Category Archives for "Retirement"

Need Money? Should you Withdraw from your RRSP?

By Randall Orser | Budget , Personal Finances , Personal Income Tax , Retirement

Most of us do not think about withdrawing from our RRSP until we retire, but in some instances it might make sense to cash in a portion of your savings early to help finance your studies, buy a home or help you get through financial difficulties during the present pandemic.  Here are some examples of times you might want to access your RRSP funds.

  • If you want to become a homeowner but you are finding it difficult to save up enough for a down payment, through the Home Buyers' Plan (HBP) you may be able to get the financial boost that you need.  Under this plan you can withdraw up to $35,000 from your RRSP to buy or build a home provided that you are a first time buyer (defined as not having owned a home in the four year period preceding a home purchase).  The amount that you take out is repayable over 15 years.  Repayments are made as a RRSP contribution designated as a repayment on your tax return.  If you don't make a repayment the amount required will be included as income on your tax return.  Contributions must be in the RRSP for 90 days before they can be withdrawn under the HBP.
  • If you want to further your education by learning new skills or training for a new career you can enrol in the Lifelong Learning Plan (LLP) that allows you to withdraw funds from your RRSP to fund your tuition and help with other costs.  The plan allows you to withdraw up to $10,000 in a calendar year up to a total of $20,000.  The funds have to be repaid over a period of ten years avoid it being included as income.  
  • If you have income volatility an early withdrawal might make sense. Only the HBP and the LLP allow you to withdraw funds from your RRSP tax free if you have no other income in the withdrawal year your tax rate may be low.  Alternatively you could move the money from to a TFSA without paying much tax.  In both your RRSP and TFSA you need to make sure when you are making withdrawals and paying back that you do not go over your contribution limit in a year.    
  • If you expect to have a clawback on your OAS and you decide to retire at 60.  In that instance your income will probably drop until you reach age 65 when you will start to receive your company pension, CPP, OAS and money from your RRSP.  As your total income at age 65 may exceed the OAS clawback limit ($79,054 in 2020) your OAS will be subject to a clawback and 15% tax.  It would make sense to withdraw money from your RRSP over these five years probably saving you a lot of tax.  If you don't need the money it might make sense to use your RRSP for income until you reach age 70 as each year you defer claiming your government benefits means that they will increase.

However you decide to use your RRSP you need to do it with caution bearing in mind that the intent of a RRSP is to contribute regularly to a fund and let the money grow over the years until you retire.  Don't forget that any withdrawals are taxable.

From an article by Margaret Craig-Bourdin

Think Carefully Before Lending Money to Relatives or Friends

By Randall Orser | Budget , Personal Finances , Retirement

In this time of Covid-19 it is important to consider all the implications of loaning money to friends or relatives. The pandemic has resulted in many Canadians having financial problems due to losing their job and they inevitably turn to friends and relatives to help them out.  Before you make the decision to loan them money you need to consider the following:

  •  It is important to put yourself first, especially now,  you need to ask yourself if you can really afford to lend money.  Everyone wants to help their friends and family but extending a loan should not cause you to be in financial straits.  It would be better for the loved one to consider applying for the various government programs available especially those for small businesses. You need to keep all the cash that you need and be prepared for the worst case scenario in your own circumstances.   You should not sacrifice your retirement plans to help your kids out even though you want to and you need to be realistic about the risk of not getting your money back.
  • Be prepared to never see your money again, the loan that you make may become a gift as even with their best intentions their circumstances may mean that they are unable to pay you back.  You could ask for collateral against the loan, but that depends on how far you are prepared to go to collect and also protect your relationship with that person. A parent who lends money to a child should also consider other family members and and view the loan not as a debt but as an advance on their inheritance.
  • Ask why they need the money, if you are advancing a loan then you should know why the money is needed so ask questions.  If you are loaning someone money to help maintain a lifestyle that they cannot really maybe it would be better to ask questions to understand their circumstances and advise them as to how they can reduce their spending.  You may be able to help in other ways rather than loaning money such as buying groceries.  
  • Set the terms, establish terms for the loan, specify the amount, the date the loan should be repaid or a repayment schedule and whether or not you will be charging interest. To secure the loan you could register an asset such as a debt free vehicle or the borrower could name you as an irrevocable beneficiary in a life insurance policy.  This makes it possible to protect the loan amount up front from other creditors for example in the event of bankruptcy.
  • Think twice about guaranteeing a loan, as this can be risky, you may end up on hook for not only the debt but the accrued interest.  A lender may not feel that they are involved in the loan if they do not provide the funds but in fact they are taking on a new debt obligation if the borrower defaults.  Be aware that your children may have their eyes on your assets and what they may inherit and may use emotional blackmail to get the money they want.  It can be difficult to say no to them if you have loaned them money before.  Even if you do help out especially to keep a business afloat, it may be a short term solution and the business may not improve its financial situation under the current circumstances and closing down may be inevitable.

If you seriously considering extending a loan to a friend or relative, it might be prudent to get some guidance from a professional beforehand.

From an article by Mathieu de Lajartre

Over-contributed to your TFSA or RRSP? Here’s what you should do.

By Randall Orser | Investments , Personal Finances , Personal Income Tax , Retirement

It can be an easy mistake to over contribute to your TFSA or RRSP especially if you have an amount automatically contributed each month. If you find that has happened to you there are some basics that you should know to remedy this situation.

RRSP Contributions

The penalty for RRSP over contributions is 1% per month for each month that you are over the limit.  The CRA  does allow you a $2000 grace amount for over contributions but that amount is not tax deductible.  The best way for you to correct an overpayment is to withdraw the amount, though it will be subject to taxes.  You will be able to claim an offsetting deduction if you meet certain conditions (link to CRA Website).  The main condition is that you make sure the the over contribution is withdrawn in the year that it was made, the year in which you receive an assessment for the year of contribution, or in the year following each of these years.

If you meet the conditions for offsetting deduction you can have withholding tax waived on the withdrawal by filing form T3012A.  If you don't do this then the tax withheld at source can be claimed as tax paid on your tax return.  It is very important to keep track of your RRSP contributions and make sure that you withdraw any over contribution so as to penalties that may arise.

TFSA Contributions

Over contributions to TFSA's happens often especially when people have multiple accounts in different banks and they lose track of those accounts over time.  As the limits allowable have varied depending on the year it can become really confusing to contributors.  Two common mistakes are:

  • Replacing a TFSA withdrawal in the same year - if your contribution limit has already been reached you have to wait to replace a withdrawal until January in the next calendar year.  This often happens when the TFSA account is used in the same way as a savings account with repeated withdrawals and contributions which can create an over-contribution as withdrawals do not lower the contribution limit.
  • When a TFSA balance is transferred to another institution, if this is not done as a direct transfer it will be counted as a second contribution and the withdrawal amount will not be added to your  TFSA room until the following year.

TFSA over contributions are 1% per month over the term of the over-contribution until the year end based on the highest excess amount for the month.  There is no $2000 grace amount as with a RRSP and penalties for over contribution must be paid by June 30th.

For more information on TFSA contributions see the CRA's TFSA Guide (RC4466) which also provides you with a RC343 worksheet  for you to keep track of your contributions and withdrawals.  It is also important to review your notice of assessment that you receive from the CRA which states how much contribution room that you have in your TFSA and RRSP for the current year.  It is a good idea to compare the CRA amounts with your own records.   In addition you can get a copy of your contribution history from the CRA's My Account service.

From an article by Denise Deveau

Planning for the Future of Your Business

By Randall Orser | Business , Retirement , Small Business

In 2011 the Canadian Federation of Independent Businesses conducted a poll that revealed that only 10% of small business owners had a succession plan.  As a small business owner you need to plan for your company's future change of ownership.  A careful exit strategy will help you to maintain the value of your company and your legacy and will ensure a smooth transition to a new owner.

A good succession plan will maintain positive relationships with employees and business partners that will help to bring a good sale price.  It will provide financial security for your heirs and other stakeholders as a plan is in place to deal with unexpected events such as death or illness.

Changes in ownership can be stressful for employees, suppliers and customers so your succession strategy needs to include communication plans to make sure that everyone is kept informed during the changeover thereby ensuring that the business continues to run smoothly.

If you expect to be leaving your business within the next five years you need to start planning right away.  Even if your business is fairly new you need to have a plan in place should the unexpected happen.  

Susan Ward a Canadian business writer says that 70% of businesses do not survive the transition from the founder to the second generation due to poor or no planning, and she offers the following tips for succession planning:

  1. Start business succession planning early, five years in advance is good, ten years is better. Think about including a business exit strategy right into your initial business plan.
  2. Make sure that you involve your family in all business succession planning discussions.  This will help to ensure that everyone is aware of your plans.  It is important to pay attention to the personal feelings, ambitions and goals of all members of the family who might be directly involved with the succession.
  3. Plan realistically, if your children do not have the skills or have no interest in taking over the company from you then consider a different family member who might be more capable.  If there is no one in the family to take over the business then you should consider selling it.  Whatever you decide it should be in the best interests of the business that you have worked hard to make successful.  
  4. Don't plan for everyone to have an equal share in the business.  It is fairer for those who have an active part in running the business to have a larger share of the ownership of the business than non active family members.  You could also transfer complete ownership to your chosen successor and make other financial arrangements for other members of the family.
  5. Make sure that you work with and train your successor for a few years so that they are ready and able to take over the reins should the need arise.  It can be difficult to teach someone your business skills and share decision making but it will be in the best interests of the business. 
  6. Make sure that you get outside help with your succession planning from your lawyer, accountant and financial planner.  They will help you to put together a good plan as well as plan asset transfer tax strategies to minimize taxes due upon your death. 

​From an article by Susan Ward and Freedom 55 Financial

Covid-19 Now is the Time to get Serious About Your Financial Wellness

By Randall Orser | Budget , Personal Finances , Personal Income Tax , Retirement

A survey done for the MNP Consumer Debt Index when the Covid-19 pandemic started showed that 49% of Canadians asked were $200 or less away from being able to settle their bills and 25% of these people said they were already behind on their payments. In this uncertain economic environment are many are unable to realize their life goals and some even face bankruptcy.  

Lack of financial security is a big cause of stress, lack of sleep and tension in relationships as people and couples are unsure about what their future will look like.  In fact 41% of Canadians say that money concerns are the biggest cause of stress in their life  The fear of the financial impact of the pandemic is a greater contributor to mental health than getting sick or losing a loved one.

This information begs the question "Why are people finding themselves in this financial predicament? There are a number of answers to this question including costs rising faster than wages which has caused many to incur debt, but the big reason has to be ignoring the necessity of financial planning.  Financial planning includes saving for the future, retirement and making informed financial decisions and living within one's means and building a emergency fund. The pandemic brings to the forefront this long avoided issue, it is time to become responsible for your financial health. 

Many use the lack of financial knowledge as a reason for not planning. This is no excuse for avoiding the issue as financial literacy can be gained from books, seminars, blogs, websites and from working with a financial planner, there is lots of help out there.  Here are some tips that may help your immediate financial situation:

  • Make a new financial plan, your income may have been reduced and you need to revise your budget and priorities accordingly.  If you are not able to pay your bills, you should not be contributing to your child's college fund making contributions to your RRSP.   
  • Don't worry about paying down debts quickly, make minimum payments and put the rest into an emergency fund.  Your emergency fund should be enough to cover three to six months of  expenses should your income be severely reduced.
  • Take advantage of the help that your bank may be offering such as reduced interest rates on credit cards, deferred mortgage payments and low interest loans or lines of credit to pay off higher interest debts.
  • Instead of making plans for the next 10 or 20 years make your financial plans cover a shorter period of time. 

Making the decision to start taking control of your finances or making your financial goals more realistic will help you to deal with the stress that the pandemic is causing.

See our previous articles for more information:

​Financial Skills you Should Have Learned in High School

Reasons why you Should Budget your Money

Ever Wondered how the Government Spends Your Tax Dollars?

By Randall Orser | Business Income Taxes , Personal Income Tax , Retirement , Sales Taxes

Most of us hate paying our taxes and believe that we are paying too much.  Unfortunately, all of us have to chip in so that the federal government can provide the essential public services that we need in our daily lives. 

Torstar Community Brands took a by-the-numbers look at how the federal government spent our tax dollars between 2012 and 2018.  As with most of us it has been a challenge for the government to make ends meet, and an analysis of six years’ worth of financial statements shows that they have spent considerably more than they have taken in.  The gap has widened by $1.2 billion in the last fiscal year.  So, where did our money go?

In the fiscal year 2017-2018 government spending was as follows: 

29.84% went to National defence, crown corporations and other direct programs – including more than 100 departments and Crown corporations.  The government departments included Citizenship and Immigration, Indigenous Services and Infrastructure Canada and cost billions to operate.   

15.30% went to transfers supporting health and other social programs 

15.23% went to benefits for the elderly.  Transfers to elder benefits have been increasing over the years as these benefits programs were originally designed on a presumption of lifespan that is outdated as people are living a lot longer now.  By 2030 one in four Canadians will be a senior compared to one in seven in 2012.  However, the government still benefits from seniors as they pay income tax on their RRSP withdrawals.

14.17% went to other transfer payments 

7.05% went to benefits for children 

6.58% went to public debt charges 

5.93% went to employment insurance

5.91% went to fiscal arrangements and other transfers

Where does this money come from?

In the fiscal year 2017 -2018 sources of income for the government were as follows: 

48.98% came from Personal income taxes 

15.4% came from Corporate income taxes 

11.72% came from Goods and Services Tax

9.37% came from other revenue

6.74% came from EI revenue

2.5% came from non-resident Income tax

1.89% came from other excise taxes and duties 

1.83% came from energy taxes

1.73% came from import customs duties

Canadians are taxed from 15% for those who earn $47,630 or less up to the highest rate of 33% for those earning $210,371 and over.  Although we all like to complain that we pay too much tax compared to other countries, it is worth considering the benefits that we receive from the government that many other countries do not provide to their citizens. 

From an article by Sheila Wang in YorkRegion.com 

Personal Finance New Year’s Resolutions

By Randall Orser | Budget , Investments , Personal Finances , Personal Income Tax , Retirement

The start of a new year is the perfect time to take stock of your financial situation and see how you can make changes to improve it.   You need to make firm resolutions to help you get closer to your financial goals whether it be saving for retirement, a down payment for a house or starting a business.  Here are some considerations that you might want to add to your resolutions list. 

RESOLVE TO DO BETTER IN 2020 – Identify the financial mistakes that you made in 2019 and how you could have avoided them so that you are armed with that knowledge to help you avoid making the same mistakes in 2020.

Prioritize Your Debts – Make a list of all your debts and organize them according to the annual interest rate.  Plan to pay off those with the highest interest rate first, these will probably be your credit cards.  It makes no sense to save money in an account with a low interest rate when you are paying high rates of interest on your credit cards. You might want to also think about selling any assets that you might have such as matured savings bonds and using the money to pay off high interest debts. 

Open a Registered Retirement Savings Plan – It’s never too late to start saving for retirement.  Meet with a financial planner and let them advise you about the right plan for you.  Even if you only contribute $50 a month it soon starts to add up and any contributions will help to lower to your income tax bill. 

Rebalance Your Investment Portfolio -  Meet with your financial advisor to ensure that your investments are still working for you, and that once attractive investments are still that way or no longer appropriate.  If your financial goals have changed then you may need to rebalance your investment portfolio.  

Set up an Automated Savings Plan – If your willpower to save money is not too great then consider setting up an automated savings plan with your bank.  “Paying Yourself First” is one of the most effective ways to save money.  With an ASP a specific amount of money will automatically be transferred to your savings account at regular intervals before you have the chance to get your hands on it.  With regular deposits like this earning compound interest your savings will grow faster.

Collect Your Change – You may think that this is not a great way to save money, but you could be surprised!  Whenever you pay with cash save the change or take the money that you get back from recycling bottles and cans at the store and put it into a jar. At the end of the year take the change you have accumulated and use it to pay down debt.  

Commit to No Spend Days – Plan on taking regular no spend days or weekends, eat at home, find free entertainment and skip shopping.  This is probably best done during cold and rainy weather that makes you want to stay indoors.  Maintain the habit throughout the year to get the best financial benefit.

Get Healthy Without Joining a Gym – Save money on expensive gym memberships by doing free exercise videos on-line, working out at the park or taking winter hikes.  There are a number of free apps such as Fitbit Coach and Nike Training Club that you can use to do workouts at home.

Cut Back on Your Bad Money Habits – these usually include eating out too much and buying too many clothes. Identify what makes you want to indulge in your bad habits and try a different activity to replace it.  If you eat out too much try prepping your meals for the week on Sunday and ask friends and family to help you. 

Start Using Personal Finance Software -  This will enable you to keep track of where your money goes.  If you don’t know how much you spend on coffee, haircuts, movie tickets or eating out how can you start to cut your spending?

Read a Financial Book Regularly -  Some books recommended for Canadians are:

Personal Finance for Canadians for Dummies (2018) Eric Tyson

Millionaire Teacher (2nd ed 2017) by Andrew Hallam

Wealthing Like Rabbits by Robert R Brown

Worry Free Money (2017) by Shannon Lee Simmons

Happy Go Money (2019) by Melissa Leong

The Value of Simple (2018) – John A Robertson

The Latte Factor (2019) David Bach

Retirement Income for Life (2018) Frederick Vettes

Pros and Cons of Reverse Mortgages

By Randall Orser | Budget , Personal Finances , Retirement

The number of seniors taking out a reverse mortgage is increasing year by year as retirees are finding that they do not have enough money to fund their retirement.  If you are thinking about taking out a reverse mortgage, as with any other big decision it is important to make sure that you know exactly how such a loan works and whether it is a good decision for you.  

Pros:

  • You continue to retain the title and live in your home.  You still have to pay your property taxes, insurance and maintenance.
  • You receive the proceeds of the loan as tax-free cash and you can use it however you wish such as pay off debts or travel.
  • You do not make any monthly mortgage payments until you decide to move or sell then the full loan becomes due.  You have the option to pay off the full amount of the principle and interest at any time though you may be charged a fee to pay off your loan early.
  • A reverse mortgage is a non-recourse loan.  You and your heirs are not responsible for any amount of the mortgage that exceeds the value of your home as long as you have paid all the property taxes and insurance.
  • You can usually decide how you want to receive the funds, all at once or to advances over time.

Cons:

  • Interest rates are higher than other secured lending options as there are no monthly payments required.  
  • The balance of the loan increases over time as does the interest on the loan.
  • If you default on the reverse mortgage you will have to pay back the entire amount due on the loan.  Lenders may have their own definitions of defaulting on your loan but in general ways you can default include: 
    • Using the money from the reverse mortgage for something illegal
    • Being dishonest in your mortgage application
    • Letting your house fall into a state of disrepair thereby lowering its value
    • Not following the conditions that you agreed to when you took out the mortgage.
  • When you die, your estate will have to pay back the full amount of the loan.  If both you and your spouse own your home together the loan will have to be repaid when the last one of you dies or sells your home.
  • The amount of time that you or your estate will have to pay off a reverse mortgage will vary.  If you die then usually your estate will have 180 days to pay off the loan, but I if you move into long-term care then you could have one year to pay it back.  This is important information that you need to get from the lender before taking out the loan.

Costs involved in taking out a reverse mortgage vary depending on the lender but usually include:

  • A higher interest rate than for a traditional mortgage.
  • A home appraisal fee
  • A setup fee
  • A prepayment penalty if you pay off your reverse mortgage early
  • Legal fees for closing costs or independent legal advice

Costs may be added to the balance of your loan or you may have to pay them upfront.

Taking out a reverse mortgage greatly affects the equity that you will have left in your home when you sell or die, and how much will be left for your heirs.  It is usually a good idea to speak to your family, a financial advisor and even your lawyer to make sure that you are fully understand how a reverse mortgage works and whether or not it is the best decision for you.

Your financial advisor may suggest alternatives to a reverse mortgage such as:

  • Taking out a different kind of loan such as a personal loan, line of credit or credit card
  • Selling your home and moving buying a smaller one 
  • Selling your home and renting another home or apartment
  • Moving into assisted living or other alternative housing.

Thinking About Taking out a Reverse Mortgage? Have you Done Your Homework?

By Randall Orser | Budget , Personal Finances , Personal Income Tax , Retirement

If you are retired or close to retirement and finding yourself short of money then a reverse mortgage might be the answer, but make sure you do your homework before you take out this type of loan.

What is a Reverse Mortgage?

A reverse mortgage is a loan secured against the value of your home.  In Canada you have to be a homeowner’s aged 55 or over to take out a reverse mortgage.  You can convert up to 55% of your home’s value into tax free cash to use as you wish.  With a reverse mortgage you retain ownership of your home and there are no monthly payments required.  The loan is only repaid when your home is sold when you either move out or the last borrower dies.   

Reverse Mortgages are surging in Canada at about 25% per year as older people are finding themselves without the income that they need for their retirement and this is a source of additional income for them.  Outstanding balances on reverse mortgages have more than doubled in the four years up to 2019 and now stand at $3.12billion, although this is less than 1% of the residential mortgages that have been issued, they are growing at a much faster pace.  

At present the big banks do not offer reverse mortgages they can only be taken out with two lenders –  the leading provider is Canadian Home Income Plan (CHIP) from HomeEquity Bank which has offered reverse mortgages since 1986, the second is the PATH Home Plan from  Equitable Bank available in BC, Alberta and Ontario.  Some Credit Unions in BC and Ontario also offer reverse mortgages. 

In order to qualify for a Reverse Mortgage in Canada, these factors are taken into consideration:

  • Both you and your spouse must be at least 55 years old.
  • The home that you are using to secure a reverse mortgage must be your primary residence, and you live there at least six months of the year.
  • The location of your home.
  • The type of home – detached, condo, townhouse etc.
  • The appraised value of your home – it must be at least $150,000.
  • The condition of your home.
  • The equity that you have in your home.
  • If you have a mortgage, loans or a line of credit secured on the home, you must pay it off before taking out a reverse mortgage.  
  • The older you are and the more equity that you have in the home the more money you could get but the amount is also impacted by current market trends. 

How to access the money

You can usually take out the money from your loan either as a one-time lump sum or by taking some up front and the remainder over time.  You need to ask your lender what options are open to you and if there are restrictions or fees.  

A reverse mortgage may sound like a great idea but is it the best option for you?

The Worst Financial Mistakes that you can Make

By Randall Orser | Budget , Investments , Personal Finances , Retirement

When people are working on their budget or long-term financial plan, they are making changes to their spending. There are some common mistakes that people make when handling their finances that can come back to bite them in the future, but there are steps that can be taken to fix these mistakes.

  1. Thinking that things will work out ok in the end – putting your head in the sand and thinking that things will magically work out means that nothing is going to change.  You have to create a solid plan to save and to follow a budget which will determine how and when you will spend your money.  It is important to know that budget and financial plan are not bad words! 
  2. Relying on your credit cards to get by -  if you do this a few times it might not be too difficult to get out of debt, but if you make it a habit then you are liable to rack up a lot of debt in a short period of time.  Emergencies can and do come up unexpectedly, so you need to be prepared by starting an emergency savings fund.   If you have that you will not need to use your credit card for emergencies.   You need to make a goal to pay off your credit card and to not use it for the next year.  If you do use it make sure to pay it off each month.  
  3. Failing to plan for retirement – you should be making regular contributions to your retirement plan even if you are in your twenties.  The earlier you start the longer you will have for your fund to grow and benefit you in the long run.  Contributing to  a Registered Retirement Savings Plan is also a good way to save on your tax bill.
  4. Giving in to pressure to take the next big step – milestones in your life will affect your financial situation, such as getting married, a career change, buying a house or starting a family.  Only you can decide when you are ready to take these big steps so do not let friends and family rush you into something that you are not ready for otherwise you might resent the step that you took.  

From an article by Miriam Caldwell

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