We thought this would be a timely article given the season. For advice on your specific situation, please don't hesitate to give us a call.
This article is courtesy of www.advisor.ca
What to do with the tax refund?
May 23, 2008 | Mark Noble
All that tax-planning work is now paying off and your client's rebate cheque is likely in the mail. The issue now is what to do with it. A popular answer is to pay off the mortgage.
BMO Financial has released some statistics that make a strong case for paying down the mortgage before doing anything else with the tax refund. According to John Turner, director of mortgage sales for BMO, a $1,400 investment now at the beginning of a 25-year mortgage could save a client as much as $38,000 in future interest payments.
"Typically with a mortgage amortized over 25 years, if we use the simple example of $200,000 at a 6% fixed rate, the interest accumulated over that amortization period would be $184,000," Turner says. "According to Revenue Canada, the average income tax refund this year is $1,400. If that's applied to the mortgage, it will save about $38,000 in interest costs over the life of the mortgage, and at the same time reduce amortization."
Debt reduction is obviously not an investment return; still, there are few investments that guarantee to put that type of money in a client's pocket. A refund could also be deployed to pay down higher interest debts on loans or credit cards, but Turner notes the amortization period of the mortgage makes it highly compelling to pay off as early as possible — even it if means carrying higher-interest debt on other things.
"Loans and credit cards tend to have the highest interest rates, but those amortizations are shorter," he says. "Depending on how the payment situation is, it may make more sense to put it towards the mortgage because of the amortization. In terms of total interest costs, right at the beginning of the mortgage is the best time to pay it down, because the sooner you can pay down the mortgage or increase your payment, clearly the more interest you'll save over the life of the mortgage."
David Phipps, a CFP and senior financial advisor with Assante in Ottawa, says debt-repayment should factor high on deployment of the refund, but he generally believes higher-interest debt should be tackled first.
"Sometimes these things are so obvious you kind of feel like an idiot even mentioning them, but I would say an excellent use of tax refund is to reduce debt. You should start with the debt that has the highest interest rate," he says. "It doesn't make sense to put the money against the mortgage if you have $1,000 debt on your credit card that never gets paid off."
Phipps stresses it's important to consider the specific circumstances of the client before definitively deciding to pay off the debt first.
"Assuming they have RRSP contribution room and assuming a reasonable rate of return in the RRSP, they are probably better to take that money and put it in their RRSP because so many Canadians have not fully used their contribution room," he says. "If you've got somebody who has fully maxed out their RRSP room, the next best thing to do with it is to pay down some debt. If a person has significant RRSP contribution room and if the contributions are reducing tax at a high marginal tax rateit makes sense to put money in the RRSP rather than pay down debt."
Phipps determines which type of debt to pay off first by considering whether it's tax-deductible or not. A home equity line of credit being redeployed for investment purposes would not rank as high as a traditional mortgage where the interest is non-tax-deductible.
"You shrink your liabilities in the following order: non-tax-deductible debt at the highest interest rate, non-tax-deductible at the lowest interest rate and finally tax-deductible debt," he says. "Home equity line of credit they borrowed to purchase an investment so that the interest is tax-deductible is not the first place you've got to pay it down, because having tax deductible debt alters the after-tax cost of the loan."
Fellow Ottawa-based CFP Diane Koven says there is no surefire answer as to whether it's better to invest the refund or pay down debt. She tends to favour the latter purely for the reason that it gives her clients peace of mind.
"There is no way to know what is better until you're looking back from years ahead, from when you did the calculations. You can't really know in advance what is going to be better in a dollars and cents way," she says. "Usually it turns out that there is not a tremendous difference or none at all. The main thing that tips the scale is the psychological aspect. Paying down the mortgage makes people feel more secure."
Koven attempts to bridge the two schools of thought by insisting her clients maximize their RRSP contributions and then use the income tax refund to pay down the mortgage.
"When you get the refund, you'll contribute to the mortgage. It feels good. You can sleep easier when you've done it. It no longer becomes an either/or situation. You've accomplished both, you're taking care of the future from both angles and you don't really feel like you're second-guessing yourself," she says.
Peter Ficek, a Calgary-based CFP, agrees that psychology factors heavily into the decision to use the refund against the mortgage.
"When it comes to paying down the mortgage versus RRSP decisions, most people reduce their planning to the flip of a coin," he says. "If the decision is to pay down the mortgage on a principal residence, people think the decision is a personal one and view it in a qualitative context, as in 'would they sleep better at night with a paid-down mortgage or with a retirement pension?'"
Ficek says because of the emotional nature of the decision, this is a classic situation where the objective advice of a financial planner is needed.
"Seek out a qualified planner and sit down and go over the quantitative and qualitative issues rather than just doing the flip of the coin," he says. "A mortgage broker is going to tell you to pay down the mortgage and an RRSP salesman is going to tell you to pay down the RRSP. A financial planner is going to make a decision by looking at the client's goals and objectives."
Tuesday, May 27, 2008
Thursday, May 1, 2008
Simplify Your Banking - Simplify Your Life
Everybody seems to have a fast-paced, needed-it yesterday lifestyle these days. Does the simple life still exist? Sure. And the good news is that when it comes to your valuable time, routine changes can free up precious hours and days. Some simplifications, like how you bank, can save both time and money.
Consider the financial and personal lifestyles of people in their mid-30s to early-50s. Their careers are demanding but fulfilling. They are able to afford things they struggled to get before. Still, they are stretched in every direction. They have full social calendars, and participate in their kids' schedules as well – whether those kids are joining every extracurricular activity imaginable, embarking on a university degree, enjoying “financially assisted” independent living or getting married. Many people in this age group also have parents who require more support and assistance as they grow older.
For this “sandwich” generation, the challenge is managing the present while keeping an eye to the future. They need to spend wisely, putting aside enough money to provide tomorrow's income while meeting their current obligations. A financial plan is important, and a trusted advisor can also help people change their banking and day-to-day finances.
THE WAY WE BANK TODAY
To save minutes in bank line-ups, many people have become self-serve bankers. However, an expanding range of financial transactions (such as debits, cheques, pre-authorized payments and transfers among accounts) is making the job more complex. Many Canadians have a chequing account to manage daily expenses. Income goes into the account, while bills, mortgage payments and other monthly expensesflow back out. If there is anything left over at the end of the month, the money may be invested or put away in a “high-interest” savings account for a rainy day, emergency or vacation.
Many also have mortgages for their home and perhaps cottage. Loans or lines of credit (sometimes based on home equity) can be arranged for larger expenses, such as new cars, furniture or home renovations. And, of course, there are also credit cards that may provide benefits at a particular store, offer convenience or earn reward points.
SPAGHETTI PLATE MANAGEMENT
The bottom line is that, on average, Canadians likely have eight or nine separate banking products from two or more financial institutions. Sometimes, you may find yourself playing one product against another. For example, you might write a cheque on your chequing account to reduce a credit card balance, only to discover that you need to transfer funds from a savings account because payday is still two days away. Furthermore, you may use a credit card for smaller purchases because you're not sure there is enough money in your chequing account. In fact, the management of so many different cards, debts and accounts can be such an onerous accounting process that it has been referred to as “spaghetti plate” banking. People often devote so much time and effort to untangling their finances that they resign themselves to muddling their way through. But the problems don't stop there.
DIVERSIFICATION OF DEBT
It's safe to assume that each product has its own set of administrative costs built into the pricing. Each product also has a different interest rate attached to it, based on the risk of defaulting payment to the lender or the benefit to the user. For example, credit cards often carry an interest rate of 18 per cent or higher because they are unsecured debt. In other words, there's a greater risk a cardholder will not repay the balance because the debt isn't tied to a specific security. Credit cards may also be subject to higher rates because they can be susceptible to fraud. A mortgage, on the other hand, is secured by the property (i.e., the lender can force the sale of the home to recoup the money), so mortgages often offer the lowest rate around. Professor Moshe Milevsky of York University conducted a study in 2005 that looked at the way Canadians manage their debt. His conclusions and recommendations were very clear: the strategies people use are costing them time and money.
He observed that Canadians diversify their debt by “space” (spreading debt over several different products) and by “time.” In other words, because of the way people bank, they delay paying off debt even though sufficient money sits idle in their accounts. So they end up paying more in interest costs than necessary.
CONSOLIDATION OF DEBTS AND ASSETS
Professor Milevsky's advice is to eliminate as many banking products as possible by consolidating debts and making better use of short-term, non-registered assets. For instance, if you can eliminate non-secured credit cards, personal loans, car loans and lines of credit and wrap them all into a single secured loan, such as a mortgage, you could significantly reduce the amount of money you're currently spending servicing the debt at higher interest rates. As a simple example, if you had a $2,000 credit card debt attracting an 18 per cent interest rate and a personal loan of $8,000 at 7.5 per cent, your monthly interest costs would be roughly $80. If that debt were consolidated into a line of credit at six per cent, the monthly interest cost would be $50 - that's a reduction in cost of almost 40 per cent! Multiplied over time and larger loan amounts, this one change in how you manage your finances could save you thousands.
Milevsky also suggests that there is a more effective way to manage money than having special-purpose savings accounts. Even if your savings are earning three per cent interest, he advocates applying that money against your debt. The interest earned on your savings account is taxable, but using it to pay down your debt means everything you save goes straight into your pocket. How does this work? Taxes will reduce your savings account earnings, but reducing a debt that is charging six per cent means a six per cent after-tax benefit to you. Why would someone want to use all their short-term assets to pay down their debt? Well, if you're using a line of credit, you can always take that money back out if you need it. Instead of having money sitting idly around earning virtually nothing in pre-tax dollars, you can apply it against debt and save some real money, until you need to use it.
THE IDEAL SOLUTION
Imagine the possible savings if you were able to combine all your debts into a lower interest rate product (such as a secured line of credit), but could also make that line of credit your chequing account. If every deposit into this account reduced your level of debt, then why not flow your income through the account as well?
That's exactly what “all-in-one” accounts are designed for. An all-in-one account offers a host of advantages:
* It eliminates “spaghetti plate” banking, thereby reducing your banking time and effort
* It offers the potential to significantly reduce interest costs
* It provides a way to maximize the benefit of every dollar you have
* It gives you increased flexibility in monthly payments now, instead of meeting fixed monthly obligations, you have the option to pay interest only, if you like
* It simplifies your financial life – just one account to worry about and a clear picture of your financial situation, while every banking receipt gives you a snapshot of your finances.
Life can be exciting, chaotic and sometimes exhausting. That's why it makes sense to find ways to streamline your activities and reduce the demands on your time and money. A good place to start is by simplifying your banking. Not only can a few easy steps save you time, money and effort today, but this approach can go a long way to helping you get out of debt faster. And that's the first step towards sound retirement planning.
Content provided courtesy of Manulife Investments
© Copyright of this article is held by The Manufacturers Life Insurance Company (Manulife Financial). You are free to make copies of this article and to distribute it, either in paper form or electronically, as long as you do not change or remove any part of this work. All other uses are prohibited.
Consider the financial and personal lifestyles of people in their mid-30s to early-50s. Their careers are demanding but fulfilling. They are able to afford things they struggled to get before. Still, they are stretched in every direction. They have full social calendars, and participate in their kids' schedules as well – whether those kids are joining every extracurricular activity imaginable, embarking on a university degree, enjoying “financially assisted” independent living or getting married. Many people in this age group also have parents who require more support and assistance as they grow older.
For this “sandwich” generation, the challenge is managing the present while keeping an eye to the future. They need to spend wisely, putting aside enough money to provide tomorrow's income while meeting their current obligations. A financial plan is important, and a trusted advisor can also help people change their banking and day-to-day finances.
THE WAY WE BANK TODAY
To save minutes in bank line-ups, many people have become self-serve bankers. However, an expanding range of financial transactions (such as debits, cheques, pre-authorized payments and transfers among accounts) is making the job more complex. Many Canadians have a chequing account to manage daily expenses. Income goes into the account, while bills, mortgage payments and other monthly expensesflow back out. If there is anything left over at the end of the month, the money may be invested or put away in a “high-interest” savings account for a rainy day, emergency or vacation.
Many also have mortgages for their home and perhaps cottage. Loans or lines of credit (sometimes based on home equity) can be arranged for larger expenses, such as new cars, furniture or home renovations. And, of course, there are also credit cards that may provide benefits at a particular store, offer convenience or earn reward points.
SPAGHETTI PLATE MANAGEMENT
The bottom line is that, on average, Canadians likely have eight or nine separate banking products from two or more financial institutions. Sometimes, you may find yourself playing one product against another. For example, you might write a cheque on your chequing account to reduce a credit card balance, only to discover that you need to transfer funds from a savings account because payday is still two days away. Furthermore, you may use a credit card for smaller purchases because you're not sure there is enough money in your chequing account. In fact, the management of so many different cards, debts and accounts can be such an onerous accounting process that it has been referred to as “spaghetti plate” banking. People often devote so much time and effort to untangling their finances that they resign themselves to muddling their way through. But the problems don't stop there.
DIVERSIFICATION OF DEBT
It's safe to assume that each product has its own set of administrative costs built into the pricing. Each product also has a different interest rate attached to it, based on the risk of defaulting payment to the lender or the benefit to the user. For example, credit cards often carry an interest rate of 18 per cent or higher because they are unsecured debt. In other words, there's a greater risk a cardholder will not repay the balance because the debt isn't tied to a specific security. Credit cards may also be subject to higher rates because they can be susceptible to fraud. A mortgage, on the other hand, is secured by the property (i.e., the lender can force the sale of the home to recoup the money), so mortgages often offer the lowest rate around. Professor Moshe Milevsky of York University conducted a study in 2005 that looked at the way Canadians manage their debt. His conclusions and recommendations were very clear: the strategies people use are costing them time and money.
He observed that Canadians diversify their debt by “space” (spreading debt over several different products) and by “time.” In other words, because of the way people bank, they delay paying off debt even though sufficient money sits idle in their accounts. So they end up paying more in interest costs than necessary.
CONSOLIDATION OF DEBTS AND ASSETS
Professor Milevsky's advice is to eliminate as many banking products as possible by consolidating debts and making better use of short-term, non-registered assets. For instance, if you can eliminate non-secured credit cards, personal loans, car loans and lines of credit and wrap them all into a single secured loan, such as a mortgage, you could significantly reduce the amount of money you're currently spending servicing the debt at higher interest rates. As a simple example, if you had a $2,000 credit card debt attracting an 18 per cent interest rate and a personal loan of $8,000 at 7.5 per cent, your monthly interest costs would be roughly $80. If that debt were consolidated into a line of credit at six per cent, the monthly interest cost would be $50 - that's a reduction in cost of almost 40 per cent! Multiplied over time and larger loan amounts, this one change in how you manage your finances could save you thousands.
Milevsky also suggests that there is a more effective way to manage money than having special-purpose savings accounts. Even if your savings are earning three per cent interest, he advocates applying that money against your debt. The interest earned on your savings account is taxable, but using it to pay down your debt means everything you save goes straight into your pocket. How does this work? Taxes will reduce your savings account earnings, but reducing a debt that is charging six per cent means a six per cent after-tax benefit to you. Why would someone want to use all their short-term assets to pay down their debt? Well, if you're using a line of credit, you can always take that money back out if you need it. Instead of having money sitting idly around earning virtually nothing in pre-tax dollars, you can apply it against debt and save some real money, until you need to use it.
THE IDEAL SOLUTION
Imagine the possible savings if you were able to combine all your debts into a lower interest rate product (such as a secured line of credit), but could also make that line of credit your chequing account. If every deposit into this account reduced your level of debt, then why not flow your income through the account as well?
That's exactly what “all-in-one” accounts are designed for. An all-in-one account offers a host of advantages:
* It eliminates “spaghetti plate” banking, thereby reducing your banking time and effort
* It offers the potential to significantly reduce interest costs
* It provides a way to maximize the benefit of every dollar you have
* It gives you increased flexibility in monthly payments now, instead of meeting fixed monthly obligations, you have the option to pay interest only, if you like
* It simplifies your financial life – just one account to worry about and a clear picture of your financial situation, while every banking receipt gives you a snapshot of your finances.
Life can be exciting, chaotic and sometimes exhausting. That's why it makes sense to find ways to streamline your activities and reduce the demands on your time and money. A good place to start is by simplifying your banking. Not only can a few easy steps save you time, money and effort today, but this approach can go a long way to helping you get out of debt faster. And that's the first step towards sound retirement planning.
Content provided courtesy of Manulife Investments
© Copyright of this article is held by The Manufacturers Life Insurance Company (Manulife Financial). You are free to make copies of this article and to distribute it, either in paper form or electronically, as long as you do not change or remove any part of this work. All other uses are prohibited.
Monday, March 3, 2008
The Budget brings new tax-savings math: RRSPs vs TFSA
From morningstar.ca – March 3, 2008
Last week's federal budget centrepiece was the Tax-Free Savings Account (TFSA), giving investors a new vehicle to save on taxes. As previously reported, the TFSA is scheduled to make its debut in 2009, allowing maximum contributions of up to $5,000 a year.
Although a TFSA is very different from an RRSP, each of these accounts holds an after-tax advantage in returns over a non-registered account. Everyone who is 18 years old and over will be able to contribute to a TFSA, and if you are eligible to make RRSP contributions it will generally be to your advantage to contribute to both.
That, of course, depends on having the money available. According to a national BMO Financial Group/Leger poll released on Feb. 27, more than half of Canadians are not making an RSP contribution this year.
Realistically, for a large number of Canadians who won't be able to contribute to both a TFSA and an RRSP, the question becomes: Which one of the two will leave me further ahead?
To illustrate the differences between the TFSA, RRSP and non-registered savings, the Finance Department created a table comparing the three according to one scenario. The example used a $1,000 one-time contribution, held for 20 years by an individual with a 40% marginal tax rate. The assumed return, implying a very conservatively managed portfolio, was a compound annual 5.5%.
The RRSP investor jumps out to an early lead, since there is a tax deduction that leaves this account with the full $1,000 to invest. The TFSA and non-registered accounts, by contrast, start out with only $600, since they must make their contributions with after-tax dollars.
Both the TFSA and the RRSP accounts enable income to accumulate tax free, while the holder of the non-registered account gets hit with income tax each year. The RRSP extends its lead, since it started out with a larger amount, while the TSFA ranks second and the non-registered account lags.
By the end of 20 years, the value of the net contribution plus investment income has reached $1,751 for the TFSA, $2,918 for the RRSP, and only $1,307 for the non-registered account. (The government's example for the non-registered account assumes a tax rate of 28% on investment income, based on portfolio returns that are assumed to be composed of 30% capital gains, 30% Canadian dividends and 40% interest.)
The great equalizer between the TSFA and the RRSP account occurs at the time of withdrawal. The value of the TSFA remains at $1,751, since no taxes are payable on withdrawal of either the original TFSA contribution or any capital gains, dividends or interest earned.
But the $2,918 RRSP is taxable at the highest marginal tax rate at the time of withdrawal, which works out to a tax hit of $1,167. This leaves the RRSP holder with after-tax proceeds of $1,751, thereby finishing in a dead heat with the TFSA holder. (The non-registered account finishes last with $1,307.)
The key variable is how the tax rate at the time of withdrawal compares to the tax rate at the time of the contribution. Here are the three scenarios, and how they may affect your choice of account:
• If the two rates are identical, as in the hypothetical example cited in this article, the TFSA and the RRSP are equally effective tax-savings alternatives.
• If the tax rate at the time of withdrawal is lower than at the time of contribution, the RRSP is the better choice.
• If the tax rate at the time of withdrawal is higher than at the time of contribution, the advantage goes to the TFSA.
In other personal-finance related developments in the budget, there were several changes affecting life-income funds (LIFs) and registered education savings plans (RESPs).
LIFs are locked-in pension accounts. They hold assets that are transferred from a registered pension plan to an individual who would prefer to manage his or her own account rather than remain in the pension plan. LIFs can be created, for instance, when individuals are laid off from an employer.
The budget provides much increased flexibility for LIF holders to gain access to their assets. Individuals who are 55 years or older, and with LIF holdings of up to $22,450, will be able to wind up their accounts and have the option of transferring the assets to an RRSP or a registered retirement income fund (RRIF).
Those 55 and older are also entitled to a one-time conversion of up to 50% of their LIF holdings into an RRSP or RRIF, with no maximum withdrawal limits.
In addition, all individuals facing financial hardship (such as low income, disabilities or medical costs), will be entitled to unlock up to $22,450 from their LIFs.
As for RESPs, the budget proposed changes in the time limits and age limits. The maximum number of contribution years will be increased to 31 years, up from 21 years. The lifetime contribution limit remains at $50,000.
The deadline for terminating an RESP will be extended to the year that includes the 35th anniversary of the plan, up from the current 25th anniversary. If the beneficiary qualifies for the disability tax credit, the deadline is extended to the 40th anniversary year, up from the 30th year.
In terms of age limits, no contributions can currently be made in family plans for beneficiaries who are 21 or older. The budget calls for raising this age threshold to 31 years old.
Last week's federal budget centrepiece was the Tax-Free Savings Account (TFSA), giving investors a new vehicle to save on taxes. As previously reported, the TFSA is scheduled to make its debut in 2009, allowing maximum contributions of up to $5,000 a year.
Although a TFSA is very different from an RRSP, each of these accounts holds an after-tax advantage in returns over a non-registered account. Everyone who is 18 years old and over will be able to contribute to a TFSA, and if you are eligible to make RRSP contributions it will generally be to your advantage to contribute to both.
That, of course, depends on having the money available. According to a national BMO Financial Group/Leger poll released on Feb. 27, more than half of Canadians are not making an RSP contribution this year.
Realistically, for a large number of Canadians who won't be able to contribute to both a TFSA and an RRSP, the question becomes: Which one of the two will leave me further ahead?
To illustrate the differences between the TFSA, RRSP and non-registered savings, the Finance Department created a table comparing the three according to one scenario. The example used a $1,000 one-time contribution, held for 20 years by an individual with a 40% marginal tax rate. The assumed return, implying a very conservatively managed portfolio, was a compound annual 5.5%.
The RRSP investor jumps out to an early lead, since there is a tax deduction that leaves this account with the full $1,000 to invest. The TFSA and non-registered accounts, by contrast, start out with only $600, since they must make their contributions with after-tax dollars.
Both the TFSA and the RRSP accounts enable income to accumulate tax free, while the holder of the non-registered account gets hit with income tax each year. The RRSP extends its lead, since it started out with a larger amount, while the TSFA ranks second and the non-registered account lags.
By the end of 20 years, the value of the net contribution plus investment income has reached $1,751 for the TFSA, $2,918 for the RRSP, and only $1,307 for the non-registered account. (The government's example for the non-registered account assumes a tax rate of 28% on investment income, based on portfolio returns that are assumed to be composed of 30% capital gains, 30% Canadian dividends and 40% interest.)
The great equalizer between the TSFA and the RRSP account occurs at the time of withdrawal. The value of the TSFA remains at $1,751, since no taxes are payable on withdrawal of either the original TFSA contribution or any capital gains, dividends or interest earned.
But the $2,918 RRSP is taxable at the highest marginal tax rate at the time of withdrawal, which works out to a tax hit of $1,167. This leaves the RRSP holder with after-tax proceeds of $1,751, thereby finishing in a dead heat with the TFSA holder. (The non-registered account finishes last with $1,307.)
The key variable is how the tax rate at the time of withdrawal compares to the tax rate at the time of the contribution. Here are the three scenarios, and how they may affect your choice of account:
• If the two rates are identical, as in the hypothetical example cited in this article, the TFSA and the RRSP are equally effective tax-savings alternatives.
• If the tax rate at the time of withdrawal is lower than at the time of contribution, the RRSP is the better choice.
• If the tax rate at the time of withdrawal is higher than at the time of contribution, the advantage goes to the TFSA.
In other personal-finance related developments in the budget, there were several changes affecting life-income funds (LIFs) and registered education savings plans (RESPs).
LIFs are locked-in pension accounts. They hold assets that are transferred from a registered pension plan to an individual who would prefer to manage his or her own account rather than remain in the pension plan. LIFs can be created, for instance, when individuals are laid off from an employer.
The budget provides much increased flexibility for LIF holders to gain access to their assets. Individuals who are 55 years or older, and with LIF holdings of up to $22,450, will be able to wind up their accounts and have the option of transferring the assets to an RRSP or a registered retirement income fund (RRIF).
Those 55 and older are also entitled to a one-time conversion of up to 50% of their LIF holdings into an RRSP or RRIF, with no maximum withdrawal limits.
In addition, all individuals facing financial hardship (such as low income, disabilities or medical costs), will be entitled to unlock up to $22,450 from their LIFs.
As for RESPs, the budget proposed changes in the time limits and age limits. The maximum number of contribution years will be increased to 31 years, up from 21 years. The lifetime contribution limit remains at $50,000.
The deadline for terminating an RESP will be extended to the year that includes the 35th anniversary of the plan, up from the current 25th anniversary. If the beneficiary qualifies for the disability tax credit, the deadline is extended to the 40th anniversary year, up from the 30th year.
In terms of age limits, no contributions can currently be made in family plans for beneficiaries who are 21 or older. The budget calls for raising this age threshold to 31 years old.
Do You Want Insurance With That?
Recently, CBC’s Marketplace ran a story on the pitfalls of purchasing mortgage and creditor insurance and we thought this would be a perfect opportunity to highlight the benefits of arranging your own life and health insurance plans in order to protect yourself and your loved ones.
When you are approved for a mortgage, credit card or line of credit, your lender will offer to sell you insurance to pay off these debts in case of a death or disability. This offer may seem convenient, but you should be aware of many factors before saying ‘yes’ to these coverages.
Most of us will agree that it is important not to leave your loved ones with outstanding debts in the case of a premature death or disability, but mortgage or creditor insurance plans offered by the banks and lenders are not always the best option.
When you purchase mortgage insurance you are actually joining a group insurance policy owned by the lender. Though this may seem like the easiest way to get the coverage that you want, but there are many disadvantages.
With mortgage insurance, the lender is beneficiary on the plan there are no further provision to protect your family. There is very little flexibility with the coverage. Your lender will insure you only for the amount of your debts. You cannot alter, renew or convert the plan.
Should you happen to move to another lender in the future, or sometimes even renegotiate with your current lender, the policy is not transferable. This means you will have to reapply for the insurance coverage and pay premiums based on a higher age, or you may not qualify for coverage at all should your health change.
Also, since creditor insurance is provided through a group plan, you pay the same rate for the coverage as everybody else. You are not rewarded for looking after your health or with some plans, even being a non-smoker.
Another important fact is that your premiums and benefits are not guaranteed. Your lender can change or cancel the policy at any time. Also, your premiums remain the same while your benefit will be reduced as you pay-off your mortgage.
There have also been many documented cases where mortgage insurance claims have been denied due to non-discloser by the clients, even after years of paying premiums for coverage mortgage clients thought were in place the whole time.
With so many gaps in creditor insurance polices, most Canadians will want better guarantees and greater choice. It should also be noted that most lending officers and mortgage brokers don’t even hold an insurance license. Quite frankly it makes sense to speak with an insurance professional about mortgage insurance.
Financial advisors that hold an insurance license have a process in place to help you purchase the right amount and right type of insurance.
Their recommendations will put you in control of your insurance plan. You will own the policy, you can make changes to the plan when necessary, and your loved ones are the beneficiaries—not the bank. If circumstance change, the beneficiary can choose to use the money for other needs instead of paying the mortgage off automatically.
Term life insurance is more affordable and will meet most people’s needs. But you also have the option of choosing permanent insurance like whole life or universal life plans, as well as personal disability or critical illness insurance as well.
A personally plan will have important guarantees and cannot be canceled. If you decide to shop around for better mortgage rates, your insurance plan is portable and will stay in force even if your move to another lender. Also, the insurance benefit will not decrease like mortgage insurance.
You should be aware that when you arrange a mortgage, the lender may ask you to purchase insurance, but you have the right to shop for the plan that meets your needs.
So before you say ‘yes’ to creditor insurance talk with an insurance professional to find out how you can better insure your debts.
When you are approved for a mortgage, credit card or line of credit, your lender will offer to sell you insurance to pay off these debts in case of a death or disability. This offer may seem convenient, but you should be aware of many factors before saying ‘yes’ to these coverages.
Most of us will agree that it is important not to leave your loved ones with outstanding debts in the case of a premature death or disability, but mortgage or creditor insurance plans offered by the banks and lenders are not always the best option.
When you purchase mortgage insurance you are actually joining a group insurance policy owned by the lender. Though this may seem like the easiest way to get the coverage that you want, but there are many disadvantages.
With mortgage insurance, the lender is beneficiary on the plan there are no further provision to protect your family. There is very little flexibility with the coverage. Your lender will insure you only for the amount of your debts. You cannot alter, renew or convert the plan.
Should you happen to move to another lender in the future, or sometimes even renegotiate with your current lender, the policy is not transferable. This means you will have to reapply for the insurance coverage and pay premiums based on a higher age, or you may not qualify for coverage at all should your health change.
Also, since creditor insurance is provided through a group plan, you pay the same rate for the coverage as everybody else. You are not rewarded for looking after your health or with some plans, even being a non-smoker.
Another important fact is that your premiums and benefits are not guaranteed. Your lender can change or cancel the policy at any time. Also, your premiums remain the same while your benefit will be reduced as you pay-off your mortgage.
There have also been many documented cases where mortgage insurance claims have been denied due to non-discloser by the clients, even after years of paying premiums for coverage mortgage clients thought were in place the whole time.
With so many gaps in creditor insurance polices, most Canadians will want better guarantees and greater choice. It should also be noted that most lending officers and mortgage brokers don’t even hold an insurance license. Quite frankly it makes sense to speak with an insurance professional about mortgage insurance.
Financial advisors that hold an insurance license have a process in place to help you purchase the right amount and right type of insurance.
Their recommendations will put you in control of your insurance plan. You will own the policy, you can make changes to the plan when necessary, and your loved ones are the beneficiaries—not the bank. If circumstance change, the beneficiary can choose to use the money for other needs instead of paying the mortgage off automatically.
Term life insurance is more affordable and will meet most people’s needs. But you also have the option of choosing permanent insurance like whole life or universal life plans, as well as personal disability or critical illness insurance as well.
A personally plan will have important guarantees and cannot be canceled. If you decide to shop around for better mortgage rates, your insurance plan is portable and will stay in force even if your move to another lender. Also, the insurance benefit will not decrease like mortgage insurance.
You should be aware that when you arrange a mortgage, the lender may ask you to purchase insurance, but you have the right to shop for the plan that meets your needs.
So before you say ‘yes’ to creditor insurance talk with an insurance professional to find out how you can better insure your debts.
Wednesday, February 13, 2008
Why An RRSP? – Deadline is Feb 29th!
A REGISTERED RETIREMENT SAVINGS PLAN (RRSP) PROVIDES ONE OF THE FEW ways in which Canadians can shelter their income from taxes. Still, the vast majority of Canadians don’t take full advantage of their RRSP eligibility. According to Statistics Canada, less than one in five Canadians contributed to an RRSP in 2002. And the amount they contributed represented only about nine per cent of the total room available.
We often hear people say that “I don’t like RRSP’s” or that they are “not good to invest in.” But when you look at the big picture, the math is clear, for most Canadians, there is no better place to save for your retirement. Where else can a person earning $60,000 a year, paying income taxes at a rate of 40 per cent, put away $10,000 and get a $4,000 gift in return?
Not only do you get an immediate deduction from your annual tax bill,
but your investment within an RRSP grows tax deferred. And when you reach the age of 71 and have to convert your plan to another tax-deferred investment vehicle such as a registered retirement income fund (RRIF), only the money you withdraw is subject to income tax. The rest remains within the tax-free environment until you need it. The key is pay less in taxes during retirement than you were paying while you were working.
The federal government introduced RRSP’s in Canada in 1957 to encourage Canadians to save for retirement. Before RRSP’s, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income. Several legislative changes have occurred over the decades that have encouraged larger RRSP contributions. Today, annual RRSP room is a calculation of 18% of your earned income minus a “pension adjustment” up to a maximum of $19,000 as of this year (it will be $20,000 next year). If that is not used up it is carried forward and added to next year’s room. A section on your Notice of Assessment you receive back from the government when you submit your income tax will outline what RRSP contribution room you currently have.
In today’s modern work environment, many people do not have the option to join in a company pension plan. As companies cut back on their pension plans, people have fewer opportunities to help them save for retirement. It’s crucial that people put something away to supplement their income in their retirement years. RRSPs are an excellent option to save for retirement.
Another misconception that we often see is the client who is looking to “buy an RRSP?” It’s important to understand that RRSPs are not something you can actually buy or invest in, but rather a name or title given to any type of investments such as a GIC’s, mutual funds, stocks or bonds, that is held within the plan. You can hold the exact same investments ‘outside’ your RRSP in a non-registered plan, but you will not get tax deduction or tax deferred growth. Think of an RRSP as a tax-saving box that you put your investment into. In a future article, we will touch on the different tax consequences of money held ‘outside’ your RRSPs.
For now however, if you have an RRSP, you have until February 29 to “top it up” to save on your 2007 tax return. But if you don’t have one, make it your month to start! Don’t be afraid to look for professional advice on what investments you should hold inside your RRSP….this decision will have the biggest impact on your retirement savings.
For most people easiest way to contribute to your RRSP is by arranging for automatic monthly withdrawals throughout the year rather than investing a single lump sum. Paying your self first is an old principle but very practical and easy to do, and has many benefits along the way. Some day you will want to retire, plan for it.
We often hear people say that “I don’t like RRSP’s” or that they are “not good to invest in.” But when you look at the big picture, the math is clear, for most Canadians, there is no better place to save for your retirement. Where else can a person earning $60,000 a year, paying income taxes at a rate of 40 per cent, put away $10,000 and get a $4,000 gift in return?
Not only do you get an immediate deduction from your annual tax bill,
but your investment within an RRSP grows tax deferred. And when you reach the age of 71 and have to convert your plan to another tax-deferred investment vehicle such as a registered retirement income fund (RRIF), only the money you withdraw is subject to income tax. The rest remains within the tax-free environment until you need it. The key is pay less in taxes during retirement than you were paying while you were working.
The federal government introduced RRSP’s in Canada in 1957 to encourage Canadians to save for retirement. Before RRSP’s, only individuals who belonged to employer-sponsored registered pension plans could deduct pension contributions from their taxable income. Several legislative changes have occurred over the decades that have encouraged larger RRSP contributions. Today, annual RRSP room is a calculation of 18% of your earned income minus a “pension adjustment” up to a maximum of $19,000 as of this year (it will be $20,000 next year). If that is not used up it is carried forward and added to next year’s room. A section on your Notice of Assessment you receive back from the government when you submit your income tax will outline what RRSP contribution room you currently have.
In today’s modern work environment, many people do not have the option to join in a company pension plan. As companies cut back on their pension plans, people have fewer opportunities to help them save for retirement. It’s crucial that people put something away to supplement their income in their retirement years. RRSPs are an excellent option to save for retirement.
Another misconception that we often see is the client who is looking to “buy an RRSP?” It’s important to understand that RRSPs are not something you can actually buy or invest in, but rather a name or title given to any type of investments such as a GIC’s, mutual funds, stocks or bonds, that is held within the plan. You can hold the exact same investments ‘outside’ your RRSP in a non-registered plan, but you will not get tax deduction or tax deferred growth. Think of an RRSP as a tax-saving box that you put your investment into. In a future article, we will touch on the different tax consequences of money held ‘outside’ your RRSPs.
For now however, if you have an RRSP, you have until February 29 to “top it up” to save on your 2007 tax return. But if you don’t have one, make it your month to start! Don’t be afraid to look for professional advice on what investments you should hold inside your RRSP….this decision will have the biggest impact on your retirement savings.
For most people easiest way to contribute to your RRSP is by arranging for automatic monthly withdrawals throughout the year rather than investing a single lump sum. Paying your self first is an old principle but very practical and easy to do, and has many benefits along the way. Some day you will want to retire, plan for it.
Wednesday, January 23, 2008
Our commentary now covered in Soonews.ca
You can now find our continuing commentary on financial planning in Soonews.ca under the blog section. Visit www.soonews.ca for more info.
Our content to Soonews.ca will compliment the articles that we post here. We are very excited for this new avenue to bring timely financial advice to Saultites and would like to thank Karen Johns, Craig Huckerby and all of the hard working staff at Soonews.ca for the opportunity.
Our content to Soonews.ca will compliment the articles that we post here. We are very excited for this new avenue to bring timely financial advice to Saultites and would like to thank Karen Johns, Craig Huckerby and all of the hard working staff at Soonews.ca for the opportunity.
Monday, January 21, 2008
Don't Sell Quality - Article from The Globe and Mail
No doubt you are aware of the recent stock market declines. We came across a great article today in the Globe and Mail that we would like to share with you. It sums up nicely our position on long term investing through a 'Bear Market'.
The most important aspect of any investment plan is to ensure that your investment choices meet your time horizon and risk tolerance. If you would like a review of your current investment portfolio, please don't hesitate to call and make an appointment.
This is no time to sell quality
Rob Carrick
Monday, January 21, 2008
Beware the one-two punch of plunging stock markets.
Not only do they decimate your portfolio, but they also lure you into making bad investing decisions that help ease your short-term anxiety but then hurt you in the long term. That's how it is that investors sell perfectly good stocks and mutual funds, buy principal-protected investments and make other mistakes with lasting repercussions.
Selling quality right now is probably the worst error you can get fooled into making by a plunging stock market. The rationale here of protecting your money against further losses makes sense, especially because it's hard to imagine there aren't more bad days ahead for the market.
But what comes after that? If you sell today you'll have your money languishing in money market funds, where returns are on the decline because of falling interest rates. You'll eventually get an itch to find something with a higher return and, quite likely, you'll end up in the stock market again. By then, stocks will have jumped from their lows and you'll be buying at elevated prices.
Some people, amateur and professional, get lucky timing their moves in and out of the market. The masses get it wrong and thus end up in a cycle of selling low and buying high that robs of them of returns and extracts unnecessary fees and commissions.
Another mistake is to give up on the risks of the stock market and instead buy guaranteed investments like principal-protected notes or segregated funds. The appeal of these investments is obvious – you get exposure to stocks with no risk of losing money in down markets like we're seeing today. The problem is with the cost of the guarantee – it cuts into returns so deeply that it's simply not a good value.
Buying guaranteed investments at times like now make less sense than usual because the stock markets have already lost a lot of ground. They may fall further, but savvy investors know that the current decline is setting up the next move up for the markets. Sellers of guaranteed products will make out like bandits when stocks rebound. Investors, not so much.
With registered retirement savings plan season just about here, gun-shy investors are poised to make yet another mistake, which is failing to make an RRSP contribution. If a plunging stock market is freaking you out, invest your RRSP money in a high-interest savings account until the dust settles and then move into a long-term investment when you can.
The best move would be to take your RRSP money and put it into the highest quality, most beaten down stocks or funds you can find. But one step at a time.
© The Globe and Mail
The most important aspect of any investment plan is to ensure that your investment choices meet your time horizon and risk tolerance. If you would like a review of your current investment portfolio, please don't hesitate to call and make an appointment.
This is no time to sell quality
Rob Carrick
Monday, January 21, 2008
Beware the one-two punch of plunging stock markets.
Not only do they decimate your portfolio, but they also lure you into making bad investing decisions that help ease your short-term anxiety but then hurt you in the long term. That's how it is that investors sell perfectly good stocks and mutual funds, buy principal-protected investments and make other mistakes with lasting repercussions.
Selling quality right now is probably the worst error you can get fooled into making by a plunging stock market. The rationale here of protecting your money against further losses makes sense, especially because it's hard to imagine there aren't more bad days ahead for the market.
But what comes after that? If you sell today you'll have your money languishing in money market funds, where returns are on the decline because of falling interest rates. You'll eventually get an itch to find something with a higher return and, quite likely, you'll end up in the stock market again. By then, stocks will have jumped from their lows and you'll be buying at elevated prices.
Some people, amateur and professional, get lucky timing their moves in and out of the market. The masses get it wrong and thus end up in a cycle of selling low and buying high that robs of them of returns and extracts unnecessary fees and commissions.
Another mistake is to give up on the risks of the stock market and instead buy guaranteed investments like principal-protected notes or segregated funds. The appeal of these investments is obvious – you get exposure to stocks with no risk of losing money in down markets like we're seeing today. The problem is with the cost of the guarantee – it cuts into returns so deeply that it's simply not a good value.
Buying guaranteed investments at times like now make less sense than usual because the stock markets have already lost a lot of ground. They may fall further, but savvy investors know that the current decline is setting up the next move up for the markets. Sellers of guaranteed products will make out like bandits when stocks rebound. Investors, not so much.
With registered retirement savings plan season just about here, gun-shy investors are poised to make yet another mistake, which is failing to make an RRSP contribution. If a plunging stock market is freaking you out, invest your RRSP money in a high-interest savings account until the dust settles and then move into a long-term investment when you can.
The best move would be to take your RRSP money and put it into the highest quality, most beaten down stocks or funds you can find. But one step at a time.
© The Globe and Mail
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