Tuesday, August 24, 2010

New credit card measures coming in Canada

According to an article by CTV.ca, new credit card measures will be coming to place on September 1, 2010. Back in May of 2009, Flaherty announced nine new proposed regulations designed to make the industry more transparent and fairer to consumers. The changes to the cost-of-borrowing regulations would have to be approved in Parliament to become law.

The time has come for implementation and one of the biggest changes is banks will be required to include information on your credit card statements about the true cost of borrowing. It is not clear yet exactly what needs to be shown but here are some examples of the type of information that needs to be on your statement as of September 1, 2010.

If you have a $500 balance on your credit card, they will have to shown you the impact of only paying the minimum income. Based on a minimum payment of 3% at a 19.5% interest rate, the new statements will need to show that only paying the minimum income will meant that it will take 78 months to pay off that $500 and the total cost will be $847.63. Essentially that means that $500 purchase will create $347.63 of interest by only paying the minimum.

In another scenario, if we assume the same $500 balance and the same 19.5% interest rate but now a $15 per month fixed payment instead of 3% on an declining balance, that balance will be paid off in only 49 months and the total cost would drop to $776.

The point to these changes is simply to make people aware that only paying the minimum on credit cards is a very expensive way to buy things. Statistics show that about 30% of Canadians keep a balance on their credit cards. According to Equifax Canada as of September 2009, the total outstanding credit card debt in Canada hit an eye-popping $78 billion. If you are part of this group that keeps a balance on your credit cards, make sure you have a plan to pay off these cards by either consolidating to a lower interest card or line of credit or at least make payments greater than the minimum.

If for example, you make fixed payments of $20 instead of the $15 per month, the total cost of that $500 balance is only $647 and the balance will be paid off in 33 months. A payment of $5 more would save $79 in interest and pay off the card 1 year, 4 months sooner.

All of these calculations we done using online calculators. My two favorite calculators were from Financial Consumer Agency of Canada
and CreditCanada.ca.

Will putting this information on statements make a difference?

I guess only time will tell. Cynically, I'm not sure this will have a big impact. It you don't know that it is important to make more than minimum payments on credit cards, then chances are you have been living under a rock.

That being said I guess I should not be so surprised. My friend Ray Turchansky, financial journalist said it reminded him of the days when cigarette companies were required to put pictures of rotting teeth and smoke impacted lungs on every package. We all knew smoking was bad for you but maybe we needed some visual reminders.

Image of Author Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.jimyih.com and www.retirehappy.ca. Inquiries can be emailed to feedback@WealthWebGurus.com

Posted via email from JIM Yih

Sunday, August 1, 2010

Take control of your portfolio before you retire

I've always said, there is a difference between pre-retirement investing and post retirement investing. As a result, retirees need to re-evaluate their investment portfolios the closer they get to retirement. I suggest that people who are three to 5 years from retirement need to get serious about it and start making sure their portfolios are positioned so there are in control over their retirement date.

If you don't agree, here are some stories about real people that might get you thinking:

As reported in the Globe an Mail, Ron, age 74, in BC saw his life take a turn to the dark side when the stock market collapsed in 2008. With no pension, this former chartered accountant and high-level finance executive relied on his retirement savings. Not only did he feel he was 'losing control of his money' but he also felt he was losing control of his life. Although well respected in social circles, Ron started to feel anxiety and depression to the point where he could not leave the house. Do you know people who retirees who were really impacted by market corrections in the past 10 years? Not only does it affect their finances but it affects their life and happiness and health.

Sharon, from Edmonton, was a nurse for 28 years. At 61, she was getting ready for retirement when the stock market took 35% of her RRSPs. Although she had a pension through work, the psychological affects of losing $40,000 overnight crippled her enthusiasm for what was supposed to be the Golden years. She decided to delay retirement for a couple of years despite having very little enjoyment with her job. Delaying retirement was not good for her, nor her employee. Do you know people who delayed retirement because of the stock market or mutual funds?

Tim from Grande Prairie, was excited to retire. Begin financially responsible he retired with a significant nest-egg of $750,000 at the age of 57. When he retired, he was excited to hear that a financial advisor could invest his money and pay him 8% per year using a combination of income trusts, dividends and income paying mutual funds. The distributions would pay him just under $60,000 per year and although it was not promised, the goal would also be to preserve the $750,000. Unfortunately for Tim, the markets took a turn for the worse, new tax rules hurt the income trust market and not only was Tim's income cut back from $60,000 per year to $40,000 per year but his $750,000 took a massive hit of $150,000 and now was only worth $600,000. Tim, not only went back to work but also made major changes to his lifestyle. He still has a bad taste in his mouth and wonders how retirement can be called the "GOLDEN" years. Do you know people who retired but went back to work because of the stock markets or mutual funds?

Todd and Lenore, happily retired at the age of 60 in early 1999 at the height of the markets. For the first years, they enjoyed what was supposed to be the best years of their life with a couple of holidays financed through Lenore's RRSPs. Todd had a pension which was sufficient to cover their basic monthly expenses. They each had CPP which gave them a bit of a financial cushion and their plan was to use the RRSPs to enjoy the golden years with some travelling and to cover some of their hobbies like Golf and Tennis. Unfortunately, for Todd and Lenore, the bursting of the stock market bubble in 2000 cut their RRSP savings by 25%. Their instinct was simply to cut their travel until the stock market recovered. The problem was over the course of the next 10 years, the stock market recovered but then took another major hit. In 2009, Todd was diagnosed with Cancer and would lose the future opportunity to make up the time lost to travel. Do you know people who cut back on their lifestyle in the Golden years because of the stock market and the fear of running out of money too quickly?

The bottom line is there is a difference between investing for retirement and investing in retirement. Retirees who recognize this fact and make adjustments prior to retirement need have the opportunity to take control of their portfolios and their retirement.

Other related investing

Investing in retirement is different than investing for retirement (Canadian Finance Blog)

Be aware of the retirement risk zone

Surviving the retirement risk zone with guaranteed income products

Conservative investing is an abused term

Markets hit retirees the hardest

Retirees should be more conservative with their portfolios

Image of Author Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.retirehappy.ca or WealthWebGurs.com.

Posted via email from JIM Yih

Tuesday, June 29, 2010

Learning about Locked-in Retirement Accounts

Every industry uses a set of acronyms and the financial industry is no different.  When is comes to Locked in accounts, there are LIRAs and LIFs.

What are locked-in accounts?

Locked in accounts are simply money that originates from a pension plan.  As long as you are employed by a company or organization with a pension, you money stays in that pension.  There are two kinds of pension plans – defined benefit plans and defined contribution plans.

But when you leave that company, you may have the choice to move the money into a personal plan.  Many people assume you can move pension money into a RRSP but that can only happen if it is a relatively small amount of money.

To read more about LIRAs and LIFs, read the whole article at Canadian Finance Blog.

Other Realted Articles

Pensions are the foundation of retirement planning

Issues to ponder before you transfer out your pension

Think Twice before you move out your pension money

Considerations for pension choices

Changes to Alberta Pension Rules

Pensions provide safe, guaranteed income in retirement

Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.WealthWebGurus.com and www.retirehappy.ca.

Posted via email from JIM Yih

Wednesday, June 23, 2010

Use caution before you cancel life insurance policies

In many cases, the best way to determine if you need life insurance in retirement is to apply the golden rule "Only buy insurance if you need it." If you don't need it, then get rid of it.

But use caution before you cancel your life insurance policies

Before you cancel life insurance make sure you've covered all the angles because you have one chance to make the right decision. Once you cancel, it's really tough to get it back and in many cases, you won't be able to get it back. Here are some important things to think about before you cancel your life insurance policy:
  1. Talk to your beneficiaries. Before cancelling insurance, maybe it makes sense to have a discussion with your beneficiaries about why they may want to keep the policy in place and pay for the premiums. Insurance can be one of the best investments your beneficiaries ever make. Open up the lines of communication about two tough topics – death and money.
  2. Talk to your spouse. If you have a spouse, they are likely to be the key beneficiary of your life insurance policy. Have a good realistic discussion about whether they need money when you pass away.
  3. Get a medical. One piece of advice before cancelling insurance is to get a complete medical examination. The feasibility and cost of life insurance all depends on life expectancy. If you go and get a complete check-up and discover your life expectancy might be shorter than you think, you may want to think twice about cancelling your insurance. Life insurance is one of those things that is easy to get while you are healthy and really tough to get when you are not.
  4. Converting Group insurance. A complete check-up will also help you in the decision to convert group insurance into a personal policy or whether you don't maintain coverage after retirement. If you are not healthy, then you may want to consider converting the group insurance into a personal policy because it provides coverage without underwriting. If you are healthy, they you may be able to get insurance on your own for a more cost effective price.
  5. Keeping wholelife and universal life might not be a bad thing. It is tough to replace permanent policies because they become more valuable, the longer you own them. Much of the costs happen up front in the early years. Later in life, it is difficult to replace these policies because you can never buy the insurance cheaper. Some people get lured into cashing out the policies because of the cash value of these policies but cashing out means you will lose the death benefit. Before you cancel, consider talking to your beneficiaries about taking over the payments on the policy, as it may be the best investment they ever make.
  6. Don't wait until costs are too high. Remember, insurance costs more the older you get. Waiting to make decisions till you retire might mean choices will be more limited due to costs.
The information in this article was taken from Jim's book 10 Things I Wish Someone Had Told Me About Retirement. For more information on this book, visit Jim's website www.JimYih.com.

Other Relevant Articles

Image of Author Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.jimyih.com and www.retirehappy.ca. Inquiries can be emailed to feedback@WealthWebGurus.com

Posted via email from JIM Yih

Wednesday, June 16, 2010

Problems with over contributing to the Tax Free Savings Account

Because the Tax Free Savings Accounts are relatively new (introduced in 2009), some Canadians are facing problems with the over-contribution penalties. The rules state that you are allowed to invest $5000 per year into a TFSA. Putting in more, will create penalties.

For many Canadians, the intent is not to over-contribute but some have discovered they have over contributed by accident. For example, Jake invested $5000 into a TFSA in February of 2009. In April, Jake takes out $3000 from his TFSA to pay some extra bills that month. In May, Jake gets a tax refund and then decides to put back the $3000 into his TFSA because he read that you can take money out of your TFSA and then put it back.

The problem here is Jake must wait till the next calendar year to replace the $3000. By putting the $3000 back into the TFSA in the same year, he has actually over-contributed to the TFSA by $3000 and will incur a 1% penalty per month. Jake received a statement from CRA that he was has over-contributed to the TFSA by $24,000 (8 months times $3000) and must pay $240 in penalties.

It's an honest mistake but the rules from the government clearly state you cannot do this.

Other articles about TFSA over-contribution penalties.

There is no shortage of information on this topic so rather than rewrite the great information that already exists, I thought I would use this opportunity to provide links to all the great articles and blogs who have delivered their insights on the topic.

TFSA Over-Contribution Penalty – How To Fix It by Money Smart Blog

TFSA Over Contributions at the Canadian Tax Resource blog.

Taxpayers hit with penalties at the Toronto Star – written by Ellen Roseman.

TFSA confusion leads to costly penalties for 70,000 by Rob Carrick at the Globe and Mail

TFSA Over-Contributions May Be Over-Penalized at Michael James on Money.

TFSA Excess Contribution Penalties Ensare Taxpayers at the Canadian Capitalist.

Apply for TFSA Waiver of TFSA Over-Contribution Penalty at the Canadian Capitalist

Qualifying Transfer definition at the CRA. This explains that transfers of TFSA money between financial institutions will not affect your contribution or withdrawal amounts for the year.

Image of Author Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.jimyih.com and www.retirehappy.ca. Inquiries can be emailed to feedback@WealthWebGurus.com

Posted via web from JIM Yih

Monday, June 14, 2010

Do you need life insurance in retirement?

It may sound like an easy question to tackle but it may be more complicated than you think. The biggest problem with life insurance is that it involves emotion which is not always the best way to make important decisions. It's not easy to look into the future and envision a life that has not been lived. For most there is no context for the circumstances that may arise when you die. In other words, how do you know what life will look like when you die if you have never (and will never) live that life?

When you think of life insurance, you probably think of something you need when you are younger -- when you have dependents and more debts. Many experts have argued that you should only buy life insurance when you need it and as a result, they suggest that you should only buy term insurance while you are young because you will not need it later in life. Although there is some truth to this general rule of thumb, it's a little too simplistic.

Insurance in retirement

Just like cereal and milk or strawberries and whipped cream, life insurance and estate planning go really well together. As we said, the most obvious reason why people buy life insurance is to protect their dependents. However, there are other situations where life insurance in retirement might make sense.

  1. To pay off debts. It used to be that retirement happened only if you paid off all your debts. However, we live in times where debt is abundant and in many cases, Canadians are retiring with more debt than in the past. This debt comes in many different forms like lines of credit, credit cards and even mortgages. If you are carrying debt in retirement, then life insurance can be used to pay off those debts when you die instead of having to liquidate assets (sometimes at times when you do not want to sell). Alternatively if you have enough liquid savings or assets to pay off debts to the estate, then life insurance may not be necessary.
  2. To cover taxes at death. When you die, there may be a substantial tax bill to the estate as a result of income from RRSPs, capital gains from investment portfolios, real estate and other sources of income. Life insurance can be used to ensure there is money in the estate to pay for this tax liability. Keep in mind that the government will still get paid their share of tax. You can't avoid that. Life insurance just means your beneficiaries will get more because the tax bill is paid with life insurance proceeds.
  3. To cover final expenses like funeral expenses and legal fees. Every estate has expenses but where will the money come from to pay for these expenses? It is crucial to ensure there is enough liquid cash to pay for fees and expenses. For some, life insurance can be a great way to inject liquid cash into the estate.
  4. To provide income for your dependents. Generally, the plan in retirement should be to not have dependents but these days kids are staying home longer. Or if they do leave, sometimes they are coming back home later in life and occasionally they could be bringing children with them. The more common dependent in retirement may be your spouse (not the kids). Will your spouse need your income when you pass away? If they need some or all of your income to make ends meet, then you are a likely candidate for life insurance in retirement unless you have significant savings or assets to leave behind. Before you jump the gun on this questions remember the best way to think about this is to simply think of yourself as the survivor.
  5. To leave a larger estate for your beneficiaries. The standard joke in retirement planning is the notion that the ideal strategy is to spend your money so you can die broke. The flaw with this strategy, of course, is you never know when you are going to die. Most people never die broke because running out of money is the biggest fear we face in life. In fact, leaving money to your spouse, kids, grandkids or others is not a bad thing. Leaving money represents relationships and creates legacies. Life insurance is a great way to pass money on to the people you love as it passes tax free.
  6. To equalize your estate. Life insurance can create a pool of cash to allow your executor to make things equal for your beneficiaries when some things can't be divided. One common example is where real estate is involved. For example, you might have a family cottage that is really only being used by one of three children. If the cottage is willed to the three kids, there is a good chance the one child that uses the cottage will have to buy out the other two siblings but where will the cash come from? Life insurance is a great way to equalize the estate by giving the cottage to the child that wants it and giving cash through a life insurance policy to the other two children.
  7. To help corporations and business arrangements remain viable. There are many uses for life insurance and estate planning when a business is involved. Every situation is unique and should involve a team of professionals.
  8. Provide for charities. Most often when we donate money to charities, we do it in the form of a direct contribution. Typically, someone knocks on your door or solicits you through the phone. Sometimes, we give a little by leaving our change at the cash register or even by attending a fundraiser of some sort. Charitable gifting with life insurance is much different. The most attractive advantage using life insurance is that it allows one to make a much larger gift to a charity. In addition to the goodwill, giving to a charity through your estate can save a lot of money in taxes.

Obviously, this list is not exhaustive but it does represent some of the key uses of life insurance in the estate planning process. Life insurance is one of the few assets that transfers to beneficiaries completely tax free. As a result, life insurance can be a great tool in the estate planning process.

The information in this article was taken from Jim's book 10 Things I Wish Someone Had Told Me About Retirement. For more information on this book, visit Jim's website www.JimYih.com.

Other Relevant Articles

Do You Need Life Insurance?

What is the best type of life insurance?

A case study: Cathy's story of life insurance

Estate Bond: Life insurance in retirement

Mortgage insurance: do your homework before you buy


Jim Yih is a Fee Only Advisor, Best Selling Author, Financial Expert and a syndicated columnist. He is a sought after financial speaker on wealth, retirement and personal finance. For more information you can visit his any of his other websites www.retirehappy.ca or www.WealthWebGurus.com.

Posted via web from JIM Yih

Friday, April 2, 2010

Best of the Bloggers

It's now been over 12 years of writing on retirement, investing, and personal finance.  My articles have been in numerous publications including the Globe and Mail, The Edmonton Journal, National Post, MoneySense, Yahoo.ca, Canadian Money Saver and so many more.  I've been spending a lot of time on financial blog sites trying to learn more about blogging as I consider really moving ahead with my own blog.  In doing so I see that blogging has become a big part of the industry.  Although there are thousands of personal finance blogs out there, I thought I would share with you some that really caught my attention.  Of course, my focus is on sites with Canadian information.  In my article, I share with you my top 12 Canadian Blog sites on personal finance.  I also throw in a few of my favorite media bloggers (For the full article and why I like these sites click here).
  1. Canadian Capitalist (www.canadiancapitalist.com
  2. Million Dollar Journey (www.milliondollarjourney.com)
  3. Canadian Finance Blog (www.CanadianFinanceBlog.com)
  4. Financial Highway (www.FinancialHighway.com)
  5. Before You Invest (www.BeforeYouInvest.ca)
  6. Canadian Tax Resource Blog (www.taxresource.ca)
  7. Balance Junkie (www.BalanceJunkie.com)
  8. Nancy Zimmerman (www.nancyzimmerman.com)
  9. Riscario Insider (blog.riscario.com)
  10. Canadian Personal Finance Blog (www.canajunfinances.com)
  11. Investing in Canada (www.investingincanada.info)
  12. The Financial Blogger (www.thefinancialblogger.com)
Media Bloggers
  1. Larry MacDonald
  2. Jonathan Chevreau
  3. Ellen Roseman
  4. Gail Vaz-Oxlade
To read the full article, visit WealthWebGurus.com

    Friday, March 12, 2010

    Financial Literacy on CanadianFinanceBlog.com

    This week, Tom gave me the opportunity to post a blog on his site www.CanadianFinanceBlog.com.  Tom is a fellow Edmontonian.  He works as a Financial Analyst for a major retailer and has developed a passion for personal finance. 

    www.CanadianFinanceBlog.com is one of the leading Canadian Blog sites.  It's got some good numbers and even got nominated for a few awards.  Most importantly, it has good sensible posts.

    Tom has a great blog and I am really honored to be asked to provide some content on a topic that is very near and dear to my heart - Financial Literacy and Education.

    For more on my post, check out http://canadianfinanceblog.com/2010/03/11/what-is-financial-literacy-part-1.htm

    Posted via web from JIM Yih

    Monday, March 1, 2010

    GICs are important but so are stocks

    Recently one of my friends and an exceptional advisor in Sarnia, Jeff Burchill, wrote to me irrate about some things said in an article by David Trahair.

    Essentially, Trahair says makes one very bold, controversial and contrarian statement like "Put your hard-earned savings only in ultra-safe GICs -- and rest assured that you are earning returns on par with those in the stock market." Trahair wrote a book called Enough Bull: How to Retire Well without the Stock Market, Mutual Funds, or Even an Investment Advisor because he was tired of hearing from people who have suffered financially because they followed "traditional" retirement planning advice. He believes the problem is compounded because people believed they had to invest in the stock market to make the illusive 8-10% a year return to build their retirement savings quickly. As a result, many have been devastated, especially many seniors that have little time to make up for their losses.

    Trahair goes on to present some data to back his claim that people who investing in stock markets would be no better off than people who invested in GICs. I'd like to offer some of my thoughts on the data and the comments.

    Firstly, I would agree with Trahair that too many people have been over exposed to the stock markets and it has especially affected people who are approaching retirement or in retirement. I wrote and article a while back about the Retirement Risk Zone and the problems that arise from being over exposed to the stock market as you approach retirement. I think this is the major reason we have seen more and more people in the last 10 years delay retirement or go back to work because of the stock market. Essentially having too much money in the stock market means less predictability and control over your own retirement. It's all a case of timing so how lucky do you feel?

    I would agree that as you near retirement, you need more predictability and should invest more of your money into GICs and other guaranteed investments but going full tilt might be a little extreme. One of the problems with Trahair's data is something I call end date bias which means that the most recent data is skewing all of the results, even the long term results. His data represents a snapshot in time which happens to be a period when stocks did not do all that well. A different snapshot like the end of 1999 would show a very different picture.

    The other concern is a statement he makes that is overgeneralized "As you can see GIC returns seem to be competitive - in the long term not much lower than the TSX Composite Total Return Index." The data he talks about shows the difference in compound returns over 10, 20, 30 , 40 and 50 year periods. The smallest difference is the 40 year period where the S&P/TSX Composite Total Return Index outpaced GICs by 2%. The biggest difference was the 10 year period where the stock market outperformed the GICs by a whopping 6.1%. How can that not be significant? Burchill is quick to point out that 1.5% to 2.0% difference on a $10,000 investment per year can mean over a $500,000 difference over time.

    Anyhow, I think the key to success is finding some balance based on your personal needs and circumstances. I think that the closer you are to needing the money, the more conservative you need to be. I also think that GICs tend to get a bad wrap not just because of the low interest returns but maybe because there is more compensation in other managed products.

    I know a lot of advisors who are exceptional and sell GICs because it is the right thing to do even though they do not pay a lot. I also know some advisors who won't touch GICs maing due to compensation. I think you should be careful with some of Trahair's controversial message. While the underlying message has some merit, it may also be a little extreme. If you think GIC's should be part of your portfolio, the best place to start is with the Registered Deposit Brokers Association of Canada (www.RDBA.com) or read my book Seven Strategies to Guarantee Your Investments.

    Relevant articles on GICs
    Advice for GIC investors
    Markets hit retirees hardest
    Retirement Risk Zone
    Retirees need to be more conservative with portfolios
    Shop GICs
    World of Guaranteed Investing
    Security of GICs

    Canadian Capitalist comments

    Tuesday, February 2, 2010

    New AUDIO CD on Investing

    As a professional financial speaker, most of my work is getting hired by corporations, organizations and associations to speak to their employees or members at private events, conferences and functions.

    In every presentation I always get people asking if I hold public seminars because the want their friends or family to hear the presentation. In the past, I had not options but now I am very excited to launch my new KEYNOTE AUDIO CD series.

    I have gone to the studio and recorded three of my most popular keynote presentations. I am very excited to share with you a sample of my investing keynote called INVESTING IS NOT ROCKET SCIENCE: The Secrets to Make You a Better Investor.

    If you are interested in more information on my KEYNOTE AUDIO CDs or any of
    my other products visit www.retirehappy.ca/products

    To purchase my AUDIO CDs, visit my store: www.WealthWebGurus.com/store

    Jim Yih is one of Canada¹s leading experts on wealth, retirement and money. Since 1990, Jim has dedicated his career to educating people in the area of retirement planning, personal finance, investing and wealth management. For more information on Jim, visit his website www.JimYih.com.
    Download now or watch on posterous
    Investing clip.mov (929 KB)

    Wednesday, January 27, 2010

    The Great RRSP Debates

    RRSPs are perceived to be one of the best savings vehicles for retirement because of some of the tax benefits of the RRSPs.  That being said, there are more and more people are questioning the validity of RRSPs and whether they really make sense?  Given many alternative uses for money, I outline three great debates of RRSPs.

    Debate #1:  RRSP vs Mortgage

    Generally speaking, either financial strategy is a good choice. It is better than spending the money on things that have no inherent financial value. It is also better than "investing" (I use that term loosely) in depreciable assets like cars.

    Let’s compare the financial benefit of the two alternatives. First, let’s look at the mortgage. Let’s assume that mortgage rates are 6%. You might think that paying down the mortgage means that you forego paying 6% in the future and therefore the mortgage paydown has a financial benefit of 6%. Most mortgages are not tax deductible thus you must earn more than a dollar to pay down a dollar of debt. In fact, you probably need to earn about $1.50 to pay down a dollar of debt. Thus paying down the mortgage has a pre-tax equivalent of 8.8% (6%/(1-32%)). Remember the higher the interest rate on the mortgage, the more attractive it is to pay down the mortgage.

    Now let’s look at the RRSP. Even if you are in the lowest marginal tax rate, you will save around 25% in tax* (combined federal and provincial). In a higher tax bracket, the RRSP might save you as much as 48% in tax savings. The bottom line is when you compare the two; a dollar put toward the mortgage saves you the equivalent of 8.8% while the RRSP saves you at least 25% in tax. Given the choice, I would take a 25% saving over a 10% saving.

    One thing to keep in perspective is that this example is overly simplistic because you will have to pay tax somewhere down the road when you take the money out of the RRSP but you also get the benefit of tax deferred compounding as long as the money stays in the RRSP.

    One thought is doing both might make the most sense.  You can do this by making the RRSP contribution first and then use the tax savings or refund to pay down the mortgage. For example, let’s assume I have $10,000 and I am in a 30% marginal tax rate. By contributing to the RRSP, I should save $3,000 in taxes and potentially get that in a refund. Once I get the refund, I should then take the $3,000 and pay down the mortgage. I have created $13,000 of use out of $10,000. 
    *Tax rates will vary from province to province.

    Debate #2:  RRSP vs non-RRSP

    When it comes to investment income, capital gains and dividends have a much better tax treatment than interest. However, is it attractive enough to ignore the benefits of the RRSP?

    The two key advantages to the RRSP are (a) the tax deduction and (b) the tax-deferred growth. These two benefits make the RRSP one of the most attractive financial planning vehicles available to Canadians. However, when you pull the money out of the RRSP, you will get taxed. Every dollar you pull out of an RRSP regardless of whether it is capital gains, interest, dividends or your original invested capital gets taxed at your current marginal tax rate.

    On the other hand, the non-RRSP is taxed only on growth, dividends and interest. Withdrawing your capital is not subject to taxation. Astute investors will look for investments that generate capital gains and dividends because of the preferred tax treatment.

    So what’s the best solution? It depends on your personal situation but most people will still benefit from the RRSP. Let’s take a look at some key factors:
    1. Investing behavior. If you are a really active investor and you like to buy and sell, trade or rebalance a portfolio frequently, you may be better off with the RRSP. Outside the RRSP, every time you trade, you create a potential tax disposition. The tax-deferred growth in the RRSP may be in your best interest.
    2. Time horizon. Generally speaking, it is rare to see investors hold the same investment for twenty to thirty years (or even ten years). The longer the time horizon, the more you will benefit from tax deferred compounding in the RRSP. It has been said that compound interest is the eighth wonder of the world.
    3. Marginal tax rates. It is important to understand what tax rate you are in at the time of the deposit but also know the your tax rate at the time of the withdrawal. This will be easier to estimate the closer you are to retirement. The ideal situation is if you take the money out in a lower tax bracket than when you put the money in.  In that case, RRSPs will always make sense
    4. Investment flexibility and freedom. RRSPs have some investment restrictions. Outside the RRSP, there are little to no restrictions of what you can do. While there is still lots of investment flexibility inside the RRSP, there is more outside the RRSP.
    5. Overall financial picture. Believe it or not, there is such a thing as having too much RRSPs. In some cases, your RRSPs may be so significant that your future income from the RRSP will push you into a higher tax bracket. In other situations, deferral of the RRSP can create a very significant tax liability down the road.
    Remember everyone’s situation is different and you must take the time to assess your personal situation to see what path is best for you. These comments are general statements that may not apply to everyone.

    Debate #3:  RRSP vs TFSA

    In the 2008 federal Budget, Finance Minister Jim Flaherty, announced what he considers will be historical significance in introducing Tax-Free Savings Accounts (TFSA). Previous to the introduction of TFSAs, saving money could be done either in an RRSP or a non-registered savings account. The newly announced TSFA is a mix between an RRSP and a non-registered account.

    RRSPs are attractive because you get an immediate tax deduction for the contribution and any investment earnings are tax sheltered as long as the money stays in the RRSP. On the other hand, the downside of RRSPs occurs when you take money out because you then have to pay the tax.

    With TFSAs, you do not get a deduction when you put the money in but you also don't have to pay tax when you take the money out. Similar to the RRSP, you do not have to pay tax on any investment earnings in the TFSA giving you the benefit of tax sheltered investment growth.

    With the TFSA, on $5000 contribution, you will save $50 to $80 in the first year of contribution from tax sheltered growth. Critics of TFSAs suggest that's not enough benefit to entice people to save and while that may be true, how would you feel if you found $50 on the ground today. I bet it would make your day. I'm of the opinion that any amount of money saved from taxes is in your best interest!

    When you compare the benefit of the TFSA with what you would get if you invested in the RRSP, the TFSA may not be as attractive because the RRSP would give you $1250 to $2000 in tax savings from the initial tax deduction.

    However, you can't properly compare TFSA with the RRSP by just looking at the tax savings going into the plans. You also have to look into the future when the money comes out of the plans. With the RRSP any withdrawal is fully taxable. That means a withdrawal of $1000 might only net you $600 to $750 after tax depending on your marginal tax rate. With the TFSA if you take out $1000, you get the full $1000.

    The bottom line is RRSPs still make sense if you are saving long term for retirement and your income at the time of withdrawal is in a lower tax bracket than your income at the time of contribution into the RRSP.  Here’s a great rule of thumb to follow:
    1. If your marginal tax rate at the time of contribution is greater than your marginal tax rate and the time of withdrawal, then RRSPs have the advantage.
    2. If your marginal tax rate at the time of contribution is less than your marginal tax rate and the time of withdrawal, then TFSAs have the advantage.
    3. If your marginal tax rate at the time of contribution is equal than your marginal tax rate and the time of withdrawal, then neither has the advantage.
    This article first appeared in Jim Yih's 2010 RRSP Kit which can be downloaded for free on his website.  All of my articles and blogs appear on my website www.WealthWebGurus.com.  Check it out, there's lot of free information there.

    Thursday, January 21, 2010

    Will CPP be there in the future

    Canada Pension Plan (CPP) is one of the pillars of retirement income benefits for Canadians. For the past 20 years since I have been in the financial industry, there has always been a perception that CPP may not be there in retirement.

    Is the CPP in crisis?

    That's what we've been led to believe for the past 20 years but the hysteria about the CPP s more of a myth than reality. Back in 1996 when there was tremendous fear that a looming pension funding crisis might cause the collapse of CPP. At that time, CPP received $11 billion in contributions but paid out $17 billion in benefits, with an asset base of about $35 billion. Unless something was done, the plan's collapse would be only a matter of time. The solution was to make some significant increases to the contribution rates and the creation of the CPP investment board to allow funds to be invested into market based securities.

    CPP has come a long way since then. Today CPP is in a strong financial position and Canadians should feel good about CPP being there when they retire. Here's some of my thoughts about why I think CPP will be there in the future.
    • In 2009, the total assets of CPP sits at about $116 billion dollars and is expected to continue to grow from increased contributions and investment income.
    • Back in 2000, The chief actuary of Canada, who reviews the health of the CPP every three years, said in his 2000 report that CPP is sound for at least 75 years. CPP continues to operate on the basis of a 75 year amortization period.
    • The CPP reserve fund is segregated from general government revenue. In other words, CPP is a separate pot of money that belongs to all Canadians that have contributed to CPP. All Fund assets belong to CPP contributors and beneficiaries.
    • CPP is a pay as you go system. Part of the money that is paid into CPP through contributions is used to fund the money leaving CPP for retirement benefits. If there is not enough money to fund the outgoing funds, CPP can simply increase contribution amounts which has been a significant reason for the growth of CPP in the last 10 years.
    • The CPP was reformed in 1997 to stave off a funding crisis. And now, there is a surplus of contributions every year. In other words, there is more money coming into the plan through contributions than money going out as a result of benefits being paid to Canadians.
    • CPP is about to undergo some more significant changes to help preserve the longevity of this key asset. I will discuss some of these proposed changes in a follow up article next week.
    Despite the good news, it seems that most Canadians still think CPP may not be there in the future. In fact, public opinion research conducted last month shows that almost two-thirds of Canadians are still unaware that the CPP was successfully reformed 10 years ago.

    In terms of your own retirement planning, I think you should incorporate CPP into your plans and assume you will get something. The best way to figure out how much is to simply contact Service Canada to get your CPP statement of contributions.

    This article first appeared on my website www.WealthWebGurus.com.  Go and check out other articles on Canada Pension Plan or other government benefit programs.

    Tuesday, January 19, 2010

    RRSP Quick Facts 2010

    It's RRSP time again and this quick reference guide might help people looking for the current rules and limits on RRSPs.  Good luck investing your money!

    Who is eligible?

    Anyone who has earned income, has a social insurance number and has filed a tax return can contribute to an RRSP up until December 31 of the year they turn 71. After this age if you continue to have earned income, you can contribute to a Spousal RRSP up until December 31 of the year your spouse turns 71.

    This maximum age was increased from 69 to 71 in the 2007 Federal budget, giving people an additional two years to contribute.

    Earned income

    For most people, earned income for RRSP purposes is the amount in box 14 of their T4 slips.

    Earned income also includes self-employed net income, CPP/QPP disability payments and net rental income.

    Income sources that do not qualify as earned income include investment income, pensions (including DPSP, RRIF, OAS, and CPP/QPP income), retiring allowances, death benefits, taxable capital gains and limited-partnership income.

    Revenue Canada's Form T1023 (Calculation of Earned Income) outlines all sources of earned income.

    Contributing securities

    You don't necessarily need cash to make an RRSP contribution. You can contribute (in kind) a security you already own outside your RRSP.

    The "in kind' contribution is equal to the fair market value of the security when contributed. The security is deemed to have been disposed of at time of contribution. Be aware that this can have tax consequences.

    Maximum contribution limits

    Your allowable RRSP contribution for the current year is the lower of:

    * 18% of your earned income from the previous year, or
    * The maximum annual contribution limit (See chart) for the taxation year less
    * Any company sponsored pension plan contributions (PA - pension adjustment)

    Tax Yr         Income From         Max. Limit
    2010             2002                      $22,000
    2011             2003                      $22,450

    1. Pension Adjustment (PA) represents the value of any pension benefits accruing from participation in a registered pension plan or deferred profit sharing plan.
    2. A Past Service Pension Adjustment (PSPA) arises in rare instances where a member of a pension plan has benefits for a post-1989 year of service upgraded retroactively.

    Obtaining your contribution limit

    After processing your tax return, Revenue Canada sends a Notice of Assessment, which includes your next years' contribution limit. This document also shows your unused contribution room.

    Or you can call your local Tax Information Phone Systems (TIPS) number, which is found in the blue pages of your phone book under Tax Services. Be sure to have your SIN and previous tax return ready.

    Spousal RRSP

    All or a portion of your RRSP contribution can be made to an RRSP in your spouses name.

    As the contributor, you get the deduction, but your spouse is the owner of the plan. This includes common-law spouse as defined by Revenue Canada

    There can be tax implications when spousal funds are withdrawn.

    Foreign content rules

    There are no longer any foreign content restrictions on your RRSP investments. Foreign content restrictions for registered plans were eliminated in the 2005 Federal Budget

    Deadline to receive a tax deduction

    The deadline for a RRSP tax contribution is always 60 days after the end of the previous year to be eligible for a deduction for the 2009 tax year. This year the deadline is March 1, 2010. Consult with your financial institutions about how they are able to accommodate deadlines.

    Contributions made in the first 60 days of the year can be applied against the previous taxation year or in any subsequent year.

    If you are turning 71, this is the last year in which you may contribute to your RRSP. You must convert your RRSP by December 31 in the year you turn 71.

    Unused/carry forward contribution room

    RRSP contribution room accumulated after 1990 can be carried forward to Subsequent years. If you are unable to maximize your RRSP contribution this year, you are allowed to make up the difference in later years.

    Over contribution

    The $2,000 lifetime over contribution allowance applies to those who have reached age 18 or older.

    Your over contribution can be used as a deduction in future years. ($2,000 over contribution this year an be used as part of your deduction in the following year.

    Any amount in excess of $2,000 will be charged a penalty of 1% per month.

    What is the Home Buyers' Plan?

    With the Home Buyers' Plan (HBP), you can, take up to $25,000 out of your RRSP to put towards the down payment on your first home and you won't be taxed on it. However, you do have to pay it back into your RRSP over the next 15 years.

    Lifelong Learning Plan (LLP)

    With the Lifelong Learning Plan (LLP), you can withdraw up to $10,000 a year, or up to $20,000 in total each time you participate in the LLP to help pay for your education. All you have to do is repay at least 10% per year for up to ten years.

    Participants must start to make repayments two years after their last eligible withdrawal, or five years after the first withdrawal, depending on which due date comes first. Amounts withdrawn must be repaid within 10 years.

    If you are interested in more information on RRSPs, here's a link to my 2010 RRSP Kit
    For more of my articles on RRSPs, visit www.WealthWebGurus.com