By now you have probably heard some information about the new Tax Free Savings Accounts available to Canadians either on the news or through TV commercials that are currently running. Maybe you have some questions, or are not sure what they are all about? Hopefully the information provided below will answer all of your questions and then some.
Until the year 2009, most Canadians will have held their savings in their RRSP, where they could claim a deduction on their contributions, while have the growth of the account go tax deferred until retirement or withdrawal. The newest savings vehicle available to Canadians is called a Tax-Free Savings Account (TFSA). Whether you are saving for the short term (0-5) years or for the longer term (6+) a TFSA could be a valuable addition to your financial plan. So what is it all about? Well here are some frequently asked questions and answers taken right from our own Government of Canada’s web site that will provide most of the information to bring you up to speed.
Q.1 What is the Tax-Free Savings Account (TFSA)?
A.1 The TFSA is a registered savings account that allows taxpayers to earn investment income tax-free inside the account. Contributions to the account are not deductible for tax purposes, and withdrawals of contributions and earnings from the account are not taxable.
Q.2 Who would be eligible to open a TFSA?
A.2 Any individual (other than a trust) who is resident in Canada and 18 years of age or older would be eligible to establish a TFSA.
You would be able to open an account at most financial institutions such as Canadian trust companies, life insurance companies, banks, and credit unions (the same institutions that are currently eligible to issue a Registered Retirement Savings Plan). You would have to provide the issuer with your social insurance number when the account is opened. You would be permitted to hold more than one TFSA.
Q.3 When can I open a TFSA?
A.3 January 2009.
Q.4 How much can I contribute to the TFSA per year?
A.4 Each year you can contribute an amount up to your contribution room for the year. Your contribution room would be made up of three amounts:
1. Each year you would be allocated and allowed to contribute at least $5,000 (this annual amount will be indexed to inflation and rounded to the nearest $500 on a yearly basis). See also Q.14.
2. Any withdrawals made in the previous year would be added to the contribution room for the year.
3. Any unused contribution room from the previous year would be added to the contribution room for the year.
For example (assuming no indexing):
• In 2009 you would be allocated and allowed to contribute up to $5,000. If you only contribute $2,000, an amount of $3,000 would be carried forward to 2010.
• Your contribution room for 2010 would then be $5,000 plus $3,000, or $8,000.
• If in 2010, you do not contribute but decide to withdraw $1,000, your contribution room for 2011 would be $5,000, plus $8,000 (carried forward from 2010), plus the $1,000 withdrawn, or $14,000.
Q.5 If I don't have the money to invest in a given year, would I be able to use any unused contribution room in a future year?
A.5 Yes, there no limit on the number of years unused contribution room could be carried forward.
Q.6 What happens if I contribute more than my contribution room?
A.6 Excess contributions would be subject to tax of one per cent per month, for each month that the excess remains in the plan.
Q.7 Would there be any restrictions on withdrawals?
A.7 No, you could withdraw any amount in the account for any reason.
Q.8 Would contributions and withdrawals have any impact on my taxes and income-tested benefits?
A.8 No, contributions to a TFSA are not deductible in computing income for tax purposes, and no amount earned in or withdrawn from a TFSA would be included in computing income for tax purposes.
Withdrawals would not be taken into account in determining eligibility for income-tested benefits or credits delivered through the income tax system (for example, the Canada Child Tax Benefit, the Working Income Tax Benefit, the goods and services tax credit, and the age credit).
Furthermore, these amounts would not reduce other benefits that are based on the individual's income level, such as Old Age Security benefits, the Guaranteed Income Supplement, or Employment Insurance benefits.
Q.9 What kind of investments could I hold in my TFSA?
A.9 A TFSA would generally be permitted to hold the same investments as a registered retirement savings plan. This would include savings accounts, mutual funds, publicly traded securities, GICs, bonds, and certain shares of small business corporations.
Q.10 Is interest on money borrowed to invest in my TFSA tax-deductible?
A.10 No, interest on money borrowed to invest in a TFSA would not be deductible for tax purposes.
Q.11 Could I use my TFSA assets as security for a loan?
A.11 Yes, you could use the TFSA assets as security for a loan.
Q.12 If I provide funds to my spouse or common-law partner to invest in a TFSA, would the income earned in that account be attributed back to me?
A.12 No, the attribution rules would not apply to income earned in a TFSA where you provide funds to your spouse or common-law partner to take advantage of their TFSA contribution room.
Q.13 What happens if the account holder passes away?
A.13 Generally, earnings that accrue in the account after the account holder's death will be taxable, while those that accrued before death would remain exempt. However, it would be possible to maintain the tax-free status of the earnings if the account holder names his or her spouse or common-law partner as the successor account holder. Alternatively, the assets of the deceased's TFSA could be transferred to the TFSA of the surviving spouse or common-law partner without any impact on the survivor's existing contribution room.
Q.14 Could I still contribute to a TFSA if I become a non-resident of Canada?
A.14 If you become a non-resident, you would be allowed to maintain your TFSA, and you would not be taxed on any earnings in the account or on withdrawals; however, you would not be allowed to contribute, and no contribution room would accrue for any year throughout which you are a non-resident.
Q.15 What would happen if there was a breakdown of a marriage or a common-law partnership?
A.15 In such a situation, an amount could be transferred directly from one spouse or common-law partner's TFSA to the other's. The amount of the transfer would not affect either person's contribution room.
Q.16 How would I know what my TFSA contribution room is for a given tax year?
A.16 The CRA would determine TFSA contribution room (based on information provided by issuers) for each eligible individual who files an annual T1 individual income tax return. Individuals who have not filed returns for prior years (because for example, there was no tax payable) would be permitted to establish their entitlement to contribution room by filing a return for those years or by other means acceptable to the CRA.
Hopefully that will provide you with enough information to inquire about the TFSA with your Financial Advisor. Here at Algoma Financial, we can accept early applications now, and can provide you with advice and printed marketing material to help you make the best decision for your tax-free savings.
Friday, November 21, 2008
Monday, September 29, 2008
6 Principals to Help You Through The Economic Storm
Many of our clients have questions about the recent news regarding the U.S economy and the volatility in the world’s stock markets. These are very confusing and sometimes scary times, as financial institutions around the world are reacting to the biggest economic crisis in 80 years. There are not a lot of answers to be found about the short-term strength of the Canadian economy.
What we do know is that Canada’s lending practices are more regulated than those in the U.S. and because of this our economy and our financial institutions are doing significantly better than those in the US for the time being.
We also know that know that our economy is still growing (thanks mainly to our oil and gas exports), but may economists predict that Canada may experience a significant slow-down in the coming months should the U.S. enter a long recession.
Let’s always remember that the economy operates in a cycle, and periods of growth and recession are natural market forces.
In good times and in bad times, my golden rule when it comes to financial planning is not to let your emotions guide you in making important decisions about money. History shows us time and time again that fear and greed are the two biggest enemies to your financial health. It may be that a recovery for the stock markets are just around the corner and you will benefit from staying invested. But either way, it should be understood that those adhere to a disciplined process to handling their finances will come out ahead in the long-term.
These basic principals to proper financial planning have not changed in since Mankind began thinking about money. These principals will help you be successful in bullish and bearish times of our economy.
Here are 6 actions you can take today to make the most of your money:
1. Build a budget, reduce your debt & live beneath your means.
We’ve all heard of the importance of knowing how much money you have and what your expenses are. The basic fundamental of financial planning is to spend less than you make. When times are tough, it’s even more important to know where you are spending your money and making sure you make the most of every dollar you have.
This is also not the time to take on more debt. In fact, it may be a good idea to reduce your debt load as much as possible. Canada’s economy is usually 12-18 months behind the US., so take this time to reduce the amount of debt you are being charged interest on. With the inflation rate creeping up in Canada, it is likely that interest rates will follow.
Here at Algoma Financial and Manulife Securities we have some of the most sophisticated debt management tools and products available in Canada to help you reduce the cost of your debt.
2. Review your savings goal and stick to your savings and retirement plan.
Having an emergency fund is an important tool to any financial plan. One never knows when we might find ourselves in need of cash. Saving 3-6 months of income can help you, your family or your business weather troubled times. We can help you achieve such a fund using our Advantage Account with Manulife Bank. The account has no service fees, pays 2.9% interest, and it CDIC protected up to $100,000.
When it comes to your investments, our process will help you build a long-term investment plan. This program will help you set your investment goals, create a plan to achieve it, and help you keep track of your progress.
To ensure that you're saving enough money to achieve your investment goal, you need to check that your plan is on track at least once a year. We are committed to meet with our clients regularly to review your investment needs.
3. Assess your risk tolerance and your time horizon for your investments.
Once you know what you need to save, choose investments that match your risk tolerance and time horizon. Our Investment Needs Analysis will help you assess not only your tolerance for losing money, but your tolerance for not making enough money as well.
If your investment needs are long-term (over ten years before a child’s education, retirement etc.) you should not be overly concerned about the short-term volatility in your investment portfolio’s value. Our economy has weathered many financial storms in the past and the markets have always rewarded those who have the time-horizon and the discipline to stay committed to an investment plan.
4. Diversify, diversify, diversify.
With a mix of stock, bond and money market funds. Over the long term, almost all investments grow. But over the short term, a specific investment will go up and down depending on market conditions. All investments don't move the same way all the time. Some may go up while others lose money over the short term. By diversifying and choosing different types of investments, you can take advantage of the long term growth potential while reducing the short term volatility. Our process helps you determine the optimum asset allocation of investments to provide a diversified mix for each investment style.
5. Don't try to time the market.
Selling stock funds when a market is depressed means you are selling at a loss. Moving back into stock funds when the market begins to climb means you will likely miss out on the recovery. If you carefully chose your equities based on your risk tolerance, stick with them. They will not let you down in the long term.
6. Maintain the saving habit.
When you invest a specific sum at regular intervals, you benefit from the magic of compounding. And you reap the rewards of dollar cost averaging. When markets are down, the unit value of investments decreases. That means you can by more units for the same amount of money. When the markets start going up, as they inevitably do following a major decline, so will the value of your units.
If you have any concerns about your current financial situation or your investment plan, please don’t hesitate to contact us. With a review of your needs and current situation, and a commitment to these six basic principals of money management, we can help that you stay on course no matter what the economic conditions.
What we do know is that Canada’s lending practices are more regulated than those in the U.S. and because of this our economy and our financial institutions are doing significantly better than those in the US for the time being.
We also know that know that our economy is still growing (thanks mainly to our oil and gas exports), but may economists predict that Canada may experience a significant slow-down in the coming months should the U.S. enter a long recession.
Let’s always remember that the economy operates in a cycle, and periods of growth and recession are natural market forces.
In good times and in bad times, my golden rule when it comes to financial planning is not to let your emotions guide you in making important decisions about money. History shows us time and time again that fear and greed are the two biggest enemies to your financial health. It may be that a recovery for the stock markets are just around the corner and you will benefit from staying invested. But either way, it should be understood that those adhere to a disciplined process to handling their finances will come out ahead in the long-term.
These basic principals to proper financial planning have not changed in since Mankind began thinking about money. These principals will help you be successful in bullish and bearish times of our economy.
Here are 6 actions you can take today to make the most of your money:
1. Build a budget, reduce your debt & live beneath your means.
We’ve all heard of the importance of knowing how much money you have and what your expenses are. The basic fundamental of financial planning is to spend less than you make. When times are tough, it’s even more important to know where you are spending your money and making sure you make the most of every dollar you have.
This is also not the time to take on more debt. In fact, it may be a good idea to reduce your debt load as much as possible. Canada’s economy is usually 12-18 months behind the US., so take this time to reduce the amount of debt you are being charged interest on. With the inflation rate creeping up in Canada, it is likely that interest rates will follow.
Here at Algoma Financial and Manulife Securities we have some of the most sophisticated debt management tools and products available in Canada to help you reduce the cost of your debt.
2. Review your savings goal and stick to your savings and retirement plan.
Having an emergency fund is an important tool to any financial plan. One never knows when we might find ourselves in need of cash. Saving 3-6 months of income can help you, your family or your business weather troubled times. We can help you achieve such a fund using our Advantage Account with Manulife Bank. The account has no service fees, pays 2.9% interest, and it CDIC protected up to $100,000.
When it comes to your investments, our process will help you build a long-term investment plan. This program will help you set your investment goals, create a plan to achieve it, and help you keep track of your progress.
To ensure that you're saving enough money to achieve your investment goal, you need to check that your plan is on track at least once a year. We are committed to meet with our clients regularly to review your investment needs.
3. Assess your risk tolerance and your time horizon for your investments.
Once you know what you need to save, choose investments that match your risk tolerance and time horizon. Our Investment Needs Analysis will help you assess not only your tolerance for losing money, but your tolerance for not making enough money as well.
If your investment needs are long-term (over ten years before a child’s education, retirement etc.) you should not be overly concerned about the short-term volatility in your investment portfolio’s value. Our economy has weathered many financial storms in the past and the markets have always rewarded those who have the time-horizon and the discipline to stay committed to an investment plan.
4. Diversify, diversify, diversify.
With a mix of stock, bond and money market funds. Over the long term, almost all investments grow. But over the short term, a specific investment will go up and down depending on market conditions. All investments don't move the same way all the time. Some may go up while others lose money over the short term. By diversifying and choosing different types of investments, you can take advantage of the long term growth potential while reducing the short term volatility. Our process helps you determine the optimum asset allocation of investments to provide a diversified mix for each investment style.
5. Don't try to time the market.
Selling stock funds when a market is depressed means you are selling at a loss. Moving back into stock funds when the market begins to climb means you will likely miss out on the recovery. If you carefully chose your equities based on your risk tolerance, stick with them. They will not let you down in the long term.
6. Maintain the saving habit.
When you invest a specific sum at regular intervals, you benefit from the magic of compounding. And you reap the rewards of dollar cost averaging. When markets are down, the unit value of investments decreases. That means you can by more units for the same amount of money. When the markets start going up, as they inevitably do following a major decline, so will the value of your units.
If you have any concerns about your current financial situation or your investment plan, please don’t hesitate to contact us. With a review of your needs and current situation, and a commitment to these six basic principals of money management, we can help that you stay on course no matter what the economic conditions.
Monday, September 15, 2008
Canadian Banks "Safe and Sound" Amid Crisis
According the Superintendent of Financial Institutions in Canada, our banks are not subjected to the same concerns that those south of the border are dealing with. This is good news for investors in Canada. In the short-term the markets may be choppy, but Canada should continue to be a good place to invest. Here is the short-story below from Reuters:
OTTAWA (Reuters) - Canada's banking regulator said the country's financial institutions are healthy and it has no plans for special measures to help banks cope with the deepening crisis in world financial markets.
"No special action is planned in response to the announcements from the U.S. because the Canadian banking system is safe and sound," Rod Giles, spokesman for the Office of the Superintendent of Financial Institutions, told Reuters.
"Our institutions are well capitalized which helps them deal with the events taking place in the markets," he said.
(Reporting by Louise Egan; editing by Janet Guttsman)
OTTAWA (Reuters) - Canada's banking regulator said the country's financial institutions are healthy and it has no plans for special measures to help banks cope with the deepening crisis in world financial markets.
"No special action is planned in response to the announcements from the U.S. because the Canadian banking system is safe and sound," Rod Giles, spokesman for the Office of the Superintendent of Financial Institutions, told Reuters.
"Our institutions are well capitalized which helps them deal with the events taking place in the markets," he said.
(Reporting by Louise Egan; editing by Janet Guttsman)
Tuesday, August 26, 2008
What your children won't learn at school
In just a few days parents will getting their children ready for the beginning of a new school year. With all the excitement of what our youngsters ready-minds will be learning in their new grade, parents should be aware some basic life skills will never be taught in the classroom.
Currently, financial literacy (the basics of handling money responsibly) is not a subject covered by the schools in our province. This important topic is left to the responsibility of the parents. Our education system is designed to help our children be prepared to enter the workforce, but often, our young adults don't know how to handle their first paycheque responsibly and they are left to learn from their financial mistakes.
According to a recent article in the Globe and Mail, the average child between the ages of eight and 13 is exposed to some 40,000 commercials per year. With so many commercials vying for your child’s attention, it’s almost never too early to teach your child about responsible money management.
According to an article published online by the B.C. Council for Families (BCCF), “By far, most of what children learn about money concepts comes from what they observe their parents doing,.”
Age-appropriate information and exercises
Start teaching your child about money when they first begin asking about it, often around the age of three or four, says the BCCF. The concept of money is a bit abstract for most preschoolers, but you can make it easier to understand by giving them an allowance.
“Since kids at this age need to see and touch their money, start by giving it to them all in coin, and to start with, the same coin,” says the BCCF. A good exercise for kids this age is to decorate three jars or cans, then label them with symbols that stand for: Spend, Save, and Share. Their coins go into the three jars in proportions that depend on the money values you want to teach.
By the early elementary school years, kids are getting into more “hard-core consumerism,” says the BCCF, so this is a good time to talk to them about how to make good choices. Help them open a savings account and talk about longer-term savings goals. During the late elementary years, sit down together to create a budget that includes spending, sharing and long-term saving.
When your children are in high school age, consider introducing them to what your family expenses really look like, says the BCCF. “Give them some real insight by having them make all the deposits and write all the cheques for a month. Show them how to reconcile a bank statement and talk about why you choose to pay things at certain times.”
For fun and information
You and your children might have fun with the money exercises and games on these websites — and learn something while you’re at it:
* www.younginvestor.com is a website for parents, teachers and children of all ages with educational exercises
* http://www.kidsmoney.org/ is a website in six languages offering articles, games and exercises for kids and parents
Handling money is a skill that every child should learn. Don't be afraid to talk to your children about the subject. With all the pressure kids have today to live up to a certain lifestyle from the advertising they are subjected too, it's important that they can distinguish between the fantasy they see on TV, the movies and the internet and the reality we all face as adults.
Currently, financial literacy (the basics of handling money responsibly) is not a subject covered by the schools in our province. This important topic is left to the responsibility of the parents. Our education system is designed to help our children be prepared to enter the workforce, but often, our young adults don't know how to handle their first paycheque responsibly and they are left to learn from their financial mistakes.
According to a recent article in the Globe and Mail, the average child between the ages of eight and 13 is exposed to some 40,000 commercials per year. With so many commercials vying for your child’s attention, it’s almost never too early to teach your child about responsible money management.
According to an article published online by the B.C. Council for Families (BCCF), “By far, most of what children learn about money concepts comes from what they observe their parents doing,.”
Age-appropriate information and exercises
Start teaching your child about money when they first begin asking about it, often around the age of three or four, says the BCCF. The concept of money is a bit abstract for most preschoolers, but you can make it easier to understand by giving them an allowance.
“Since kids at this age need to see and touch their money, start by giving it to them all in coin, and to start with, the same coin,” says the BCCF. A good exercise for kids this age is to decorate three jars or cans, then label them with symbols that stand for: Spend, Save, and Share. Their coins go into the three jars in proportions that depend on the money values you want to teach.
By the early elementary school years, kids are getting into more “hard-core consumerism,” says the BCCF, so this is a good time to talk to them about how to make good choices. Help them open a savings account and talk about longer-term savings goals. During the late elementary years, sit down together to create a budget that includes spending, sharing and long-term saving.
When your children are in high school age, consider introducing them to what your family expenses really look like, says the BCCF. “Give them some real insight by having them make all the deposits and write all the cheques for a month. Show them how to reconcile a bank statement and talk about why you choose to pay things at certain times.”
For fun and information
You and your children might have fun with the money exercises and games on these websites — and learn something while you’re at it:
* www.younginvestor.com is a website for parents, teachers and children of all ages with educational exercises
* http://www.kidsmoney.org/ is a website in six languages offering articles, games and exercises for kids and parents
Handling money is a skill that every child should learn. Don't be afraid to talk to your children about the subject. With all the pressure kids have today to live up to a certain lifestyle from the advertising they are subjected too, it's important that they can distinguish between the fantasy they see on TV, the movies and the internet and the reality we all face as adults.
Friday, June 27, 2008
Be prepared to share more information about yourself with financial institutions
The world continues to change since the terrorist attacks of 9/11. The Canadian Government has released significant new amendments to the ‘Proceeds of Crime (Money Laundering) and Terrorist Financing Act effective June 23rd, 2008 which brings the act in line with international standards.
These new amendments to the Act will require financial institutions (banks, investment dealers, and insurance companies etc.) to collect more information on their clients and be more prudent in monitoring client transaction than ever before. Also, be prepared for you financial advisor to ask a lot more questions about your intentions with your money.
Under the new amendments, all financial institutions have an additional obligation to report ‘suspicious transactions’ to the government. If a financial advisor, finds that a client is attempting to request a suspicious transactions (whether or not the transaction is completed), he or she must now file a report with the Financial Transactions and Reports Analysis Centre of Canada.
Further, it is now an Advisor’s duty to understand where your money came from and have an idea of what your purposes are with the money. To be honest, a client does not have to be too specific here. It is acceptable, for example, to tell an advisor, the money comes from your wages and you are saving for retirement.
Also, your financial institutions will have a responsibility to prove their clients identities. Even if you have been dealing with the same person for years, be prepared to provide at least one copy of picture ID for new transactions.
Another new responsibility your advisor or broker will have is to ask if your money is coming from, or being used for, a third person. If you are making an investment for another individual, you will have to answer questions about this person, and your relationship with them. Signatures from the third party may also be necessary in some situations.
Your advisor or broker will also have to know if you or someone from your immediate family has worked for any level of provincial or federal government, including embassies or if you have political exposure to foreign persons.
The act sets out penalties and sanctions against firms that don’t comply with these regulations, so there is no doubt that these new changes will effect all of our financial transactions.
As Investment Professionals, we understand the reasons behind the new regulations and we want to help the government prevent illegal money from entering the system. However, these new requirements will cause more paperwork for everyone in the industry, more frustration for the average investors and at the end of the day will probably raise the costs of doing business for the vast majority of honest consumers. Unfortunately, those that want to break the law will probably find others ways around these regulations.
These new amendments to the Act will require financial institutions (banks, investment dealers, and insurance companies etc.) to collect more information on their clients and be more prudent in monitoring client transaction than ever before. Also, be prepared for you financial advisor to ask a lot more questions about your intentions with your money.
Under the new amendments, all financial institutions have an additional obligation to report ‘suspicious transactions’ to the government. If a financial advisor, finds that a client is attempting to request a suspicious transactions (whether or not the transaction is completed), he or she must now file a report with the Financial Transactions and Reports Analysis Centre of Canada.
Further, it is now an Advisor’s duty to understand where your money came from and have an idea of what your purposes are with the money. To be honest, a client does not have to be too specific here. It is acceptable, for example, to tell an advisor, the money comes from your wages and you are saving for retirement.
Also, your financial institutions will have a responsibility to prove their clients identities. Even if you have been dealing with the same person for years, be prepared to provide at least one copy of picture ID for new transactions.
Another new responsibility your advisor or broker will have is to ask if your money is coming from, or being used for, a third person. If you are making an investment for another individual, you will have to answer questions about this person, and your relationship with them. Signatures from the third party may also be necessary in some situations.
Your advisor or broker will also have to know if you or someone from your immediate family has worked for any level of provincial or federal government, including embassies or if you have political exposure to foreign persons.
The act sets out penalties and sanctions against firms that don’t comply with these regulations, so there is no doubt that these new changes will effect all of our financial transactions.
As Investment Professionals, we understand the reasons behind the new regulations and we want to help the government prevent illegal money from entering the system. However, these new requirements will cause more paperwork for everyone in the industry, more frustration for the average investors and at the end of the day will probably raise the costs of doing business for the vast majority of honest consumers. Unfortunately, those that want to break the law will probably find others ways around these regulations.
Tuesday, May 27, 2008
What To Do With That Tax Refund?
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."
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."
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.
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