Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs).  RRSPs offer tax-postponed growth and TFSAs, like their name suggests, provide tax-free savings arrangement.  Work with your financial advisor to figure out how much needs to be set aside.

If you don’t have a rainy day fund, then you will be ill-prepared for the little disasters that occur from time to time.  Experts agree that you should have a minimum of six months to a year of income set aside to deal with the financial hiccups that we will all experience.  Credit card limits do not count.

If you don’t follow a budget, then you probably find yourself scrambling at the end of your paycheque or racking up credit card balances to get to your next payday.  Without a plan, it’s far too easy to overspend and end up in the vicious cycle of carrying a balance.

If you don’t save regularly, then you may miss out on opportunities when they come along.  Without some money set aside, you may miss out on starting your own business, getting an education upgrade, or moving into a better home or neighborhood. 

Working with your financial advisor can make it much more likely that you achieve your goals.     

According to the Statistics Canada website, common-law relationships are more likely to fail.  The General Social Survey issued by Statistics Canada in July 2002 illustrates that common-law unions are twice as likely to end in separation as marriages and these relationships are far more common today than they were over a decade ago.          Many mistakenly believe laws across Canada are consistent in how they treat common-law relationships.  Nothing could be further from the truth.  There are federal laws that govern how these unions are treated for income tax purposes.  Each province, however, dictates what constitutes such a relationship and how it is viewed legally.          In BC, a March 2013 ruling now treats common-law couples the same as married couples if they have cohabited for over two years.  In Alberta, these are referred to as “adult interdependent partners” and are deemed a common-law relationship when the couple has lived together for more than three years, or has a child and live together.  A couple can be considered common-law in Newfoundland after living in a conjugal relationship for over two years.  In Nova Scotia, a couple living together over two years would be entitled to spousal support, but would not be permitted to register as a “domestic partnership” under the Nova Scotia Vital Statistics Act.  In Manitoba and Ontario, a couple would have common-law standing if they have lived together for three years or one year if they have a child.  A couple in Manitoba can register their common-law relationship at the Vital Statistics Registry.           Because the laws vary so much from province to province, here are some steps that can be taken to protect oneself in a common-law relationship:

    If a child, a spouse, a life partner, or a parent depends on you and your income , you need life insurance.

Registered Retirement Savings Plans (RRSPs) have evolved into the most popular savings vehicles in Canada since being introduced in 1957. It is important to be aware of the key features of RRSPs in order to maximize the benefits:

Income Tax Savings – First and foremost, it may go without saying that any contribution to RRSPs can result in an immediate tax savings. These deposits are deducted from the contributor’s income at the highest tax rate they must pay first.

Tax-Postponed Growth – Any growth than an RRSP earns does not attract income tax until it is actually withdrawn from the plan. This maximizes the benefit of compound interest.

Income Splitting – When income is taken from an RRSP after age 65, an election can be made on the tax returns of a married or common-law couple to split qualified income between them. This generally means a lower overall income tax bill, in many cases significantly lower.

Deferred Deduction – A contributor can choose to make a deposit to an RRSP but delay deducting all or part of it until a later tax year. This makes sense if income in a future year would put them into a higher tax bracket. In the case of someone who receives a financial windfall and has unused contribution room, a large deposit can be made initially and deductions from income only used to reduce their highest taxed income in several future years.

New Home Purchase – If certain conditions are met, funds can be withdrawn from an RRSP tax-free and used towards the purchase of a new home. The funds need to be paid back into an RRSP within fifteen years or they may become taxable.

Education Funding – The Lifelong Learning Plan (LLP) allows you to withdraw amounts from RRSPs to finance full-time training or education for you or your spouse or common-law partner. You cannot participate in the LLP to finance your children’s training or education, or the training or education of your spouse’s or common-law partner’s children.

Instant Tax Break – If you are making regular contributions (say, monthly) to an RRSP, you can apply to the Canadian Revenue Agency (CRA) to get permission for your employer to deduct the RRSP contributions from your income before calculating the amounts that need to be withheld and remitted.

RRSP Loans – Many contributors borrow to invest in their RRSP close to the annual deadline. They then use their tax refund to reduce or pay-off the loan.

Name a Beneficiary – You can name a beneficiary and, in some cases, a secondary beneficiary for an RRSP on death. This means funds can be paid directly to that person or persons and avoid the delays and cost of being processed in your estate.

It is wise to work with someone experienced in the area of RRSPs and retirement planning to help set up and monitor your program. Avoid making RRSP decisions at the last minute because of the deadline. A well planned strategy can mean retirement comfort.                                                                   -M Dumond