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

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: 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. 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. 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. 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. 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. 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 Do you need life insurance in retirement? 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.jimyih.com and www.retirehappy.ca. Inquiries can be emailed to feedback@WealthWebGurus.com

Posted via email from JIM Yih

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.

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

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