RRSP Season is Over…Now What?
As many Canadians have become used too, the March 1st deadline is officially come and gone.
The primary question many of our clients are asking us is “What’s the best way to use my available cash flow now that my RRSP is maxed out for the year?” One of the most obvious and natural answers is to take full advantage of the Tax Free Savings Account that the Government “gifted” us on January 1st, 2009.
If you haven’t used up your room entirely (you have contribution room of $5,000 from 2009 and $5,000 for 2010), then we suggest a simple yet effective monthly investment. If you break down the $5,000 available per year, that works out to approximately $416 per month.
The real beauty of the TFSA is the fact that your money is always 100% liquid and accessible at any point, and you never pay taxes on withdrawal, regardless of how much you’ve grown your account.
You’re Take Away: Simply put, you won’t lose if you take whatever cash flow you have available and begin to invest that in a TFSA every month. However, it amazes us how many of us don’t realize that you can invest in stocks, mutual funds, high interest savings accounts and many other investment vehicles much like your RRSP. Depending on your risk profile, time line and realistic expectations, it is highly possible that you should and will want to look at investment choices that have the potential to earn you a larger return then your basic bank is promoting.
After all, if you do happen to hold on to this investment without accessing it for a few years, your growth could be substantial and be withdrawn completely tax free. That, and you can always use your TFSA account to transfer money to your RRSP during next year’s RRSP season if you’re running low on cash at the time.
Until next week, have a wonderful Wednesday!
Chris and Elisseos
How Will The H1N1 Virus Affect Your Life Insurance
It is very easy to become caught up with the fear that naturally develops when we hear words like “life threatening”, “breakout”, “pandemic”, or even just the word “virus”. As a result, our team wanted to help you answer the question “How will the H1N1 virus affect my life insurance?”
The Good News
The good news for those that already own life insurance is that it won’t; not even a little bit.
One of the benefits of obtaining life insurance at a young age, or anytime for that matter, is that it’s as though the life insurance company is taking a snap shot of your health at that exact moment. As long as you are honest and truthful with the information you provide, you are forever covered as long as you keep the insurance premiums and policy up to date, regardless if your health status changes in the future.
The Not so Good News
For those who don’t own life insurance at this time, this new breakout could play a substantial role in the possibility of whether you can or will be able to insure yourself in the future, should you be exposed to it.
Just because an insurance company may not ask the direct question like “Have you been diagnosed with the H1N1 virus?” does not mean you don’t have to worry about this new virus. In fact, most insurance companies will ask broad sweeping questions in their application such as:
- Have you consulted any physician within the past five years for anything not covered in the above questions or in this application?
- Are you aware of any symptoms or complaints regarding your health for which you have not yet consulted a physician?
- Have you had any symptoms, illness, injury, surgery, treatment or investigation, or been advised to receive treatment or investigation, or examination not mentioned above?
A simple yes to any of these questions could not only postpone your approval indefinitely, but also raise red flags that as a potential life insurance applicant, you’d rather not face.
Most insurance companies will not accept a new client if they are currently undergoing testing or treatment for any illness within the last six months, H1N1 included. What that means is that if you are exposed or worse, diagnosed with this virus, the insurance company could either rate your request for life insurance, postpone your approval, or flat out decline you for life, depending on the severity of your specific situation.
Your Take-Away: If you are or have been looking to insure yourself or your family for life insurance, disability insurance or critical illness insurance, or may be considering raising your policy, we recommend that you consider doing so sooner rather then later.
Below are a couple of reasons you may want to consider when deciding if now is the time to look into adding to or setting up your insurance program:
1. You have visited a medical facility within the last 3 months and potentially been “exposed”
2. You have a friend, family member or colleague who has actually been diagnosed with H1N1
3. Insurance companies are far more flexible and lenient during the last two months of the year
Until next time, have Terrific Thursday!
Chris and Elisseos
5 Reasons To Consider Life Insurance
Tim Cestnick is a well respected writer and columnist with the Globe and has recently written a great article entitled “Five Reasons to be Nice to Your Insurance Agent”.
Despite the fact that the title of this article comes across as very “Agent Focused”, Tim actually focuses on five great reasons to consider owning life insurance. The five reasons that Tim discusses include:
- Provide for Others
- Cover Final Disbursements
- Provide Equitable or Larger Bequests
- Shelter Income From Tax
- Maintain Business Health
I really enjoyed this article because Tim provides a very “birds eye view” of life insurance and some of it’s core and primary uses overall. The one that really sticks out to me however is point four entitled “Shelter Income From Tax”. After all, we live in a country where we can pay up to 50% of our income back to the Government in the form of taxes, so why wouldn’t we want to explore all of our tax shelter opportunities?
Your Take-Away: Life insurance is a topic that is not easily discussed in general conversation, and rarely ever praised. That said, the basic reason people purchase life insurance is love, and if you’ve ever received a life claim as a result of a loved ones passing, you have likely become a big advocate.
The good news however is that whether you want to purchase life insurance for others or not, it is still very much worth your time and effort to understand how it works and more importantly, how it can save you literally thousands of dollars of tax in a year. Most of us really aren’t aware of these kinds of benefits and how to properly structure life insurance for this purpose, but after looking at the facts and the numbers, you may just find that you’ve piqued your own interest!
Until next time, have a wonderful long weekend!
Chris
Canadians are Behind on Their Credit Payments
Equifax Canada recently released information stating that more then half a million Canadians are continuing to fall behind on their credit payments.
In their report, they went on to say “The average delinquency rate for Canada rose by approximately 19% over a one-year span from May 31, 2008 to May 31, 2009…This means that over a half a million Canadians are now more than 90 days behind on their credit payments.”
What’s even scarier to me is that Equifax claims “The sharpest increase has resulted from Credit Card and Sales Finance purchases, which have increased by 38% and 58%, respectively, since May 2008. Such transactions typically represent the purchase of durable goods, such as furniture or electronics, and consumers appear to be willing to fall behind on them first before they miss payments on their Bank Loans and Lines of Credit.”
You’re Take-Away: This information may not be news to you, nor may it make any difference to you if you’re one of those lucky few who are able to live debt free or at least manage your debt payments. The one lesson that stands out to me however is that we need to be learn to manage our cash flow better, for the sake of our financial futures and credit ratings.
After all, the reality is that those falling behind aren’t doing so in terms of their mortgages or lines of credits mainly. In fact, they’re falling behind on payments that have resulted largely from consumer purchases, which I like to call, consumer wants. The financial companies that offer no interest or payments for a year or more are still making money or they wouldn’t offer the program in the first place. Read the fine print. If you miss your payment by a day, they will back charge you for the entire period of time that you haven’t paid anything with interest rates as high as 24% and more.
The long and short, if you’re going to purchase anything using a store issued credit card, make sure to make a note and pay that purchase off at least one week prior to the deadline. If you don’t, you will see your bill jump dramatically and possibly join the Canadians mentioned above in the Equifax report.
Until next time, happy spending and have a Terrific Tuesday!
Chris
Couple Declined Their Mortgage Insurance Claim - The Toronto Star
Third party articles are always of interest to us, and this specific article in the Toronto Star is an eye opener for anyone.
Ellen Roseman of The Toronto Star recently documented one couple’s fight to get paid on a death claim that was made through their TD Canada Trust. We’ve talked about the perils of Mortgage Insurance offered through your lender in posts before, but this story is a real life experience for one Toronto based couple and I’m sure it will make you question where you hold your insurance.
The good news is that despite the original decline of their claim, to TD’s credit they did revisit the situation once the Star became involved and later paid out the claim in full. The reality however is that had they not gone to the Star for help, they may never have received that money. And even if they would have, do you think they really wanted to have to fight for something they knew all along they were entitled too? Never mind the fact that they were also in the midst of dealing with the news of a terminal Cancer diagnosis. Perfet timing it seems?!?
Your Take-Away: The most chilling comment written by Ellen was quite poignant, and one you should seriously considering thinking through. Ellen wrote: “The lesson: Banks can issue insurance and deny coverage years later if they think there was misrepresentation on an application.”
I can’t help but think it may just be time to at least explore your other life insurance options, mainly because the underwriting is done up front, not at claim time. And after all, you’re most likely going to save some money too. Not a bad thing considering the current status of our economy!
Until next time, have a very Happy Easter!
Chris
Canadian Fund Managers Outperform
Does it really pay to invest in mutual funds? Apparently, it does.
According to a recent report, Canadian Fund Managers outperformed the S&P/TSX in the final quarter of 2008. That is especially important considering it was one of the worst three month periods in market history. Although the difference was small, specifically a -22.71% return for the index versus a -21.67% return for active Managers, the news is still quite positive. In fact, over 50% of active Managers were in this category of “outperformers”, while in previous periods that number was as low as 11.2% to 22.0%.
Your Take-Away: There is no question that you are probably thinking that this news is not overwhelmingly positive considering that the markets still fell quite steeply and that it is the first time in a long time that so many Managers beat the index. I agree.
That said, what I do think is important is that although the majority of Fund Managers may not have beaten the index in the past, there are still many that do. What that says to me is that the Managers you choose to invest with need to be well researched and have some form of proven track record. If in fact you happen to find one of these great Manager’s, you can unquestionably justify that there are times when Mutual Fund’s are worth their price tag.
One great place to start in terms of researching both the fund you are being recommended as well as the Manager who is responsible for it is www.morningstar.ca. I have used that many times myself and I’m confident that you will find this resource quite useful for your own due diligence.
Until next time, have a Wonderful Wednesday!
Chris
The TFSA: Should I Invest in My RRSP or TFSA (Part 4 of 4)
With the recent development of this latest CRA initiative, the biggest question most are asking is “Should I invest in my RRSP or my new TFSA?”. Truth is, that’s a very fair and personal question all at the same time.
It’s personal mainly because of the fact that each person’s situation is very unique and that means that there really is no easy answer or one size fits all solution, except one. That one exception is based on whether or not you contribute the annual maximum towards your RRSP every year, because if so, your new TFSA is by far the next best place to put your additional retirement savings.
If you don’t fall into the small percentage of Canadians who max out their RRSP contributions every year, we need to make a couple of assumptions and look forward to the day you begin to redeem money from either account. In other words, your retirement. Take a look at a couple of the different scenarios below:
- If you expect your tax rate during retirement to be the same as it is today, the choice is really yours as to whether you invest in your RRSP or TFSA as the benefits will remain fairly equal.
- If you expect your tax rate during retirement to be lower then it is today, you are far better off to maximize your RRSP contributions first and use your TFSA to fund your additioanl retirement needs.
- If you expect your tax rate during retirement to be higher then it is today, then there is no question that you are better off to maximize your $5,000 contribution limit inside of your TFSA first, and then use your RRSP room to make up the additional savings you will need for your retirement.
Your Take-Away: As I mentioned above, there is definitely no one size fits all answer to the question we are addressing today. My suggestion is that you take an overall look at your entire portfolio, revisit and maybe even redefine your goals, and then decide which account is better for you in your specific situation.
In the end, your best bet is to try and take maximum advantage of both your RRSP and your TFSA. If you’re like most and do not have that luxury, why not invest in your RRSP and then put your tax refund back into your TFSA? Just a thought.
Until next time, have a Wonderful Wednesday!
Chris
The TFSA: Why Does it Make Sense for You (Part 3 of 4)
As I sit here on my couch writing this post, I realize how personal this question really is.
We have discussed what the Tax Free Savings Account (TFSA) actually is and how it works, and now we need to look at why it may in fact make sense for you. The reality is that this type of account can work for just about everyone, but it is essential that you know why you want to take advantage of this new investment vehicle.
That said, there are multiple reasons and ways that you can make this account work for you. In order to keep this post short and to the point, I’ve chosen to try and put some examples together in the form of bullet points. Some of the reasons this could make sense for you could be:
- You want to save additional retirement funds outside of your current RRSP or pension plan
- You are actively saving for a specific goal, such as a new home or vacation, and need total liquidity
- You own high risk, potentially high reward stocks or funds that could grow substantially and would like to ensure not $1 of the growth is taxable
- You are saving money to pay down your mortgage and would like to invest it throughout the year with the hope of growing your account value and creating a larger deposit on your mortgage
- You are receiving retirement income from your CPP or OAS, your RIF or your pension and are not in need of the full amount but do not want to pay additional tax on the growth over time
Your Take-Away: By no means is the list above exhaustive in nature. There are multiple reasons for a Canadian to invest in the new TFSA, but it is very difficult to specify which one will make the most sense for you. The only question you need to ask yourself is “do you want to eliminate the taxes you currently pay on your investment growth?” If so, looking at the TFSA is a complete no brainer and something that certainly deserves a small investment of your time.
A couple of more posts to come on the new TFSA, but until then, have a Wonderful Weekend.
Chris
The TFSA: How Does It Work (Part 2 of 4)
As discussed in yesterday’s post, today I will be explaining the basics of how the new TFSA actually works.
According to the official definition as stated by Canada Revenue Agency, the TFSA is “a new way for residents of Canada to set money aside tax free througout their lifetimes.” They go on to say that “contributions are not tax deductible for income tax purposes and the income earned inside the account is tax free, even when it is withdrawn.”
Because there are a number of rules surrounding this amazing new account, I have chosen to use a point form format to better explain what they are:
- Owner: Only the account holder can contribute to their own personal TFSA
- Eligibility: Any resident of Canada who is 18 years old and holds a valid SIN
- Beneficiary: You can stipulate who your beneficiary is and all proceeds at death are passed down tax free
- Contirbution Limit: The annual dollar limit is $5,000 per account and will increase with inflation each year
- Withdrawals: Any withdrawal is tax free and the limit for the following year increases by the same amount
- Investment Choices: You can choose from mutual funds, securities, GIC’s, Bonds, even savings accounts like ING
Your Take-Away: As I’ve mentioned previously, this is a tremendous new investment vehicle and it is well worth your time to look into this further. Learning how to properly incorporate this new account within the rest of your financial plan appears to be one the largest challenges that most will face, which is why understanding how it works is so essential.
If you would like to read more detailed information about the TFSA and how it works, please see the attached CRA document entitled “The TFSA Explained by CRA“.
Until next time, have a Terrific Tuesday.
Chris
The TFSA: Introduction (Part 1 of 4)
The Tax Free Savings Account (TFSA) is one of the hottest topics in the Canadian investment world today, and for great reason.
Like everyone else, I believe the TFSA is an incredibly useful savings vehicle for anyone currently living in Canada. In fact, I am exceptionally grateful that the Canadian Government decided to bless an iniative of this nature.
Over the course of the next few days, I plan on providing you with a very simple explanation of what the TFSA is. This is not an overly complicated account or tax vehicle, but it is one that needs to be understood properly in order to take full advantage of its full potential.
Your Take-Away: Because the TFSA is so new to the Canadian market, in fact January of 2009 is the first time that one could open an account, I plan on providing you with an explanation of a number of different questions and topics relating to this new account. Together we will cover the following topics specific to the TFSA:
- How does it work?
- Why does it make sense for me?
- Is it better to invest in my RRSP or my new TFSA?
I am very excited about this series and hope that by the time you are finished reading our posts you will have a much clearer understanding of what this TFSA is really all about and better yet, how you can make it work most effectively for you and your family.
Until next time, have a Magnificent Monday!
Chris
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