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.
Finance Minister Joe Oliver delivered the Federal Budget in Ottawa on April 21, 2015. It is already being labeled as an “Election Budget,” but there are some items that can potentially make a difference to most Canadians’ long-term wealth:
Tax Free Savings Accounts (TFSAs) – Probably the most obvious item in the Budget is the increase to the annual contribution limits to TFSAs from $5,500 to $10,000 and is effective for the 2015 tax year. Often criticized as a plan that benefits the rich more than the poor or middle-class, a TFSA can play a very important role for most Canadians retirement cash flow.
Deposits made to a TFSA, while not deductible from income for tax purposes, grow truly tax-free. Deposits to Registered Retirement Savings Plans are deductible from income, but withdrawals will be taxable when they are withdrawn. Because withdrawals from a TFSA are tax free, the opportunity exists for many taxpayers to maximize their government retirement income benefits like Canada or Quebec Pension Plans, and Old Age Security. This means that for some a TFSA could be more beneficial than an RRSP. Your financial advisor can help you make the wise choice. If you had maximized your TFSA for 2015, this means you can add another $4500.00. If you have maxed it out for 2014, you can add another $10,000.00.
Additionally, TFSA contribution limit increases will no longer be determined by inflation. Any future increases to TFSA deposit amounts will need to be legislated by the government.
Upon reaching 71 a holder of an RRSP must convert their plan to a RRIF. In subsequent years a minimum amount must be withdrawn annually. The budget proposes to reduce the minimum amount till the holder has reached the age of 95 at the beginning of the year. This could help some with OAS claw back.
Home Accessibility Tax Credit
The new non-refundable Home Accessibility Tax Credit is aimed at seniors and persons with disabilities. The 15% credit applies to up to $10,000 of eligible renovation expenditures per year, per qualifying individual, per eligible dwelling. These renovations include wheel chair ramps, wheel-in showers and walk-in bathtubs.
Lower Small Business Tax Rates
The Budget proposes to reduce small business tax rates to 9% from 11% by 2019. There will be small reductions each year starting in 2015. This reduction generally applies to the first $500,000 of taxable business income. The tax rate will be pro-rated for businesses with non-calendar tax years.
Registered Disability Savings Plans (RDSP)
A temporary measure in the 2012 Budget allowed a qualifying family member (a beneficiary’s parent, spouse or common-law partner) to become the plan holder of an RDSP for adults lacking the capacity to enter into a plan themselves. This measure was to apply until 2016.
The 2015 budget proposes to extend this temporary measure until 2018 to allow the provinces to streamline the processes and appointments of such qualified family members.
Lifetime Capital Gains Exemption for QualifiedFarm or Fishing Property – The Budget proposes the Lifetime Capital Gains Exemption for dispositions of farm or fishing property after April 20, 2015 be increased to $1 million. The exemption for dispositions earlier in 2015 is $813,600.
There are additional proposed changes and initiatives. Work with your financial advisor to see how they can affect your overall financial plan.
No, this is not a John Lithgow long-distance plan commercial. Remember these numbers, however, when allocating your paycheque.
All too often, people experience financial stress when something happens and they haven’t done a proper job of allocating their income. Ideally, an allocation plan will become a habit that leaves you prepared for just about any eventuality. Here’s how:
10% for Lifestyle Protection – Disasters happen and most rarely make the news. You have likely experienced at least one already. Very few people are in the financial position where they can cover the cost of an event without the help of insurance. Use life insurance to cover debts, last expenses and income replacement on death; vehicle insurance to cover the costs of damages or injuries; property insurance to replace lost or damaged property; critical illness insurance to help recover from a serious illness; disability insurance to replace a portion of your income if you can’t work because of illness or injury; travel insurance if you become ill while travelling outside your province or country.
10% for Savings – There will come a time when you will need funds for a certain event in your future. Put aside these funds regularly for things like education, home down-payments and, perhaps most importantly, an emergency fund. Eventually your savings should be at a level that will allow you to allocate some of these funds to other things.
10% for Investing – An investment is something that will generate an income, either right away or sometime in the future. This includes retirement savings, a business, income generating real estate, or funds that generate a regular income.
10% for Giving – There are financial benefits to you for giving to charity. The first $200 generates a non-refundable tax credit or 15%. Everything above that, within limits, gets a credit at the top tax rate no matter what tax bracket you are in. In Alberta, for example, the maximum credit is actually 50% which is 11% higher than the maximum tax bracket of 39%.
60% for Lifestyle – This is where everything else comes from – your home, your vehicle(s), your food and clothing, your vacations, your entertainment and hobbies. All too often, this portion gets too much income allocated to it and is the first to suffer when something goes wrong.
Your income is what makes your lifestyle possible. However, if your income stops due to illness, injury or death, will there be adequate funds for you and your family to maintain your lifestyle? Will your resources be adequate if you experience a short period of unemployment, when a child is ready for post-secondary education, or if you need legal help with an unforeseen problem? Will you have enough independent income in the future or will you have to keep working at a time when you would have preferred retiring?
If you don’t have a problem tipping a server 15% to 20%, why not pay yourself a little better than that? – M Dumond
In This Issue
- Lifestyle Protection
- Estate Planning
- Retirement Planning
- Tax Efficiency
- Team Leader
The results of a recent poll reported by Fidelity Investments stated that 71% of retirees who worked with a financial advisor have the retirement they were hoping for. Of those retirees who did not use did not use an advisor, only 53% have the retirement they had hoped for. Additionally, 52% of pre-retirees expect to continue working in retirement, and 48% of working retirees do so for financial reasons.
If you are serious about achieving your financial objectives, chances are you need a financial advisor. He/she will help you identify your unique problems and define your goals in specific, measurable terms. Then your advisor will provide detailed recommendations that can help you reach your goals.
Some advisors work for fees only. Since fees can run into thousands of dollars, fee only advisors are usually employed by the more affluent. Some advisors are compensated entirely by commissions earned on the financial products acquired through them. Others use a combination of fees and commissions to provide a more affordable service.
No advisor, no matter how much they are paid or how good they are, will magically solve all your financial problems. The aim is to help you define your goals, establish their order of importance, and show you how to achieve them.
What can a financial advisor do for you? Here are some key benefits:
Lifestyle Protection – We all face the same risks in life that can disrupt our lifestyles,
Estate Planning – Just as you wouldn’t expect your home to be built by someone who didn’t use blue prints, don’t expect your family to take care of your affairs without clear written plans for the event of your death or illness. Your advisor can also work with other professionals who will help you with important estate documents and strategies.
Retirement Planning – After determining your risk tolerance and calculating your retirement income needs, your financial advisor can recommend appropriate savings plans to help you reach your goals. He will also regularly review your plans to make sure you are still on track.
Tax Efficiency – Every Canadian has the right, perhaps even the duty, to pay as little income tax as legally possible. Your advisor can help you arrange your finances in as tax efficient manner as possible, and make recommendations of various alternative methods to pay any income taxes that do become payable as inexpensively as possible.
Team Leader – A proper financial plan can often require the services of several professionals, including lawyers accountants and bankers. Your financial advisor can act as the leader of this team to make sure all the different parts of your overall financial plan get implemented in a timely, cost efficient manner. – M Dumond
Karyn won three million dollars in the lottery, a dream come true. She remembers reading about previous lottery winners and the fact that most had little to nothing to show for their luck after two years. Karyn was determined to not let that happen to her.
When his mother died, Randy was left with a substantial amount of cash from her estate. While his parents had lived frugally all their lives, Randy is better at spending money. However, he doesn’t want to fritter away his inheritance.
Jayne, a new widow, received over a million dollars in life insurance proceeds when her husband, Mike, died. Its purpose was to maintain her lifestyle in just such an event. With two young children, money matters should be the least of her worries.
Most people who suddenly receive a substantial amount of money are not prepared to handle it. We have all heard about the lottery winners who vowed they would not let the money change their lives, but soon became the best customer at the local auto dealer, travel agency and electronics store.
It can be hard to resist going on a little spending spree. But all too often it is virtually impossible to stop buying until the money is all gone. It is vital to enlist the help of a professional financial advisor.
When someone “comes into some money” like in the examples above, it is important to take some time before making any big financial decisions. This may be a few weeks or several months.
It is critical to set some realistic financial goals. They should include:
Pay off non tax deductible debt
Pay off debt – The debt with the highest interest rate first. With interest charges on credit card balances as high as 20% or more, these should be paid off right away.
Catch up on RRSP and tax free savings account deposits – In Jayne’s case, she can even maximize her husband’s RRSPs too. This will reduce or eliminate the taxes on his final tax return. She can roll his RRSPs, tax-free, into her name and keep postponing taxes until she retires.
Review life insurance
Review life Insurance – It can be tempting to let policies go if there is lots of cash on hand. Some types of insurance products can be used to build up investments and save taxes at death. Imagine making premium payments with pretax dollars as opposed to after tax. Your estate will need liquidity when you die and the taxman will need to be paid. Life insurance is the best way to do this.
Invest most of the money for income – Think of a large amount of money as a “cash cow” that gives you milk in the form of income. If you slaughter the cow, it can’t produce milk. So, if you spend all the money, it can’t generate income.
There are investment products that can guarantee income for your life and that of your spouse.
Karyn can still get herself some nice things, but she can use the income from her cash cow to pay for them. By leaving the cow alone, she still has a steady income. Part of the planning that Mike and Jayne did included a home free and clear. She can use the income to continue making mortgage payments and she will still have the income when it’s paid off. Randy can top up his RRSPs and buy a nice home, paid for with his new income. -M Dumond
The 2013 RSP deadline is over. If you took advantage of it, congratulations, if you missed it, there is always next year. If you did your RSP in the final hour, there are better ways. Keep reading. First some history.
The Registered Retirement Savings Plan (RRSP) was created by federal legislation in 1957 as an incentive for Canadians to save for their retirement income needs. Many changes have been made over the years, but the basic mechanics and strategies of RRSP’s are unchanged and remain quite simple.
Delaying taxes – Canada Revenue Agency (CRA) enforces the rules as to how much we can contribute to RRSPs. For the 2014 tax year, it’s 18% of 2013 income to a maximum of $24,270.00 plus any unused contribution room carried forward from previous years, minus any pension adjustments (if you happen to be apart of a pension plan). CRA reports to each tax payer the amount they can contribute to an RRSP on their Notice of Assessment a few weeks after filing a tax return. Deposits made to an RRSP within the above limits are considered deductible from income at your highest tax bracket. Some or all of your deductions can actually be carried forward to a future year when income is greater, thereby making the tax savings larger.
Income taxes on the RRSP deposit and growth are postponed until money is actually withdrawn. For example, John commits to saving $18,000 of his total income each year. If he contributes this amount to an RSP, because an RRSP deposit is tax deductible, the full amount can be invested on a before tax basis. If John were to deposit instead to a non-RRSP account,(after tax situation), he would only be able to invest $11,700 (assumes a 35% marginal tax bracket) which is what he would have left over after paying taxes. As taxes on growth are also postponed inside an RRSP, his $18,000 per year would grow to about $1,625,766 in 35 years at 5%. His non-RRSP account would only grow to about $861,731 over the same period because John’s growth will be taxed along the way.
Use an RRSP to Purchase a Home – Federal legislation allows qualifying home buyers to withdraw up to $25,000 per person of existing RRSP funds towards the purchase of a home under the Home Buyers Plan (HBP). Income tax will not be withheld on this withdrawal. In essence, this is a tax free loan from your own RRSP.
Over a period of up to 15 years, you have to repay to your RRSPs the amount you withdrew under the HBP. Generally, for each year of your repayment period, you have to repay 1/15 of the total amount you withdrew, until the full amount is repaid to your RRSPs. The repayment period starts the second year following the year of withdrawals and ends when the HBP balance is zero. If a repayment is missed in any year, regardless of previous payments, it will be considered a taxable RRSP withdrawal.
Contribute to a Payroll Deduction RRSP – Many forward thinking employers have set up Group RRSP plans for their employees. In some cases, the employer will match a certain portion of the employees deposits. If you have one available where you work, you should consider taking advantage of it.
They are convenient and effective. You choose an amount to be deposited to your RRSP per pay period and it’s automatic. That way, the money doesn’t have a chance to trickle through your fingers. A Group RRSP can provide an instant tax break. The deposit can be subtracted from income before taxes are calculated. Do you really want to wait for the CRA to send you a refund?
If your employer does not have a group RSP we can help you set up monthly contributions yourself on a before tax basis and accomplish the same thing. – M Dumond
Please contact our office for more information on how we can help you achieve your financial goals.
Since 1957, when RRSP were first introduced to encourage Canadians to save for their retirement, there have been many changes that effect how money can go into and come out of them. Two programs that allow funds to be withdrawn for RRSP for purposes other than retirement income are the Lifelong Learning Plan (LLP) and the Home Buyers Plan (HBP). Here’s how they work.
Sam and Linda have raised their children to school age with Linda as a stay at home mom. She wants to re-enter the work force, but needs to upgrade her education so she can get back into her previous profession. Linda will be a full-time student. While raising their children. Sam and Linda contributed to RRSPs both in Sam’s name and in a spousal RRSP in Linda’s name. They can withdraw up to $10,000.00 each per year from their RRSPs, to a maximum of $20,000.00 total, to help pay for Linda’s education.They cannot however make withdrawals from Linda’s locked in- RRSP. Sam and Linda will be able to withdraw funds from their RRSP’s without having to pay taxes on them as long as Linda participates in a qualifying educational program at a designated educational institution. They will have to pay back the funds within 10 years ( sooner if the person who made the withdrawals dies, becomes non-resident or reaches age 71) Sam and Linda will be required to repay a portion of the original withdrawal each year. If all or part of a repayment is not made then the unpaid amount will be fully taxable.
Glenn and Jane started RRSPs as soon as they entered the workforce. They are now ready to buy a home and may withdraw up to $25000.00 each from their RRSPs toward the purchase. They cannot make withdrawals from Locked-in RRSP plans. The home must be in Canada and they must intend to occupy it as their principle residence within one year of buying or building it. Glen and Jane must also qualify as first time home buyer in order to withdraw funds from their RRSP and not pay taxes on them. This means that neither of them could have owned a home and occupied it as a principle residence “at any time during the period beginning Jan.1 of the fourth year before the year of the withdrawal and ending 31 days before the withdrawal. If Glen and Jane make an RRSP contribution 89 days prior to making a withdrawal for HBP purposes, they will not get the tax deduction. Glen and Jane will have 15 years to repay their withdrawals ( sooner if the person who made the withdrawal dies, becomes a non-resident or reaches age 71) A minimum payment must be made each year. If all or a part of the required annual repayment is not made, then the unpaid amount must be included as income for tax purposes. – M Dumond
This article is intended to provide a brief overview of the life long Learning Plan and the Home Buyers Plan for Canadian residents and is not intended to provide specific advice. For a free copy of the Canada Revenue Agency (CRA) guide for either plan, or help in these areas please contact our office and speak with Susan or Michael.
Since their introduction in 1957 as an incentive to save for retirement, Register Retirement Savings Plans (RRSP) have evolved into the most popular savings vehicles in Canada. All too often though, RRSP decisions are made in a panic to meet a deadline, with little or no planning or understanding of the effects of our actions. Here are a few top strategies to help you get the most from your RSP and retirement plans.
Make Systematic RRSP deposits
Most of us plan and budget on a monthly basis. You can do the same with monthly pre-authorized deposits to an RRSP. It is also possible to get an instant tax break by contributing this way. With approval from CCRA ( Canada Customs and Revenue Agency), your RRSP deposits can be subtracted from income before deductions are calculated. This reduces the amount that needs to be sent to Ottawa each pay period but also reduces any tax refund that may be coming to you.
Use RRSPs to save for or make a down payment on a home
Income tax legislation allows qualified home buyers to withdraw up to $25000.00 per person of existing RRSP funds for the purchase of a new home. Income tax will not be withheld on this withdrawal. Payments are required to be repaid to an RRSP over the next 15-year period. If a repayment is missed in any year, it will be considered a taxable RRSP withdrawal.
Borrow to make your RRSP deposit
You may want to consider borrowing to maximize your RRSP deposit if you don’t have the cash or have waited until the deadline. Although RRSP- loan interest is no longer tax-deductible, the immediate tax savings and long-term tax-deferred growth usually more than makes up for any loan interest cost. Due to the interest not being deductible we recommend that in most cases the loan be no more than you pay off in one year.
Reinvest your tax refund
A few weeks after filing your tax return, a refund check arrives in the mail. It’s only natural to want to spend it. A 30-year old depositing $5000.00 per year to their RRSP at 8% compounded annually will have about $861,584.00 at age 65. Assuming 40% tax savings, the RRSP will grow by an additional $330,680.00 by depositing the tax savings as well. So don’t blow your tax refund. CCRA makes it easy for us to maximize contributions. After we have filed our tax returns, they tell us what our RRSP deposit limit is for the next year. This amount appears on your most recent tax notice of chessmen. While the mechanics of RRSPs are relatively simple, the ongoing retirement financial planning associated with them can be more complex. It is highly recommended that you work with some one experienced in the are of RRSPs and retirement planning to help set up and monitor your program. Your financial comfort in retirement may just depend on it. – M Dumond
Want help with your retirement financial plans?