RRSP Loans

Hour glass with pink sand and clock in the background

As you know, the deadline for RRSP contributions for the previous tax year is usually March 1. That means you have time to think about your taxes and still purchase more RRSPs.

If you are a procrastinator and didn’t contribute to your RRSPs throughout the year, or you start working on your tax return and realize you are going to owe money, you may want to make a lump sum RRSP contribution ASAP.

Banks will take advantage of this urgency by advertising RRSP loans. How it is supposed to work is that:

  • you borrow money with a known interest and payment plan
  • make a larger RRSP contribution
  • get your tax refund
  • partially pay back your loan
  • continue to make payments for the rest of the year or until the loan is paid off
Occasionally an RRSP loan is a decent idea, but usually there are some SIGNIFICANT downsides to this plan:
  • You must have enough discipline to actually use the refund to pay back the loan. Unfortunately a lot of people get that money and use it as fun bonus money, figuring they can just pay down the loan every month as planned.
  • Taking on debt can be risky. You never know what the future holds, and you or your spouse could lose your job tomorrow.  Then you might need your tax refund for living expenses.  And even worse, you’d still be stuck with your RRSP loan payments.
Plus, the math often doesn’t work in your favour. 

The amount of money you will save when using an RRSP loan relies on three factors, only one of which is a guarantee amount.

  1. The difference between your tax rate when you invest the money and when you withdraw it. 
    We can make some assumptions, but your retirement income and the tax rates then are out of our control. If you end up having to pay more tax during retirement, then the RRSP was pointless, from a pure math standpoint.
  2. The rate of return you will earn on your investment. 
    Only GICs give you a guaranteed investment return, and the rate on an RRSP loan is going to be higher than on a GIC so this is something you are unlikely to ever do.
  3. The interest rate on the loan. This factor at least is known, as RRSP loans are typically at a fixed interest rate.

So this strategy can be beneficial to you IF:

  • You earn more on your investment than you pay for your loan, AND
  • You tax rate at retirement is the same or less as you are paying now

Instead, a much better strategy is to make automatic monthly or biweekly deposits into your RRSP account. Then you are earning every month, instead of paying the bank every month. 

What’s your opinion on RRSP loans?

RRSP or TFSA?

A road sign that shows 4 different "right ways"

This article is by freelance writer, Sharon Skwarchuk. Ironically, due to my busyness and procrastination I didn’t get this posted before the 2017 RRSP deadline. So don’t be me – don’t wait until the last minute. Start your investing ASAP using automatic contributions so you don’t miss next year’s deadline – Meena

RRSP Basics

So it’s RRSP season once again.  What exactly is RRSP season?  It’s the time of year when people start thinking about filing their tax returns, and whether or not they need to buy RRSPs in order to create or increase a tax refund.  The RRSP deadline for 2017 is March 1, 2018.  This means that if you want to contribute to your RRSP for the 2017 tax year, you must do so by March 1, 2018.

Many people, including me, wonder if the RRSP is still the best solution for our retirement savings.  Not so long ago, it was really the only option for reducing your potential taxes while saving for retirement.

There are a number of rules that must be followed with respect to RRSP contributions and withdrawals.  But in a nutshell, the reasoning behind an RRSP is this: 

You put money into it now while your income is higher.  The money you deposit does not get taxed until you withdraw it, hopefully at retirement.  And when you retire, your income will be lower (and you may have more tax credits), so the amount of the tax that you pay at withdrawal will be less than you would have paid when you earned the money. 

That’s the logic, which makes sense if you can actually go the distance and not withdraw the money before retirement.  But how realistic is that? 

Withdrawing RRSPs

Speaking for myself, I had managed to save up about $25,000 in an RRSP over about 15 or 20 years.  Then the oil recession hit Alberta, and my boyfriend‘s hours started getting cut.  His annual income dropped from $110,000 to less than $30,000 over a three year period.  When he got laid off, he was out of work for almost 15 months.  And when you’re trying to make it on about less than half of what you were bringing in, you can’t get ahead – especially when you’re buying groceries and gas with your credit card.  So our bills started piling up.  I made the very difficult decision to cash in my RRSP. 

But as some of you probably know, when you cash in an RRSP, the financial institution withholds a certain percentage immediately, (just like your employer does on your paycheques) and then the actual tax owing is calculated when you do your tax return.  Needless to say, I ended up paying about 30% of that $25,000 to the government in taxes at a time when I really could have used that extra cash.  So this was a definite downside to RRSPs.

Something else people often do in February is take out an RRSP loan. There’s a separate article about them here. To summarize, I don’t usually recommend an RRSP loan.  An automatic savings plan throughout the year is a much better option.

TFSA Basics

So what about a Tax Free Savings Account instead of an RRSP?  With a TFSA, you are currently allowed to contribute up to $5,500 per year into the TFSA (plus unused amounts from prior years), and you don’t have to pay income tax on the interest that you earn within that account. 

Normally, you have to pay tax on any interest that you earn from an investment, but with this account, you don’t have to pay the tax.  So if you earn $300 in interest, you don’t pay tax on that amount.  That’s the great thing about this investment.  You can also withdraw money from this TFSA without having to pay taxes on your withdrawal, because the taxes were paid on the money before you put it into the TFSA. 

However, there are also certain restrictions with respect to this account, including how much you can deposit, so you need to make sure that you follow the rules. 

So which is better – an RRSP or a TFSA? 

Personally, I prefer a TFSA.  I want to be able to take out the money when I need it without having to pay tax on it.  Plus all the interest that I earn within the TFSA is tax-free.  And for some reason, I find it easier to contribute to a TFSA than I do an RRSP.  Don’t ask me why – I think it’s psychological.  I think I feel better knowing that I’ve already paid the taxes on this money, and when I withdraw it, I can have it all because the government has already taken their share. 

I also think that I prefer to contribute to a TFSA because it feels more like a choice than an obligation.   To me, an RRSP feels like an obligation- it’s like something you have to do because you’re a responsible adult.  And I hate it when people tell me that I have to do something.  

Finally, I want to say that I am not a financial advisor in any sense of the word. All I am giving you is my own personal opinion from my own research and my own experiences and observations.  As always, the final choice is up to you.

Meena’s Note:

As a financial planner, I can discuss with you the reasons why a TFSA or an RRSP is preferable in your situation. A case can usually be made for some of both. But on a strictly mathematical sense there is a rule of thumb to follow. (Unfortunately, it requires some guess work.)

   Your Situation                                                             Best Option

  • Current income is lower than planned retirement income             TFSA
  • Current income is higher than planned retirement income           RRSP
  • Current income is the same as planned retirement income          Either

I think the suggestion to contribute automatically monthly or bi-weekly is an excellent one. You earn more money by contributing throughout the year, and it’s easier on your budget, than doing the lump sum contribution next February. So start today! I’m working with the robo-advisor WealthBar, and they are an excellent tool for low cost, super easy investing – in TFSAs, RRSPs, and RESPs.

My Basic Investing Rules

Simple Investing Tips

A bar chart with a line graph over top of it, slowly increasing in height

I get a lot of questions about investing.

  • How should I start?
  • How does the stock market work?
  • What is high risk or low risk?
  • How do I not lose all my money?

I have plans to write a mini-book. But in the meantime here are my simple rules for investing*. If followed I think these will give you reasonable returns with a reasonable amount of risk.

  1. Use a diversified method.
    Buy stocks (shares in Canada, also called equities) and bonds. Invest in various countries and industries. Don’t put a big chunk of money into Bitcoin or marijuana stocks or whatever other fad of the week, unless you can afford to lose it all.
  2. Use a passive investing method.
    Numerous studies have shown that active management only sometimes earns you more money than the average stock market increase.
    From the Globe and Mail

    From CNBC
  3. Use a low cost method. Related to the above point, when fees are taken into account it is rare for high cost, active methods to outperform the low cost, passive methods over time.
  4. Perform routine rebalancing between asset classes, or have the company do it for you (as happens with robo-advisors and passive-method portfolio funds). This means you will always be buying low and selling high, without trying to time the market.
  5. DON’T PANIC (any HGTTG fans?) Sell. Some ways to avoid panic selling are:
    1.  Don’t sell until you actually need the money.
    2. Don’t put short-term investments in the stock market.
    3. Ignore the noise. When everyone else is panicking, stick to your strategy. During the big stock market drop in the USA in 2008, within a few years the markets recovered nicely. If you didn’t sell when everyone else did you wouldn’t have lost any money.

*I did not invent these rules. I just agree with them and invest by them. And I think most people should, too.

Want more info? Book an appointment and we can talk about your particular situation.

Want more reading material. My two favourite sources for Canadian investors are the website, Canadian Couch Potato, (start with the top tabs) and the magazine, Canadian Money Saver (check your library; you might get lucky).

Try this New Retirement Calculator.

The company that makes the financial planning software I use, recently put out this little retirement calculator. You’ll enter a few pieces of information and it will tell you how much income you might have during retirement, and how that compares to other Canadians.

It’s completely free. And there’s no obligation to purchase anything or talk to anyone. Try different scenarios to see how retiring earlier or saving more will affect your lifestyle.

If you want to talk further about your retirement plans or other money concerns, contact me . . . who knows you might even get a free coffee!

You Deserve a Financial Plan

Do you…

…want the peace of mind that comes with having a financial plan in place?

…need methods to reduce your debt and save more money?

…want to make sure your family is taken care of in the unfortunate case of disability or death?

…need to learn more about investing, but don’t know where to start?

…plan to give your child the best start in life as far as money is concerned?

…require a system of managing money with a partner?

…have dreams of early retirement?

If so, you deserve a clear, detailed money plan that will help you accomplish your goalsBook your first complimentary consultation now!

What does a comprehensive financial plan entail? Read all about it here.
Don’t need a full financial plan? Check out all my services.

Or have more questions? Don’t hesitate to contact me. I’d love to speak to you.

couple on a mountain

Improved Fee Model for Financial Plans

I’ve decided to use a tiered fee structure for holistic financial plans for two reasons:

  1. To avoid planning services being unaffordable for low to moderate income people, who are as entitled to good financial advice as anyone else.
  2. To reflect the fact that the more money that is coming into a household, the more money a good financial plan can help you save.

This simple method takes the household income, multiplies it by an increasing percentage, to determine the total plan cost.

Household Income     % of Income     Fee with GST 

       $20,000                            1%                        $210

               $30,000                             2%                      $630

               $40,000                             3%                     $1,260

               $50,000                             4%                     $2,100

               $60,000                             5%                     $3,150

Above $60,000 cost is 5% of household income plus GST, up to a maximum of $5,250.

I think this is a good balance between being able to provide services to whoever needs them, being able to pay myself and cover my expenses, and balancing the cost of the plan to the benefits to be obtained.

Your First Appointment

Location
I am renting space out of Bitner & Associates Law Office. The office is located at 6932 Roper Road. It is at the far left side in the business park on the north side of Roper Road between 50th and 75th streets. Please park in one of the four spots directly in front of the office if at all possible.

 

 

 

 

 

 

 

Please note, due to severe allergies, the office is a fragrance-free environment.
I also can often offer consults in your home, business, or other private location, for a small additional travel charge.
If neither of these work for your situation or location, we can talk with phone or Skype and email.

What to Bring
If you have a specific question, bring all related documents and information. Also bring your list of questions if you have one.
For a no-obligation initial consult, be prepared to answer questions related to your goals, preferences, and current financial concerns.

How Long Will It Take?
Expect the first appointment to take 30-60 minutes. For the actual services to be completed, it varies depending on your needs and schedule.

What will Happen at the First Appointment
We’ll talk about your most pressing concerns and what you hope to get out of the coaching sessions.
If we seem to be a good fit for each other, there will be some paperwork to review. This includes your personal information and information about me and my business, such as:

  • My privacy and security policy
  • Disclosures about who I work for (you), how I’m compensated, and any       conflict of interests
  • My qualifications and services provided and not provided

Depending how much time is left, I’ll start gathering information from you.
We’ll schedule a time for the next appointment.
You will be given “homework” to work on – additional data gathering, and/or completing more personal information forms, in anticipation of our next session.

After the Appointment
Before I start any work I will give you a letter summarizing our conversation. I will also describe the services I will be providing and provide you a quote for the work. You will need to confirm your acceptance of this.
For a comprehensive financial plan, expect a letter of engagement which can be fairly lengthy. I will describe the nature of our relationship, including services, time-frames, and who will undertake what activities.

Payment Methods
I accept payment in cash, certified cheques, credit card via Square or PayPal, or e-transfer. I’m unable to accept personal cheques in most circumstances.

Detailed Financial Plan Outline

1  We begin with a No Obligation Consultation to confirm that I can help with your particular situation. We’ll discuss your goals, current circumstances, and specific needs. This is important for both of us to decide whether I’m the right planner for you, and whether you are ready to create a comprehensive financial plan.
With a well-done and fully implemented financial plan, you should end up with a structured system and improved financial security, but creating it does require a significant upfront commitment of time and money.

 

2  If you decide to work with me, I will provide you a Letter of Engagement. This is the contract that lays out:

  • the scope of the plan — what areas will be addressed
  • the estimated time commitment and completion date.
  • what I will do, and what you will need to do
  • what fees are payable and when they are due

If you haven’t received them before this point, you will also receive full company information – disclosures, billing policy, liability waivers, etc.

 

3  The Data Gathering step is the part requiring the majority of your time commitment.

  • You will need to gather many documents and meet with me for one or more appointments.
  • We will go over all aspects of your life, including your current situation and goals for the future.
  • To get the most out of the plan it’s important for you to disclose all facts and thoughts, whether you feel them relevant or not.
  • If you have any concerns about the financial plan procedure, please bring them up early in the process.

 

4 We will start to talk about the Assumptions needed to create your financial plan. There are many of these and they are often imperative to the success or failure of the plan.
Assumptions include (but are not limited to):

  • Inflation rates
  • Salary increases
  • Returns of different investment types
  • Tax rates
  • Life expectancy

We will do the best we can to accurately predict the future, using conservative assumptions as appropriate. Note, all assumptions need to be updated at least annually, are variable, ultimately unpredictable, and are subject to change.

 

5  Next, I start the majority of my work. This involves analyzing your current situation and considering future scenarios in many areas of your life. I will check in with you periodically to ensure we are on the same page and to get additional information.
The financial plan consists of multiple sections. Here is the brief outline of what I will be looking at in each of these:

Cash Management
Do you need help controlling your spending, saving money, or reducing debt?

I will prepare financial statements showing your current:

  • Assets
  • Debts
  • Net worth
  • Expenses
  • Income
  • Statement of cash flowI then create forecasts and projections of all these items in your future as well.I will provide you tips and assistance with:
  • Value-based spending
  • Saving for your goals
  • Reducing debt
  • Getting over past mistakes
  • Talking to others about money
  • Other money management areas as neededI will work with you to prepare a plan for your current and future income and expenses.Insurance Planning
    Are you and your family adequately protected?

I will:

  • Determine your current insurance needs, based on financial status, health, employment, age, etc.
  • Analyze how well your current insurance is meeting your actual needs.
  • Help you determine if you over or under-insured in any areas.
  • Explain insurance terms and considerations to ensure you get what you need in a policy.
  • Provide you referrals and/or assist you in reviewing insurance quotes.

 

Retirement Planning
When do you want to retire and how do you want your retired life to be?

I will:

  •  Formulate various scenarios based on our previous discussions of your preferences and goals.
  • Help you understand any company pension plans.
  • Create projections for your money leading up to, and after retirement.

My analysis will include:

  • How much money you will need to save to reach your goals.
  • What asset allocations are reasonable.
  • What investment vehicles may be appropriate.
  • Taxes payable in retirement.
  • What money you will use and when.

 

Education Planning
If you have children or are planning to return to school.

I will:

  • Determine the likely costs of post-secondary education.
  • Give you options for saving and investing methods.
  • Provide tips for taxes and spending while in school.

 

Investment Planning
This is related to all the other planning areas.

  • For each goal, I’ll help you decide on reasonable investment methods.
  • I will provide general education regarding common investing strategies,  terms, and costs.
  • I can help you review any recommendations from an investment advisor.
  • We’ll discuss if self-directed investment strategies are appropriate for you.
  • I’ll refer you to investment professionals when appropriate.

 

Estate Planning
Do you have a will, insurance, and a plan for the distribution of your assets and care for your family members if you pass away?

I will:

  • Provide general education about what may happen at death regarding taxes, asset transfers, insurance, etc.
  • Discuss with you what might be contained in a will. You will need lawyer to actually execute it, and I can refer you.
  • Help you create instructions for your spouse, children, or executor.

 

Income Tax Planning
It’s an inescapable area, and is related to all other aspects of the plan.

I will:

  • Explain strategies for legal tax reduction, such as: income splitting, investment methods, and when to claim tax credits and deductions.
  • Create a plan for your taxes, from now, until death.
  • Assist you complete your tax returns, if needed.

 

Your Money and Your Relationships
Do you have a spouse, children, parents, or others in your life?

I will:

  • Help you to navigate the difficult waters of money management and other people.
  • Provide tips for money management with your spouse.
  • Discuss with you about teaching your children about money.
  • Give you options in dealing with parents and other relatives about their own money difficulties.

 

Risk Management Planning
This is related to all other areas of the plan.

You will end up having plans in place for the unexpected, including emergency funds, insurance, estate planning, and other topics as appropriate for your life.

 

All of the above will be fully documented, graphed, and summarized. Then we will meet again.

 

6  Now, you pick your Strategies. I’ll present all my findings and we’ll discuss the pros and cons of each. Some of your goals may not be attainable. You will have to decide where your priorities lie.

 

 7  It’s time to Finalize your plan. I will use your chosen strategies to prepare a formal financial plan including all the information, charts, projections, and scenarios previously made.

 

 8  Together we will Implement your plan. We will get together to discuss the next steps. This is where you take over again. Most of the implementation will be up to you, but I will provide as much support as I can. We can discuss and review information you receive from other professionals. I’ll keep checking up on you to make sure you are able to implement the plan. A comprehensive financial plan is worthless without implementation.

 

 9  Going forward, we will both Monitor the plan. Typically yearly, or more often if you have a life change, we’ll review and update the plan. We will make sure the assumptions are still valid, and change them if they are not. And then adjust the plan as your life changes. Although the greatest amount of work is already done, the plan is not static. It is only useful if it is referred back to and updated appropriately.

 

If you’ve made it to the end of this, congratulations! That’s the first step towards a great financial future. Contact me today and let’s get started. 

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