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January 2014

TFSA or RRSP: A case study

TFSA or RRSP: A case study
TFSA or RRSP: A case study
Written by Jim Yih
I’ve written about choosing between a TFSA or RRSP in the past but I thought I would share a real case study on someone I recently met.
Richard is 32 years of age.  He is married with one four-year-old son.
He is putting away $300 per pay into 3 different accounts at the bank.
·         $100 per pay into RRSPs
·         $100 per pay into TFSAs
·         $100 per month into RESP
Is this the right mix?
0When deciding which account to invest, the starting point is deciding what you are saving for.  After a brief discussion, Richard concluded that the RRSP money was for retirement, the TFSA was like an emergency fund and the RESP was for his son’s education.
Optimize RRSPs first
In Richard’s case, he was making about $116,000 per year in the Northwest Territories.  His marginal tax rate is about 38% so any money he puts towards RRSPs gives him a really great tax deduction.  Given this high tax savings, any money going into RRSPs will give him the best immediate bang for his buck.
From a purely numbers perspective, the RRSP gives a better initial ‘return’ than the TFSA and RESP.  Does that mean he should redirect the entire $300 per pay to the RRSP and not contribute to the TFSA and the RESP?  Not necessarily!
RESPs are still good
Numbers are important but there’s more to this decision than just numbers.  Contributing to RESPs means Richard gets a government grant called the Canada Education Savings Grant (CESG), which is worth 20% of every dollar contributed.
Related article:  The ins and outs of RESPs
Although that’s lower than the 38% he would get in tax savings for the RRSP, the purpose of the money is completely different.  The RRSP is for his retirement where the RESP is for his son’s education.  The decision is less about math and more about purpose and priorities.
What about the TFSA?
In Richard’s case, he has good cashflow but having an emergency fund is never a bad thing.  Richard currently has $12,500 in the TFSA that he does not need or plan to touch anytime soon and was wondering if he should leave it in the TFSA or move it to the RRSPs?
The answer again depends on what the money is for.  If Richard does not need the TFSA for spending or emergencies then switching it over to RRSPs gives him a pretty good bang for his buck.  Let’s look at the math:
If Richard moves $10,000 of the $12,500 to RRSPs, he will get a $3800 tax refund in May after he files his 2012 tax return.  He can then take the $3800 and add it to the $2500 left behind in the TFSA for a total of $6300.  He was comfortable with having $6300 in the TFSA.  Richard also decided that he would keep $50 per month going into he TFSA and redirect the other $50 to the RRSP.
By moving some of the money to the RRSP, it allowed him take advantage of a bigger tax refund and based on the time of year, the TFSA would not be depleted for a long period of time.
This example represents a planning opportunity for those people who have money in their TFSAs and have not maximized their RRSP.  Take a look at your marginal tax rate and if you don’t need the money to stay in TFSAs, you may benefit in moving some of the TFSA to the RRSP to get a tax deduction on the money.
What would you do if you were in this situation – TFSA or RRSP?

Are You Taking Advantage of the Pension Income Tax Credit

Are You Taking Advantage of the Pension Income Tax Credit
Are You Taking Advantage of the Pension Income Tax Credit?
Written by Jim Yih
As many Canadians can attest, it’s not always what you earn that counts, it’s what you get to keep. This is especially true if you are currently retired or are planning to retire in the near future. To make the most of your retirement income, it makes sense to become familiar with the numerous tax credits that are made available through the Canada Revenue Agency (CRA). One of those tax credits is the Pension Income Tax Credit.
What is the Pension Income Tax Credit?
The Pension Income Tax credit is available to you if you are 55 years of age or older. Basically, it enables you to deduct, from taxes payable, a tax credit equal to the lesser of your pension income or $2,000.00. Depending on which province you live in, this equates to $440-$720 in actual tax savings each year.
The pension income tax credit is non-refundable and may not be carried forward each year. In other words, you need to use it or lose it.
In order to claim the credit, the taxpayer must be in receipt of certain specified income. The definitions of “pension income” are therefore important.
What is eligible pension income?
Eligible pension income depends on your age. If you were 65 or older in the year, pension income includes:
1.       Income from a superannuation or pension fund
2.       Annuity income out of a RRSP or a Deferred Profit Sharing Plan (DPSP)
3.       Income from a Registered Retirement Income Fund (RRIF)
4.       Interest from a prescribed non-registered annuity
5.       Income from foreign pensions
6.       Interest from a non-registered GIC offered by a life insurance company.
If you are younger than 65 for the entire year: Pension income includes:
1.       Income from a superannuation or pension plan
2.       Annuity income arising from the death of your spouse under a RRSP, RRIF, DPSP
What is not eligible pension income?
·         Investment income from market based investments
·         Interest income from GICs with banks, trust companies and credit unions
·         OAS and CPP
·         Lump sum death benefits
·         Lump sum withdrawals from RRSPs
·         Retiring allowances
Tax planning strategies involving the pension income credit
If you are over the age of 65 and you are not part of a superannuation or pension plan, you may be able to create qualified pension income to save taxes.
1.       Transfer RRSP to a RRIF. At age 65 transfer $12,000 to a RRIF and take $2000 out per year from age 65 to 71(inclusive). This essentially allows you to get $2000 out of your RRSP tax-free for 6 years. Whether you need the income or not, it is an opportunity you do not want to miss.
2.       Transfer Locked-in Retirement Account (LIRA) assets to a Life Income Fund (LIF) and then annuitize. In most cases, you can transfer your LIRA to a LIF or LRIF once you reach the age of 55. To make the most of this strategy, you must transfer the LIRA to the LIF and then to an annuity in order for the income to be reported as eligible pension income. If you purchase the annuity directly from the LIRA, the annuity is considered a RRSP annuity, which only qualifies for the pension income credit after age 65.
3.       Buy a GIC from a life insurance company. If you do not have any qualifying pension income, are age 65 or over, and do not want to draw down your registered assets at this time, there is a relatively easy way to make a GIC qualify for the Pension Income Tax Credit. Simply purchase a GIC through a life insurance company because it is considered eligible pension income. To determine how much principal you would require to be able to claim the full credit, divide $2,000 by the applicable interest rate for the term you want. For example if you wanted a 5-year term and the current annual rate was 4.0% you would need to invest $50,000 (2000 divided by 4.0%=$50,000).
4.       Transfer of Unused Credit to a Spouse. Unused pension income credit is transferable to a spouse or common-law partner. The ability to transfer this credit should be explored in circumstances where one spouse is earning pension income in excess of $2,000, and the other spouse is not otherwise fully utilizing his or her pension income credit.
If you are over the age of 65, take a look at line 314 in your tax return to see if you are taking advantage of the Pension Income Tax Credit. If not, consider one of these tax savings strategies.

Online Guide for RRIFs

Online Guide for RRIFs
Online Guide for RRIFs
Written by Jim Yih
When people retire, the money that people have in their RRSPs typically finds a new home.  That home is called a Registered Retirement Income Fund or RRIF for short.  When Canadians need to set up a regular income stream from their RRSPs, they have the option to use a Registered Retirement Income Fund or a Life Annuity.  RRIFs are by far the more popular option these days.  Here’s a list of great articles to help you make important RRIF decisions:
RRIF Basics
Understanding the basic RRIF rules
This article is a great starting point to learn about RRIFs and the basic rules of how they work.  If there is only one article you read, this is it.  This articles has been one of my most popular articles on the site.
RRIF minimum income rules
A RIF is designed to create a regular stream of income for retired Canadians.  The government has imposed some rules around how much money can be taken out each year.  They call this the minimum income
Should RRIF minimums be changed?
Some people think the RRIF minimum rules are old and needs some updating to make the rules more current and relevant to the times.  What do you think?
Converting your RRSPs to income
Before you convert your RRSPs to income, it is important to take a look at the amount of money you will receive from different options including the RIF.  How can you make a decision without having some numbers?
RRIFs vs Annuities
When you retire, you can convert your RRSPs into income using a RIF or a Life Annuity.  This article will highlight some of the basic differences.
RRIFs and estate Planning
Designating Beneficiaries for RRSPs and RRIFs
One area of tax planning that does not receive enough attention is the designation of beneficiaries when it comes to RRSPs andRRIFs. Make sure you understand the tax implications of different beneficiary designations.
RRSP and RRIF tax traps
When you die, RRSPs and RIFs become fully taxable to the estate.  Many people designate beneficiaries on the RRSPs and RRIFs at the time of application and more often than not, they do not put the estate as the beneficiary.  This can potentially create a tax trap.
What happens to your RRSPs and RRIFs when you die?
Although it’s not something we like to think about it is an important issue with RRSPs, especially when it comes to tax. On death, the tax consequences really depend on who is listed as the beneficiary of the RRSP.
Taxation of RRIFs
Using RRIFs to take advantage of the Pension Income Tax Credit
Do you want to learn how to get some of your pension income tax free?  All you have to do is learn about the $2000 pension income tax credit.
Income splitting strategies in retirement
In 2007, the government introduced Pension Splitting rules.  Once you turn 65, you can also used the Registered Retirement Income Funds to take advantage of the pension splitting rules.  This one is really worth checking out because it can save couples a lot of money.
RRIF meltdown strategy
One popular question I get is how to get the money out of registered funds without paying tax.  Because it involves leverage and borrowing money, I do not often recommend this strategy.  It’s still worth reading about how to do it.
Investing your RRIF
The difference between an account and an investment
A RIF is an account just like the RRSP is an account. I often call these buckets of money. It’s important to understand the different between these buckets and the investments inside the buckets.
You don’t want too much risk in a RRIF
When you convert your RRSPs to a RRIF it is critically important that you review the investments and make the portfolio much more conservative.  The math of withdrawals to create a retirement income stream can work against you when there is too much volatility

Finances for Students

Finances for Students
Finances for Students
Written by Sarah Yetkiner
“Don’t be afraid to fail. Don’t waste energy trying to cover up failure. Learn from your failures and go on to the next challenge. It’s OK to fail. If you’re not failing, you’re not growing” – H. Stanley Judd
For many students, university and college is an opportunity to learn about much more than just the subjects that they are studying. So much of the University/College experience seems to revolve around figuring out the best (and worst) ways to do things, testing limits, falling down and getting back up again. Lessons about life, love and friendship are as much a part of the student experience as the academics; some of those lessons are easier to absorb than others but it seems that the hardest lessons are often the most powerful. For students living away from home for the first time, managing their time and their finances effectively can be two of the most challenging aspects of student life to master. However, any student who can get them under control can be sure that they’re creating a solid foundation for their future success. When it comes to managing student finances, the principles are very simple:
Understand Your Cashflow
0Student finances can be tricky to manage because often students will receive large sums of money from student loans and bursaries that need to last for several months. Human nature and a person’s money psychology make it very tempting to spend more than necessary at the beginning of the semester when the bank account looks healthy which can make things challenging later on. Figuring out how much money a student needs for tuition, books, food, accommodation, transportation and other necessities and putting it straight into a separate account (preferably not one linked to their debit card!) can help them determine more clearly exactly how much they have for extras and reduce the risk that they’ll overspend without realizing.
Keep Track of Your Spending
Keeping track of your spending is the easiest way to keep it under control. Figuring out a reasonable budget or money management system and then keeping track of spending is a great way for students to avoid going into debt. It’s also really good practice in developing good spending habits and effective money management skills that will help them a great deal once they graduate. It’s not always easy at first but if students can make tracking their money a habit it will go a long way to keeping them out of debt.
Related article:  Know Your Spending
Minimize Your Expense
This may sound logical but for many students it doesn’t come naturally and a big part of that is because they expect their lifestyle as a student to be exactly what they’ve been used to at home. Often, that means eating out regularly, lots of trips to the mall and those “must haves” such as VIP cable and super-fast internet. All the little luxuries that can make living on a student budget seriously challenging and taking on more debt seriously tempting. Human beings are hard-wired for pleasure so it can be hard for students to cut back on the things they’ve come to take for granted, especially when so many other students have them. However, the fact is that the less debt graduates have when they start working the better off they are in the long run. Trying to shift their perspective to see reducing expenses as empowering rather than restrictive can go a long way towards helping students to keep their spending in check.
Related article:  Watch Your Spending Habits
Contribute as Much as You Can
Part-time work while in school and full-time work when not in school can go a long way to helping students stay out of debt and can also help them value their education more. We can’t help but attach a value to something that we’ve had to work for and working in order to help pay for education is no different than working and saving hard for a new computer or something else that we really want. There are also lots of bursaries and other grants available to students with good grades or who meet certain criteria and students who are willing to take the time to research and write application letters or fill out application forms can often get a great financial return on that time investment. I know of one student who funded her entire degree through bursaries and part-time work and she found herself miles ahead of her classmates financially within a short period of time after graduation. Education can be expensive but the more students can do to help cover the costs of being in school, the better off they’ll be after graduation.
Related article:  Ways to increase your income
At the end of the day, university (or college) is a training ground for life, not simply for a chosen career path. The whole experience is a unique opportunity for students to develop the money management skills necessary to succeed in the “real world” and to build a solid foundation for their future financial success. It’s also an environment riddled with opportunities to get into debt; an environment rich with offers of student loans, credit cards and credit lines that are likely to be approved based on a student’s expected income upon graduation rather than their current situation. Being approved for credit is not an indicator of a person’s ability to manage it or pay it off. The more we can do to help our young people avoid falling into the debt trap during their student years so that they can graduate with as little debt as possible the better off they will be in the long term and this is a topic I’m planning to explore further in next week’s post.

10 Things you need to know about RRIFs

10 Things you need to know about RRIFs
10 Things you need to know about RRIFs
Written by Jim Yih
A RRIF is a Registered Retirement Income Fund. If you are nearing the age where you will be looking at converting your RRSPs to income, you should consider the RRIF as an option. RRIFs are the preferred income vehicle today because they offer more flexibility over annuities. Here are 10 things you need to know when converting your RRSPs to RRIFs:
1.       RRIFs are income plans. Unlike the RRSP, the RRIF is an income plan and not a savings plan. You only need a RRIF if you want to withdraw regular periodic income. If you are less than 71 and you need periodic income (once in a while) over regular income (monthly), you might have more flexibility leaving the money in an RRSP and just making a withdrawal from time to time.
2.       You must convert RRSPs to income by age 71. Even if you do not need periodic income or any income at all, you must convert the RRSP into income in the year you turn age 71. Converting to a RRIF will subject you to the minimum income rules but you do not have to start income until the year you turn 72. Technically, at 71, your minimum income is $0 because there was no value to the RRIF at the end of the previous calendar year.
3.       You cannot contribute to a RRIF. If you have a RRIF and you want to make an RRSP contribution, you cannot contribute directly to the RRIF. Instead you must contribute to the RRSP, prior to age 71 and then convert the RRSP to the RRIF. You cannot have a RRSP after the age of 71.
4.       There is a minimum income formula. The minimum income is the lowest amount of income you can take from your RRIF. The minimum income amount is the December 31 balance from the previous year times 1 over 90 minus your age. This formula applies until age 71 at which time the government has an imposed schedule for minimum income.
5.       Minimum income can be based on a younger spouse’s age. For maximum tax deferral, you want to take out as little as possible from your RRIF for as long as possible. One of the ways to stretch the income is to base the minimum income on a younger spouse’s age. This will allow you to withdraw less out of the RRIF if you do not want the income nor want to pay income tax on the income. This option can not be changed.
6.       Understand the beneficiary designation. Under the current rules, if you name your spouse as the beneficiary of the RRIF, the plan can be transferred to the spouse without triggering tax. If the surviving spouse is over the age of 71, the RRIF must be transferred to a RRIF. If the surviving spouse is less than 71, the RRIF can be converted back to an RRSP, or RRIF. At the time of application, you can also designate the beneficiary as a successor annuitant, which means the payments will simply continue onto the surviving spouse without liquidation of assets. Other than some provisions made for dependent children and beneficiaries under the age of 18, any beneficiary other than the spouse will cause the entire value of the RRIF to come into income to the estate.
7.       RRIFs are very flexible. The biggest advantage of the RRIF is tremendous flexibility. You have the flexibility to choose your investments, how much income you want and how frequent that income is paid to you. You also have the flexibility to make changes should your circumstances change. The RRIF is a wonderful planning tool because the flexibility allows you to customize to your specific needs and circumstances.
8.       Watch the attribution rules. If the RRIF is being set up with spousal RRSP money, you must be aware of the attribution rules. If any contribution has been made to any spousal RRSP with any institution in the year of income or the two preceding years, there will be attribution of income to the original contributor. This attribution only applies to amounts in excess of the minimum income. If you need income but want to avoid attribution, you can withdraw just the minimum.
9.       RRIF income may be subject to withholding tax. Even though all RRIF income is fully taxable, only the amounts withdrawn in excess of the minimum are subject to withholding tax at source. Withholding tax is simply the amount of tax you prepay to the government. The more withholding tax, the less you will have to pay in the future. Less withholding might mean you would owe more down the road. Withholding taxes in all provinces expect Quebec are 10% for amounts withdrawn up to $5000, 20% for amounts between $5001 and $15,000, and 30% for amounts greater than $15,000. To minimize withholding taxes, you may want to consider withdrawing a number of withdrawals less than $5000 each time.
10.   RRIFs qualify for the $2000 pension income credit. If you are over the age of 65 and you do not have a company pension plan, you may be able to withdraw $2000 per year of income from the RRIF tax-free.

RRSP and RRIF tax traps

RRSP and RRIF tax traps
RRSP and RRIF tax traps
Written by Jim Yih
The designation of beneficiaries is a very important component of estate planning especially when it comes to the RRSPs and RRIFs. It has been regular practice for financial advisors and institutions to list a beneficiary designation for the Registered Retirement Savings Plans (RRSP) or Registered Retirement Income Funds (RRIFs).
Generally it is common practice if you have a spouse to list your spouse as the beneficiary because the transfer will qualify for a tax deferred rollover to the spouse and there will be no tax paid. CRA will get their money later.
With a RRIF only, if you are going to list your spouse as the beneficiary, you may want to designate your spouse as a successor annuitant instead. In this case, the spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this, as there is no need to execute a new contract.
Watch beneficiaries other than the spouse
When someone other than the spouse is listed as the beneficiary, the RRSP/RRIF is deemed to have been sold just prior to death and the tax burden goes to the estate. Here’s a quick example of this:
Richard was in his second marriage and wanted to make sure that his 2 children, Beth and Art would get part of his estate. As a result, he listed his two kids as the beneficiary of his RRSP. His new spouse would get the house and his pension.
When Richard passed away, the kids got the RRSP money but the RRSPs were still taxable to the estate. When the final tax return was done, there was a significant tax bill but no money in the estate to pay it. The house and the pension did not go through the estate as it went directly to the spouse.
In the end, the kids had to pay the tax but the problem was they spent the money right away. The relationship with their mother-in-law was damaged for life because they felt that she should pay for part of the tax bill.
My two cents
There are a few possible solutions to prevent this trap from happening. The first is to simply watch the designation of beneficiaries on RRSPs and RRIFs. Just remember that no matter who gets the money, there will be tax that has to be paid.
Also remember the joke “Die broke and have fun at it”. The reason it’s a joke is because it’s really hard to do. That being said, when it comes to RRSPs, it’s best to have spent them before you die because they all become taxable when you die. The key is not to die with too much RRSPs but rather spend them while you are living.
And lastly, remember that life insurance can be a great estate planning tool because it creates liquidity. One of the benefits of having life insurance is it can create money in the estate to pay for the tax liability.

Bequests of RRSPs and RRIFs to charities

Bequests of RRSPs and RRIFs to charities
Bequests of RRSPs and RRIFs to charities
Written by Grant Hicks
Who is your beneficiary on your RRSPs or RRIFs? Did you know that it can be more than one person and can include a charity. For income tax purposes, a charitable donation made under a deceased will is deemed to have been made immediately before the deceased death. Accordingly, the donation can quality for the charitable donation tax credit in the year of death. Furthermore, to the extent it is not claimed in the year of death, the charitable credit can be carried back and claimed in the preceding year.
Until recently, where an individual designated a charity as a beneficiary under the individuals RRSP or RRIF, the gift to the charity upon the individuals death did not qualify for the charitable tax credit. The credit upon death was formerly available only with the respect to donations that were made under the deceased will and direct designations under RRSPs and RRIFs did not meet this requirement.
Fortunately, the government has changed the rules, and the tax credit is now available for gifts of RRSP and RRIF proceeds to charities that are made under a direct designation under an RRSP or RRIF. As a result, the credit in these circumstances will be available in the year of death or in the preceding year, as described above. These changes apply to deaths occurring after 1998.
The amount of the donation for these purposes will generally be the fair market value of the gift from the RRSP or RRIF, determined as of the time of the deceased death. The gift must actually be made to the charity within 36 months of the death, although the CCRA has the discretion to extend this period further. Note that a similar new rule will allow the charitable tax credit where the deceased designated a charity as a direct beneficiary under a life insurance policy. If you are looking for ways to plan your estate, leave the non taxable assets to the family, and the taxable assets, such as RRSPs and RRIFs to a charity. This may maximize your estate, however, professional advice should always be considered when planning your estate.

What happens to your RRSPs when you die?

What happens to your RRSPs when you die?
What happens to your RRSPs when you die?
Written by Jim Yih
When we think of RRSP planning, we often think about whether it makes sense to buy RRSPs or how to invest your RRSPs.  One question we may not think about addressing right away is “What Happens to your RRSPs when you die?”  Although it’s not something we like to think about it is an important issue with RRSPs, especially when it comes to tax.
On death, the RRSPs are deemed to have collapsed.  The tax consequences really depend on who is listed as the beneficiary of the RRSP.  The general rule for an RRSP or RRIF is that the value of the RRSP or RRIF at the date of death is included in the income of the deceased for the tax return for the year of death
There are three exceptions to this rule where the tax can be deferred if the beneficiary of the RRSP, RRIF, or estate is one of three parties:
1.       the spouse (includes common-law partner)
2.       financially dependent child or grandchild under 18 years of age, or
3.       financially dependent mentally or physically infirm child or grandchild of any age.
Your spouse as the beneficiary
The spousal rollover provision allows a spouse that is listed as the beneficiary to rollover the amount of the deceased’s RRSP into their RRSP without any tax consequences.  Obviously for planning purposes, it is wise in most cases to list a spouse as a beneficiary.
Dependent child or grandchild
If a financially dependent child or grandchild under the age of 18 is the beneficiary of the RRSP, the dependent child under the age of 18 can roll the RRSP into an annuity that pays the child to the age of 18.  For example, a 7 year old who is the beneficiary of a RRSP can have the RRSPs rolled into an 11-year annuity, which would spread the tax over an 11-year period.
Dependent infirm child or grandchild
For dependent infirm children, the amount received can be transferred to an RRSP set up for the child, meaning the funds will not be taxed until the funds are withdrawn. It is important to weigh any tax savings against the practical issues related to having funds go into the hands of an infirm child.
Other considerations:
What happens to the Home Buyers Plan at death?
If there is an outstanding balance remaining in the RRSP home buyer’s plan, the outstanding balance will be included as income on the deceased’s final income tax return unless the spouse was named as beneficiary and had taken out a home buyer’s amount at the same time. In this case, the beneficiary has two options:
1.       the outstanding amount can be added to the final tax return of the deceased spouse or,
2.       the entire RRSP, including the Home Buyers’ Plan balance, can be rolled over to the beneficiary’s RRSP.
Successor Annuitant for RRIFs
For RRIFs, when naming your spouse as beneficiary, you are given the option of having your spouse receive the RRIF as a lump sum or choosing your spouse as the “successor annuitant” to the RRIF.
If a successor annuitant election is not made, the deceased’s RRIF will be collapsed causing a disposition of the investments in the RRIF followed by a rollover to an RRSP or RRIF of the surviving spouse. There may be several disadvantages to this. It may not be a good time to sell the investments in the RRIF or there may also be selling costs to consider. Also, there is the issue of preparing all of the paperwork at a difficult and stressful time for the surviving spouse.
The successor annuitant designation is effortless. The spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this, as there is no need to execute a new contract.
Listing a charity as a beneficiary
The most significant changes affecting estate planning relates to the ability to receive a credit of up to 100% of taxable income for donations made through a Will. This means that the tax on RRSPs and RRIFs arising from the death of the annuitant can be avoided completely if a donation equal to the value of the RRSP or RRIF is made in his/her Will.
This is a great opportunity for individuals to donate money to their favorite charity that would have otherwise gone to the government in the form of taxes.
Listing the estate as the beneficiary
Many people choose not to do this for two reason.  Firstly, the amounts become fully taxable to the estate and secondly, the RRSP form part of the estate and are also subject to probate fees.  If there is no spouse, many people prefer to list their children as beneficiaries, which can help avoid probate but not tax.  In this case, it is important to watch the tax trap that can occur when someone other than the spouse is listed as a direct beneficiary of the RRSPs or RRIF.
Don’t die with too much RRSPs
I’ve said it before and I will say it again . . . the worst thing you can do is die with too much RRSPs.  It may sound odd because most people are supposed to spend their money in retirement but far too often people get focused on deferring RRSP income so they do not have to pay tax and the fear of running out of money.  As you can see, it is critical that people take the time to do some proper estate planning, which includes thinking about beneficiary designations.  More importantly, I encourage people to think about a spending plan for their RRSPs as part of their overall financial plan.  Choosing the right beneficiary is a significant part of estate planning.

Designating Beneficiaries for RRSPs and RRIFs

Designating Beneficiaries for RRSPs and RRIFs
Designating Beneficiaries for RRSPs and RRIFs
Written by Jim Yih
One area of tax planning that does not receive enough attention is the designation of beneficiaries when it comes to Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). When you open up an RRSP or RRIF, you are opening up a special contract under the Income Tax Act, which allows you to designate one or more beneficiaries.
Far too often, this is done too casually and without enough thought. More importantly, as your circumstances change, like marriage, divorce or children, you should consider reviewing your beneficiaries to make sure you have the right people designated.
Taxation of the RRSPs/RRIFs at death
0The first place to start in understanding whom to list as a beneficiary is to understand the taxation of these contracts at death.
The general rule for an RRSP or RRIF is that the value of the RRSP or RRIF at the date of death is included in the income of the deceased for the tax return for the year of death. There are three exceptions to this rule where the tax can be deferred if the beneficiary of the RRSP, RRIF, or estate is:
1.       the spouse (includes common-law partner)
2.       financially dependent child or grandchild under 18 years of age, or
3.       financially dependent mentally or physically infirm child or grandchild of any age.
Who should be the Beneficiary?
For obvious reasons, there are tax benefits to naming your spouse, dependent children/grandchildren under the age of 18 or dependent adult children who are mentally or physically inform.
That being said, anyone can be named the beneficiary. Most often, it is the spouse, children or the estate that are named but it does not have to be that way.
RRIFs and Beneficiary Designations
When you are converting your RRSP to a RRIF, you are setting up a new contract and you must designate a beneficiary at that time. If you assume the RRSP designation would continue to apply, that would not be the right assumption.
Successor Annuitant for RRIFs
For RRIFs, when naming your spouse as beneficiary, you are given the option of having your spouse receive the RRIF as a lump sum or choosing your spouse as the “successor annuitant” to the RRIF.
If a successor annuitant election is not made, the deceased’s RRIF will be collapsed causing a disposition of the investments in the RRIF followed by a rollover to an RRSP or RRIF of the surviving spouse. There may be several disadvantages to this. It may not be a good time to sell the investments in the RRIF or there may also be selling costs to consider. Also, there is the issue of preparing all of the paperwork at a difficult and stressful time for the surviving spouse.
The successor annuitant designation is effortless. The spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this, as there is no need to execute a new contract.
Probate Fees
One key benefit is if a beneficiary is designated in the RRIF contract, the RRIF value will not be included in the calculation of probate fees on death. While probate fees are not as significant as income taxes, such a simple step will ensure that there is more available for your beneficiaries.
Giving money to charities
The most significant changes affecting estate planning relates to the ability to receive a credit of up to 100% of taxable income for donations made through a Will. This means that the tax on RRSPs and RRIFs arising from the death of the annuitant can be avoided completely if a donation equal to the value of the RRSP or RRIF is made in his/her Will.
This is a great opportunity for individuals to donate money to their favorite charity that would have otherwise gone to the government in the form of taxes.
RRSPs, RRIFs and estate planning
As you can see, the designation of the beneficiary in your RRSPs and RRIFs is one of the most important factors in how much taxes you are going to have to pay at the time of death. Yet, it is astonishing how many people make this decision without regard to the overall estate plan or simply forget to designate a beneficiary.
When setting up a RRSP or a RRIF, it is crucial that you make good beneficiary choices. It is equally important that you review the beneficiaries in the RRSPs, RRIFs and through your will from time to time. If you haven’t done this in a while, review it sooner than later.

Pension plans provide safe, guaranteed income in retirement

Pension plans provide safe, guaranteed income in retirement
Pension plans provide safe, guaranteed income in retirement
Written by Jim Yih
Samantha and Jack just met with a financial advisor recommending they pull their money out of Jack’s defined benefit pension plan with the government and move it into a Locked in Retirement Account (LIRA). The advisor suggested that he could earn better returns than the pension and that the LIRA would provide an estate for their kids. Moving the money into a LIRA would also give them the opportunity to unlock 50% of the LIRA into an RRSP where they could use the money for whatever they wanted.
Related article:  Unlocking LIRA money
Before anyone considers moving money out of a pension plan, there are many issues to consider:
01. You have to quit to pull the money out.
In Jack’s case, he works for the Alberta Government. His advisor told him he could move money out of his pension before the age of 55, which is correct but was not aware that he had to quit to move the money out. In most cases, especially for defined benefit pension plans, the only way you can move pension money out of the pension is to sever ties with the employer. Make sure your financial advisor is knowledgeable and qualified to advise on pensions.
2. Pension decisions are irreversible.
Any pension decision should be made with care especially the decision to move money to a LIRA. Essentially, you have only one chance to make the right decision. All pension decisions are irreversible and irrevocable. Once you make a decision, you can’t go back and reverse the decision. Make sure you take you time and be very, very careful before you react too quickly.
3. Pension decisions are personal.
When it comes to pensions, every situation is unique. Jack knew other people who moved their pensions out to a LIRA so he thought he should consider it too. The only way you can make the right decision about pensions is to crunch your own numbers. Many people have a tendency to look at other people and drawing comparison but this is foolish analysis.Jack’s pension is based on his age, his spouse’s age, his years of service, his salary information, etc.  Just because it made sense for someone else, it does not mean Jack should too. Be careful about using rules of thumb and over simplified analysis.
4.Pensions provide safe guaranteed income.
The whole point of pension plans is to provide lifetime guaranteed income. Although there can be some valid arguments to move pension money into a LIRA, never downplay the importance of lifetime guaranteed income. The minute you move money out to a LIRA, you have no guarantees. Just ask Jack friend Eldon about his decision to pull his pension money out 3 years ago to invest in a portfolio targeting 9% returns. Now, not only has ne not made 9% but also he has lost about 25% of his pension money to these crazy markets.
5.Watch out for biased advice.
Getting unbiased help with pension advice is not easy. Most pension representatives are not allowed to provide advice as to whether you should or should not take your pension. On the other hand, going to financial advisor can have some flaws too because most financial advisors make money only if they get the asset to manage. Thus it is much better to pay someone a fee to do the analysis. Wherever you seek help in making this very important process, make sure the analysis is balanced. There are pros and cons to every decision. You need to be aware of both before you can make the right decision.
There are many more issues and considerations if you are contemplating moving pension money out to a LIRA. Just be careful, complete and patient. Do what’s right for you!

Income Splitting Strategies in Retirement

Income Splitting Strategies in Retirement
Income Splitting Strategies in Retirement
Written by Jim Yih
Income splitting is not an easy strategy to accomplish in Canada. We live in a tax system where every individual must report their personal income and pay tax individually.
Income splitting is a strategy where couples try to move income from a spouse in a higher tax bracket to a spouse that is in a lower tax bracket. The government has been tough on income splitting because it would mean much lower tax revenues to them. For example, an individual who makes $70,000 per year would pay considerably more tax than a couple that earned $35,000 each.
Although couples are not allowed to pool their income and report it in a split fashion, there are income splitting strategies for Canadians. In this article, I will share with you three income splitting opportunities for retirement.
Pension Splitting
As of January 1, 2007 individuals who are 65 years of age or older can allocate for tax purposes up to a maximum of 50% of the annual income received from a lifetime annuity, registered pension plan, RRSP annuity, registered retirement income fund (RRIF) or deferred profit sharing plan annuity to a spouse (or common-law partner or same-sex partner). Although the actual income is still received by the individual, the splitting for tax purposes is done via the tax return. The receiving spouse is not required to be 65 years of age or older to receive an allocation, and the amount allocated can be changed each year for the benefit of the couple. This is great news for senior couples.
For those individuals under age 65, pension splitting only applies to those who receive lifetime annuity payments from a registered pension plan. RRIF income cannot be split under age 65.
Spousal RRSPs
With the new changes to pension splitting, spousal RRSPs are not as beneficial for those over the age of 65. However, they still make sense for income splitting under the age of 65. Spousal RRSPs simply allow a spouse that is in a higher marginal tax rate to contribute to a spousal RRSP in the name of the lower income spouse. For example, my spouse Liz is in a lower tax bracket than me so conventional thinking is I should contribute to Liz’s spousal RRSP instead of my personal RRSP. That way, when she withdraws the money, she pays the tax instead of me (as long as she we follow the 3 year attribution rules).
The key to benefiting from spousal RRSPs is planning ahead and looking down the road to retirement. A 60 year old cannot arbitrarily assign some of his or her RRSPs to a spousal RRSP. It has to be done at the time of contribution. Don’t wait to plan when it might be too late. Start early.
Canada Pension Plan splitting
Similar to pension splitting, couples can split their CPP retirement benefits. The only reason you would do this is if the spouse with the higher CPP is in a higher tax bracket than the lower CPP earner. Unlike pension splitting, both spouses must be over the age of 60 and both must be collecting CPP. Also, the split between spouses must be 50-50 and no other fashion. For example, if the higher income spouse earns $700 per month and the other spouse earns $300 per month, CPP allows each spouse to take $500 per month ($700 plus $300 divided by 2).
Although the government is tough on income splitting, there are strategies for Canadians to lower the tax bite. Next week, we will look at other income splitting strategies beyond just retirement.

25 annual expenses to budget for now

25 annual expenses to budget for now
25 annual expenses to budget for now
Did the holidays sneak up on you last year? Do you find yourself scrambling for cash to pay insurance premiums or car registration fees? Do copays for your annual dental and eye exams throw your budget out of whack?
If you're like many people, you forget about some of these annual expenses. Even though you know you'll have to pay them at some point during the year, they're out of sight and out of mind until you get hit with an unexpected bill.
And when you're suddenly scrambling to pay $200 for your car registration, $500 for holiday gifts or even $75 for your dental visit copay, your whole monthly budget gets thrown off. Then, you just wind up on a financial roller coaster for the entire year.
But you don't have to live this way. Instead of dealing with constant unexpected expenses, learn to expect these annual costs. Add them into your budget each month, and you'll be cool as a cucumber when those bills come in the mail.
Monthly budgeting for annual expenses
Budgeting for annual expenses when you make a monthly or biweekly budget is simple. Just divide the total expense by 12, and set aside 1/12 of the overall payment each month.
You can leave this money in your checking account until you need it, or move it over to savings for safe keeping. Having immediate access to the money when it comes time to pay these expenses matters more than where it's kept.
So to start your new year off right, go through last year's spending to find the annual expenses you need to account for. Add up how much you spent on charges that come at the same time each year, divide it by 12 and set aside some cash each month for these budget items.
25 common annual expenses
Your list of annual expenses will vary, depending on your circumstances. So you'll want to take the time to look over last year's spending. Check for expenses that came up once - or twice, if they're paid every six months - and write down the cost for each one.
Just so you don't miss any annual charges in your budget, here's a list of 25 of the most common yearly expenses:
1. Auto registration fees
2. Annual scheduled car maintenance
3. New tires and brakes (as needed)
4. Car insurance premiums
6. Holiday, birthday and anniversary gifts
7. Holiday and birthday parties/entertaining
8. Pet wellness visits and vaccinations
9. Pet tag/licensing fees
10. Co-pays for annual physicals, dental exams and eye exams
11. Life insurance premiums
12. Union dues
13. Professional licensing/subscription fees
15. CAA membership fees
16. Other membership dues (local museums, zoos, etc.)
17. Annual credit card fees
18. Tax preparation fees
19. Annual home maintenance (carpet cleaning, gutter cleaning, tree trimming, etc.)
20. Vacations
21. Magazine and newspaper subscriptions
22. Other subscriptions (Netflix, Amazon Prime, Hulu, etc.)
23. Homeowner's insurance and taxes (if they aren't escrowed with your mortgage payments)
24. Homeowners association fees
25. Taxes on side business income or interest income
The first time you decide to budget for annual expenses, it can take some time. After all, you'll need to go back over bank statements or your budgeting software for the past year to make sure you account for everything.
But it won't take long before you see the benefits of budgeting each month for annual and one-off expenses. As soon as you get hit with the bill for your life insurance premiums, or the reminder to renew your license plates, you'll breathe easier knowing you already have that money set aside.

What’s Your Financial Motivator?

What’s Your Financial Motivator?
What’s Your Financial Motivator?
Written by Sarah Yetkiner
“Go confidently in the direction of your dreams. Live the life you have imagined.” – Henry David Thoreau
Achieving financial security and financial success is not always easy. The principles of achieving the goal are pretty simple; pay yourself first, spend less than you earn and pay off your debts; the reality of adopting and maintaining the discipline and the habits that will keep you on track and take you where you want to go is not always so simple.
0The trouble is that being smart with your money is not always the most fun you can have with your money. As human beings we’re hard-wired for pleasure and it’s the anticipation of that pleasure that is far more exciting than actually achieving it. There are a myriad of pleasurable things that can be bought with money and it can be all too easy to get caught up in the drive to enjoy those short term pleasures rather than spending time building something bigger in order to reap a much higher long term gain.
Part of the solution lies in a change of perspective; if we can start to see saving as more exciting than spending then the drive to save will be greater than our drive to spend. This makes it easier to resist the temptation to spend our hard-earned money on bargains and must-haves that all too often turn up in our closets months later with the tags still attached.  The other part lies in having a financial motivator to save that is bigger than our motivator to spend. It’s not the act of saving and building wealth that we enjoy, it’s the fact that in building wealth we are creating a life that is rich in so many non-financial ways.
What does financial freedom mean to you?
Is it a house on the beach? A great education for your kids? The time and the money to travel? Perhaps it’s establishing a charitable foundation or having the time to commit to volunteering overseas or just the freedom to spend time with those you love? How much money would you need in order to fund that freedom? If you had enough money coming in each month to pay your bills and meet your savings goals then what would you do with the time you currently spend working? It might sound like a pie in the sky fantasy but the reality is that every day, ordinary people who work ordinary jobs and live in ordinary homes retire with an extraordinary amount of wealth. They are able to do it not because of a lottery win or some other windfall but because they had a clear vision, followed simple principles and worked consistently towards achieving a financial goal.
Reaching that goal needs a plan but what it needs even more is a financial motivator. Once you’ve defined what achieving your goal looks like, take it one step further and consider how exactly attaining financial freedom will impact your life? Why do you want to achieve your goal? How will it benefit those you care about?  Dig deep for your motivator; you need to make the vision of achieving your dream so real that you can taste the excitement of reaching it. It’s this feeling that will boost your willpower when you’re tempted and get you back on track when you’re discouraged. It’s this excitement that will fuel your drive to achieve and inspire others to believe in and support your dream. Don’t let your dreams be limited by what society or your peers say is real and possible; the world is full of people who have achieved so much more than others thought they could. Don’t be intimidated into making your goal too easy; you won’t ever know what you are capable of unless you’re willing to risk going outside of your comfort zone.
Setting goals
I recently joined a goal setting group in order to get a little more accountability and motivation to help me stay on track towards achieving the big goals I’m intending to achieve by the end of 2014. The leader of the group told me not to think small in setting my goals but to push myself right to the limits of what I think I’m capable of.
The theory is that if you set the bar too low you won’t push as hard to get over it, setting it high enough to be challenging but not so high that it’s impossible inspires you to drive harder to achieve. For me financial freedom means no debt, a year’s worth of expenses in the bank, a steady passive income stream, a cozy (rented) apartment and a shiny, black (fully paid for) 2014 Tesla Model S. The car is my one indulgence; I’ve learned that I don’t need a big house, a lot of “stuff” or the trappings of an extravagant lifestyle but I really love driving nice cars.

Keep Moving towards your financial goals

Keep Moving towards your financial goals
Keep Moving towards your financial goals
Written by Sarah Yetkiner
“A journey of a thousand miles begins with a single step.” – Lao Tzu
It’s almost the end of January, the point in the year where for many of us, all the resolutions we made with such enthusiasm 30 days ago have either been abandoned or are fading rapidly. It’s become so commonplace not to follow through with our good intentions that many people have stopped making resolutions altogether and those that do, accept that not following through with them beyond the second week of January is pretty much par for the course. The trouble with resolutions is that they tend to be an intention rather than a definite commitment to action. We recognize that we need to make a change, we have the enthusiasm to start on the path towards that change but somewhere along the way, usually within the first week, we start to lose momentum and we drift back into the space we were in before. This is especially true with money. We start the year with good intentions but it doesn’t take long for us to fall back into the ‘comfortable discomfort’ of our original situation. So, if we’re serious about making the change, what can we do differently to increase our chances of success?
Be Clear About Your Goals
The difference between financial resolutions and financial goals is that resolutions tend to be simply intentions for action whereas goals are commitments to action. By taking the time to ensure our financial goals are S.M.A.R.T., written down (preferably somewhere we can see them) and have a clearly defined action plan attached to them we dramatically increase our chances of success.
Know Your Motivator
All of us are motivated by different things. Some people want to build financial security to protect their family, some people want the time freedom that comes with not relying on their 9-5 to pay their bills, some people want to use their wealth to benefit causes that are important to them. Some of us just want the peace of mind that comes from finally being debt-free. Whatever your goal, take the time to think about why you want to achieve it and focus particularly on how it will feel when you attain it. That feeling is what will keep you on track when you get discouraged and motivate you to keep going.
No matter what your goal there will be people around you who don’t believe in it. At the end of the day though it doesn’t matter what anyone else thinks; all that truly matters is that you believe in your goal and also in your ability to achieve it. Goals are very personal things; what drives you won’t be the same as what drives someone else and so your dreams don’t have to match anyone else’s vision except your own. If you believe in your goal, if you know what is driving you to achieve it and you believe that you can achieve it then there isn’t an obstacle big enough to stop you getting there. Mark Victor Hansen and Jack Canfield, the authors of the Chicken Soup for the Soul series, were turned down by 144 publishers before they found someone who said yes to their first book. James Dyson created 5127 versions of his Dyson vacuum cleaner before developing the one he considered perfect for production. Edison failed thousands of times before he finally created a light bulb that worked the way he wanted it to. All of them persisted because they believed in their goal and their ability to succeed and in the end all of them were successful.
0Take a Step Every Day
Taking the first step towards a goal is an essential part of your success but even more important is to keep moving. Remind yourself every day of your goal and why you want to achieve it and then do just one thing that moves you closer to reaching it. Some days the steps will be larger and more significant than others but every step you take is important. Each day the movement becomes a stronger habit and every step you take makes it easier to keep going. Keep your eyes on your end goal but be sure to celebrate every step of the journey; not only will it keep you motivated but you’ll inspire those around you too. Whether you’re working to eliminate debt, change your spending habits, simplify your life or reach a significant savings goal do something every day that takes you closer to achieving it. You’ll be amazed at how quickly those small steps add up to become a big leap towards reaching your goal. Take some time this week to consider what you want your life to look like at the end of this year.

Who’s Sabotaging Your Financial Goals?

Who’s Sabotaging Your Financial Goals?
Who’s Sabotaging Your Financial Goals?
Written by Sarah Yetkiner
“Once you realize that you’re the only person holding yourself back, you’ll stop making excuses and start making changes.” – Sonya Parker
It seems that there’s a huge difference between knowing and doing. In so many areas of life we make choices that we know don’t really serve us because the desire to have is greater than our willpower to resist. Food, exercise, money, career, relationships; in every one of these areas we sabotage our pursuit of success and happiness by making choices that we know aren’t the best, often because they’re more enjoyable than doing what we know makes most sense in the long term.
The trouble is poor choices are easy to justify and nothing is guaranteed. We know that, as much as we’d like to think that we’ll live a long, healthy life there’s also the chance that won’t happen. When we stick to our game plan we’re thinking about the long term but when we take the pleasure instead of the pain we justify it with a “life is short” mindset that gives us a free pass. Where’s the balance between having fun and having the resources to ensure the fun lasts into retirement? Can we have our cake and eat it too?
The Fun Factor
0Anyone who’s ever set a goal knows that there are three key factors when it comes to success: a clear, achievable goal, a solid plan and a strong motivator for success. When you set a goal you don’t achieve, the reason for not succeeding is usually connected to one of these three factors. We decide that the price required in order to reach the goal is higher than we’re prepared to pay or we find that our desire for the goal just isn’t strong enough to keep us committed to the plan.
Often we get derailed simply because the action plan we create to take us to our goal doesn’t have a “fun factor”. Humans are hard-wired for pleasure; if we don’t build opportunities for fun and relaxation into our goals then we make the path to achieving them much more challenging. This is especially true when it comes to financial goals because there are so many things that we can do with our money that give more immediate pleasure than purposing it towards a goal. Making sure that you allocate some money just for fun may mean that it takes you a little longer to achieve your goal but it will make it much more likely that you’ll reach it without getting derailed along the way.
The Friend Factor
It’s said that we are the sum of the five people we spend the most time with. Whether these people are positive or negative can have a dramatic impact on what we are able to achieve in all areas of our lives. When we’re on a path to creating something better it’s important to be surrounded by people who not only support and believe in our goals but who are also committed to making positive changes in their own lives. One part of supporting our friends in their goals is to hold them accountable, even when they’d rather that we just kept quiet. I’ve noticed recently that we tend to look to our friends for validation when we make a decision that’s not strictly in line with our goals. Giving (and receiving) that validation isn’t necessarily in a person’s best interests, especially when it comes to helping them justify a purchase or an expense that really isn’t taking them closer to their goals. We use phrases like “you need to treat yourself once in a while” or “you’ve been working really hard, you deserve a treat” or “that’s such a great deal, it doesn’t make sense not to take advantage of it” which make our friends feel better but don’t hold them accountable to their bigger goals. Essentially what we’re doing is supporting their self-sabotage, which, when it comes to financial goals, can have a big impact on their happiness and future success. Friends are a big part of our lives and this is why it’s important that we surround ourselves with people who not only support our goals but who will also hold us accountable to achieving them.