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2016 Tax Tips for 2015 Filing Year

2016 Tax Tips for 2015 Filing Year


2016 Tax Tips for 2015 Filing Year- www.aliko-aapayrollservices.com/blog


Did you know that last tax filing season, the average tax refund was just under $1,800, or about $150 a month? That’s a lot of money to give to the government on an interest-free basis. Yet that’s what almost 17 million tax filers did and CRA paid back approximately $30 Billion dollars. Astute tax filers will want to get that money back working for their own futures quickly this year. If that includes you, do file your tax return early and accurately. But make sure you have all your documentation, first.
Make a point of acquiring and reviewing tax software if you are NETFILING this year. If you hire a pro, make an appointment as soon as possible to determine what is needed to meet new tax filing rules and discuss what has changed in your personal affairs. Births, deaths, marriages, divorces, new jobs and job terminations – all can impact the tax return.

Two-Parent Families With Kids: $85,000 Is Median After Tax Income

Two-Parent Families With Kids: $85,000 Is Median After Tax Income - www.aliko-aapayrollservices.com/blog



Two-Parent Families With Kids: $85,000 Is Median After Tax Income
 
Written by: Evelyn Jacks
The Canadian Income Survey for 2013 for 2013 was released by Statistics Canada on July 8.  While things are virtually unchanged from 2012, some interesting facts emerge about the income levels earned by Canadian families
The survey defines market income as “earnings, private pensions as well as income from investments and other sources such as support and disability payments”.  After-tax income is defined as the total of market income and government transfers, less income tax.  The survey also defines those who live in “economic families”, as groups of two or more people who live together in the same dwelling who are related by blood, marriage or common-law, adoption, or in a foster relationship.  For the purposes of this article, we’ll call all others, “singles”.
It is clear that when it comes to making ends meet, the numbers squarely favor economic families over singlehood:
  • Senior families.  Where the highest earner in the family was 65 years or older (senior families) median after-tax income was $52,500 in 2013.  Singles in this age group has after-tax income of $25,700.
  • Non-senior Families.  Median after tax income in this group was $77,100; for singles in this group the after-tax income was $29,800.
  • Parents with Children. .  Two-parent families with children had median after-tax income of $85,000.  Lone parent families had median after tax income of $41,700, with families headed by a woman earning slightly less:  $39,400.According to the survey, the median amount of income tax paid, including both federal and provincial tax, by non-senior families was $11,700 in 2013; in contrast, the median paid by senior families was just $3,100.How much do top earners make? The top 10 percent of earners are economic families and singles with an after-tax income of more than $130,600. And in that top decile, average after-tax income was $183,600.  After taxes, Canadians in the highest decile  had 23.7% of all after-tax income in Canada in 2013, while the four lower deciles together accounted for 19.8% of total after-tax income.The bottom line for all taxpayers – regardless of earning level - is that what you keep is more important than what you make. What can tax and financial advisors do to help their clients accumulate, grow, preserve and transition more wealth, as prescribed under a Real Wealth Management™ model?  Here are some suggestions for your next discussion with your clients:For two-parent families: Two-parent families are able to take advantage of the Family Tax Cut, first introduced for the 2014 year. By averaging out family income, two-parent families whose incomes are in different tax brackets are able to retain up to $2,000 in their pocket that would otherwise go to the government.For example: A two-income family with parents earning $75,000 and $25,000 respectively can take advantage of the FTC and reduce their combined tax bill by about $1,330. These additional funds might well be best saved within an RESP, (Registered Education Savings Plan) to take advantage of government grants and bonds available under the plan as well as the tax deferred income accumulation opportunities.For single and two parent families: Both types of economic households – singles and couples - will be able to take advantage of the enhanced Child Care Expense deductions in tax year 2015,  with increased limits of $7,000 for children under seven and $4,000 for children from 7 to 15 years of age. In addition, the Enhanced Universal Child Care Benefit has increased to $160 per month for children under 6 years (from $100), and $60 per month is now available for each child from 6 through 17 years of age starting in 2015. Lump sum payments for the enhanced amounts for of $60 a month for all children under 18 are being paid retroactive to January 2015 this week.  Investing those sums into a child’s education savings or the parent’s TFSA are both great ways to leverage tax efficient investment opportunities for future financial freedom.They may also often benefit from an increased monthly refundable Child Tax Benefit as a reduced family net income has the potential to increase or create access to the monthly refundable Child Tax Benefit.  With CTB claw back rates at 12.2% for one child up to 33.3% for three or more children, the effective return on an RRSP investment for these families can be very high.For single non-parents: Utilizing tax brackets strategically remains the best option for single, non-parent taxpayers. These individuals can maximize the use of RRSPs to reduce their income to a lower bracket, thus paying less tax annually. When taxable income has reached the lowest bracket, maximizing TFSA contributions provides further options for retirement savings and security.For seniors: In addition to being able to claim the Age Exemption amount of $7,033, seniors can also be pro-active from a tax point of view by structuring their income levels advantageously by triggering or deferring OAS and CPP benefits. Furthermore, maximizing tax benefits through pension splitting for married or common-law seniors reduces the overall tax burden when private pension income from RRSPs or RRIFs becomes taxable.   

Five Steps To Calculating 2015 TFSA Contribution Room

Five Steps To Calculating 2015 TFSA Contribution Room - www.aliko-aapayrollservices.com/blog

Five Steps To Calculating 2015 TFSA Contribution Room



A new version of form RC343 has been released by the CRA to calculate TFSA contribution room for 2015, taking into account the new 2015 contribution limit of $10,000.
 
The new form is available here.  Here’s how the calculations work:
1. Start with your TFSA contribution room as of January 1, 2014
2. Subtract any TFSA contributions made in 2014
3. Add any TFSA withdrawals made in 2014
4. Add $10,000 (your new  TFSA contribution limit for 2015)
5. If you’ve already made TFSA contributions for 2015, subtract those
Here’s an example:
Joni had  TFSA contribution room of $12,000 as of January 1, 2014, including the $5,500 of new contribution room for 2014. She made a $10,000 TFSA contribution in 2014 and withdrew $15,000 that same year. She has not made any contributions in 2015 yet.  Following the steps outlined above, her 2015 TFSA contribution room is:
1. $12,000
2. - $10,000
3. + $15,000
4. + $10,000
5. - $0
Total: $27,000
 
Beware of TFSA Traps:  The biggest trap, other than holding non-registered investments outside a TFSA when there is contribution room available, is recontributing to the TFSA in the same year as the withdrawal is made. Withdrawals do increase TFSA contribution room, but not until the beginning of the following year.
In the example above, after her $10,000 contribution, Joni’s TFSA contribution room for 2014 was reduced to $2,000. Her $15,000 withdrawal did not open up contribution room until January 1, 2015. If Joni had re-deposited the $15,000 in 2014, she would have had a $13,000 excess contribution. All excess contributions are subject to a 1% penalty tax for each month they remain in the TFSA.
For these reasons, it’s important for wealth advisors to encourage their clients to seek their assistance or consult with  A Tax Services Specialist  before withdrawing money or recontributing it to a TFSA.
 
 
 
 
 

The Rule of 72


The Rule of 72 - www.aliko-aapayrollservices.com/blog
The Rule of 72



Written by Sarah Milton
“Compound Interest is the eighth wonder of the world.” – Albert Einstein
Einstein described compound interest as the eighth wonder of the world because he felt that those who understood it, earned it and those who didn’t, paid it. Compounding is what makes saving early and saving regularly such a powerful part of building wealth and it’s also what makes it so hard to get out from under the mountain of consumer debt that so many of us accumulate. In an nutshell, compound interest is earning (or paying) interest on interest. When you earn interest at a compounded rate, your money grows faster because you are earning interest on your total balance (principal + interest) rather than on the principal alone. Similarly, when you pay interest at a compounded rate (as you do with credit cards) your interest charges grow much faster and your debt load gets larger.
We can see the power of compounding in the table below, which shows how $1000 earning 5% annual interest grows over time. The first column shows how the $1000 would grow earning 5% simple interest (earned on just the $1000 principal) and the second column shows how it would grow earning 5% interest compounded annually (earned on the principal + interest).
YEAR
5% SIMPLE INTEREST
5% COMPOUND INTEREST
5
$1,250
$1,276
10
$1,500
$1,629
15
$1,750
$2,079
20
$2,000
$2,653
25
$2,250
$3,386
30
$2,500
$4,322
35
$2,750
$5,516
40
$3,000
$7,040
45
$3,250
$8,985
50
$3,500
$11,467
The Rule of 72
The rule of 72 is a simple way to estimate how long it will take your money to double in value at a given interest rate. If you divide 72 by the annual interest rate, the answer is the number of years it will take to double. For example, 72 divided by 5 is 14.4. This means that, as you can see in the table above, it takes just under 15 years for $1,000 to become $2,000. 15 years later (in year 30) the money has doubled again to be just over $4,000 and, 15 years after that (in year 45) it has doubled again to become more than $8,000. In year 60, it will have doubled yet again and become $16,000. Using this rule, it’s clear to see that both time and interest rate are two key factors in building wealth. At 8% interest, your money will double in 9 years (72 divided by 8 = 9) but it will take 36 years to double earning 2% interest. For a 20 year old, $100 invested at 7% is worth $2,100 at age 65. For a 30 year old, that same $100 invested at the same rate is only worth $1,068 at age 65 and for a 40 year old, $100 invested at 7% is worth just $543 at age 65. This means that, at 40 years old, even though I’m only twice the age of the 20 year old, I have to save four times as much each year in order to achieve the same level of wealth at age 65. It’s a concept that I wish I had understood as a teenager because I’m pretty sure it would have motivated me to manage my money differently!
At the end of the day, saving is always a very personal decision: the choices we make about whether to save, where to save and how much to save, vary enormously from person to person. However, all too often, I hear people in their twenties saying that they’ll wait to save until they’re older because then they’ll be earning more. When you consider how powerful a factor time is in the wealth building equation, it just doesn’t make sense (especially when you consider that just because you’re earning more doesn’t mean you have more discretionary income). If you can do as much with $25 at 20 as you can do with $50 at 30 or with $100 at 40, it makes sense to start the saving habit early.
Even if you feel like you’ve “missed the boat” because you should have started saving years ago, remember that whatever you save today has a greater power to grow than money you save next month, next year or 3 years from now. We can’t change our past choices but we always have the power to choose to change our financial future by making different choices today.
 
 
 
 
 

Reminder: Some families Will Win UCCB Lottery July 20

Reminder: Some families  Will Win UCCB Lottery July 20/www.aliko-aapayrollservices.com/blog
Reminder: Some families  Will Win UCCB Lottery July 20

 


Following are the key points about the UCCB   benefit:

  • The UCCB is increasing for children under 6, from $100 per month per child to $160 per month, effective January 1, 2015.

  • The UCCB is also being expanded to include a benefit of $60 per month for each child aged 6 through 17, effective January 1, 2015.

  • Because these enhanced benefits were announced in April  21 , 2015 but made effective retroactive to January 1, 2015, families who qualify for the UCCB will receive a lump sum for the additional amounts, payable on July 20, 2015.What does that mean?  Parents with children under age 18 living at home will be receiving a lump sum of $420 per child with their July Child Tax Benefit payment. This amount represents the additional $60 per month per child payable as of January 1, 2015.This is a great opportunity for families  who will be winning the UCCB lottery to invest the lump sum in an RESP or TFSA for maximum growth and tax savings.  

Enjoy the benefits of filing on time and online


Enjoy the benefits of filing on time and online - www.aliko-aapayrollservices.com/blog


Enjoy the benefits of filing on time and online
Did you know?





Filing your income tax and benefit return and paying what you owe on time helps you avoid possible interest and penalty charges, and ensures that your benefits won't be delayed.
Important facts
  • You have until midnight on or before April 30, 2015, to file your 2014 income tax and benefit return.
  • If you or your spouse or common-law partner is self-employed, you have until midnight on June 15, 2015, to file your return.
  • Any balance owing must be paid on or before April 30, 2015—even if your return is due on June 15, 2015.
What happens if I don't file on time?
When you file your yearly tax return, you are letting the Canada Revenue Agency (CRA) know your current tax situation. Without that information, the CRA can't be sure that you are still eligible to receive certain benefit payments. If you don't file on time, your benefit and credit payments (for example, the Canada child tax benefit and the goods and services tax/harmonized sales tax credit) may be interrupted.
Also, if you have a balance owing and you don't file your return on time, we'll charge you a late-filing penalty. The penalty is 5% of your 2014 balance owing, plus 1% of your balance owing for each full month that your return is late, to a maximum of 12 months. If we charged a late-filing penalty on your return for 2011, 2012, or 2013, your late-filing penalty for 2014 may be 10% of your 2014 balance owing, plus 2% of your 2014 balance owing for each full month that your return is late, to a maximum of 20 months.
In addition to the late-filing penalty, if you have a balance owing for 2014 you'll be charged compound daily interest beginning May 1, 2015, on any unpaid amounts owing for 2014.
Even if you can't pay all of your balance owing right away, you should still file your return on time. You can set-up a pre-authorized debit agreement using the My Account service, or call us at 1-888-863-8657 to make a payment arrangement. By filing on time, you'll avoid the late-filing penalty.
CRA online services make filing easier and getting your refund faster
The CRA's online services are fast, easy, and secure. You can use them to file your income tax and benefit return, make a payment, track your refund, receive your notice of assessment, and more. Did you know that the Government of Canada is switching to direct deposit for payments that it issues? This includes your tax refund and benefits payments? Sign up for direct deposit today! For more information, go to www.cra.gc.ca/getready
 
 

The Rule of 72



The Rule of 72- www.aliko-aapayrollservices.com/blogThe Rule of 72

Written by Sarah Milton

 

“Compound Interest is the eighth wonder of the world.” – Albert Einstein

 

 

Einstein described compound interest as the eighth wonder of the world because he felt that those who understood it, earned it and those who didn’t, paid it. Compounding is what makes saving early and saving regularly such a powerful part of building wealth and it’s also what makes it so hard to get out from under the mountain of consumer debt that so many of us accumulate. In an nutshell, compound interest is earning (or paying) interest on interest. When you earn interest at a compounded rate, your money grows faster because you are earning interest on your total balance (principle + interest) rather than on the principle alone. Similarly, when you pay interest at a compounded rate (as you do with credit cards) your interest charges grow much faster and your debt load gets larger.

We can see the power of compounding in the table below, which shows how $1000 earning 5% annual interest grows over time. The first column shows how the $1000 would grow earning 5% simple interest (earned on just the $1000 principle) and the second column shows how it would grow earning 5% interest compounded annually (earned on the principle + interest).

YEAR
5% SIMPLE INTEREST
5% COMPOUND INTEREST
5
$1,250
$1,276
10
$1,500
$1,629
15
$1,750
$2,079
20
$2,000
$2,653
25
$2,250
$3,386
30
$2,500
$4,322
35
$2,750
$5,516
40
$3,000
$7,040
45
$3,250
$8,985
50
$3,500
$11,467

The Rule of 72

The rule of 72 is a simple way to estimate how long it will take your money to double in value at a given interest rate. If you divide 72 by the annual interest rate, the answer is the number of years it will take to double. For example, 72 divided by 5 is 14.4. This means that, as you can see in the table above, it takes just under 15 years for $1,000 to become $2,000. 15 years later (in year 30) the money has doubled again to be just over $4,000 and, 15 years after that (in year 45) it has doubled again to become more than $8,000. In year 60, it will have doubled yet again and become $16,000. Using this rule, it’s clear to see that both time and interest rate are two key factors in building wealth. At 8% interest, your money will double in 9 years (72 divided by 8 = 9) but it will take 36 years to double earning 2% interest. For a 20 year old, $100 invested at 7% is worth $2,100 at age 65. For a 30 year old, that same $100 invested at the same rate is only worth $1,068 at age 65 and for a 40 year old, $100 invested at 7% is worth just $543 at age 65. This means that, at 40 years old, even though I’m only twice the age of the 20 year old, I have to save four times as much each year in order to achieve the same level of wealth at age 65. It’s a concept that I wish I had understood as a teenager because I’m pretty sure it would have motivated me to manage my money differently!

At the end of the day, saving is always a very personal decision: the choices we make about whether to save, where to save and how much to save, vary enormously from person to person. However, all too often, I hear people in their twenties saying that they’ll wait to save until they’re older because then they’ll be earning more. When you consider how powerful a factor time is in the wealth building equation, it just doesn’t make sense (especially when you consider that just because you’re earning more doesn’t mean you have more discretionary income). If you can do as much with $25 at 20 as you can do with $50 at 30 or with $100 at 40, it makes sense to start the saving habit early.

Even if you feel like you’ve “missed the boat” because you should have started saving years ago, remember that whatever you save today has a greater power to grow than money you save next month, next year or 3 years from now. We can’t change our past choices but we always have the power to choose to change our financial future by making different choices today.

 

 

 

Scenario 4: Seniors Without TFSAs


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Scenario 4:  Seniors Without TFSAs

By: Walter Harder
Robert and Jackie are contemplating retirement.  Robert is 65, earns $55,000 from employment and also receives a $24,000 pension.
 
Robert and Jackie are contemplating retirement.  Robert is 65, earns $55,000 from employment and also receives a $24,000 pension.  He has not started to receive OAS or CPP but is contemplating retirement at age 67.  Jackie is 62 and earns $45,000 employment income.  Jackie has accumulated $150,000 in her RRSP.  Both Robert and Jackie have no TFSA contribution room.
Will Robert and Jackie be better off in 2015 than in 2014?
This couple derived no benefit from the Family Tax Cuts announced in October 2014.
Indexation of the tax brackets and personal amounts will result in slight reductions in taxes payable by both Robert and Jackie unless their income levels increase.  Robert’s contributions to CPP and his EI premiums will increase due to increases in the maximum pensionable and insurable earnings.
As the couple has no TFSA contribution room, they have been making the maximum contributions under the old limit so they will benefit from being able to contribute more.  In the long term, the increased TFSA contribution room may help Jackie shelter earnings on RRIF minimum withdrawals if they money is not needed to fund their lifestyle.
The decrease in minimum RRIF withdrawals may help Jackie to plan her RRIF melt-down strategy once she reaches age 72.
If this couple is philanthropically inclined and have real estate such as a cottage that has increased in value, they could benefit from the new rules allowing the proceeds from real estate to be donated to charity in order to reduce capital gains tax.
Since both Robert and Jackie are currently working, they are not likely to be benefit from the new Home Accessibility Tax Credit in the short term. Should either develop mobility issues, they may be able to modify their home to accommodate their mobility issues while getting a 15% tax credit for the first $10,000 of their expenditures.
 
 

Scenario 3: Retired Couple with RRIFs


Scenario 3:  Retired Couple with RRIFs-www.aliko-aapayrollservices.com/blog

Scenario 3:  Retired Couple with RRIFs

BY: Karen Milner

Brian and Patricia retired a few years ago.  Brian is 74 and Patricia is 72.  The couple live in Halifax, NS and have RRIF balances of $300,000 and $400,000 respectively.

 

Will Brian and Patricia be better off in 2015 than in 2014?

This couple derived no benefit from the Family Tax Cuts announced in October 2014.

The reduction in RRIF minimum withdrawals will affect both Brian and Patricia.  Under the old rules, Brian was required to withdraw at least $23,130 from his RRIF.  Under the new rules, he is only required to withdraw $17,010.  If he has already withdrawn more than $17,010, he will be able to redeposit the excess (to a maximum of $6,120).

Under the old rules, Patricia was required to withdraw at least $29,920 from her RRIF.  Under the new rules she is only required to withdraw $21,600.  If she has already withdrawn more than $21,600, she can put back up to $8,320.

By withdrawing less, both Brian and Patricia can reduce their tax bill for 2015.  In addition, Patricia’s age amount could be increased by the reduced withdrawal (depending on how much other income she has).

This couple may well be able to benefit from the Home Accessibility Tax Credit if they need to make renovations to their home to make it more accessible.  Under this new program, 15% percent of the first $10,000 renovation costs could be eligible for a non-refundable tax credit.

If either Brian or Patricia has foreign assets with a value between $100,000 and $250,000, they’ll be happy to learn that the sometimes onerous rules for reporting such assets will be simplified for 2015.

This couple may also be able to take advantage of the new rules exempting capital gains on small business corporation shares or real estate investments if a portion of the proceeds is donated to charity.  If they are selling a family farm, they will be happy to know that the capital gains exemption on farm property has been increased to $1,000,000, exempting up to $500,000 taxable capital gains from tax.

The increase in TFSA contribution limits may allow for more flexibility in retirement as any minimum RRIF withdrawals that are not needed to fund lifestyle, can still be sheltered from tax (after the tax is paid on withdrawal).

 

 

Scenario 2: A Young Family

Scenario 2: A Young Family-www.aliko-aapayrollservices.com/blog

Scenario 2: A Young Family

By: Walter Harder
Matthew and Ashley live in Winnipeg. They have two children, ages 3 and 5.  They own their own home. 
 
Matthew and Ashley live in Winnipeg.  They have two children, ages 3 and 5.  They own their own home.  Ashley earns $45,000 annually and has an RPP through work.  Matthew operates a small business (proprietorship) and nets $80,000 annually.  He has RRSP savings.  Child care costs total $12,000 annually.  The couple has no TFSA savings.
Will Matthew and Ashley be better off in 2015 than in 2014?
This couple were major beneficiaries of the Family Tax Cuts announced in October 2014.
The Family Tax Cut (income averaging) saved this couple a few hundred dollars in 2014 because after claiming Child Care Expenses the two spouses are in different tax brackets.  The couple is likely to continue to benefit from the Family Tax Cut unless Ashley’s income increases so she moves into the second tax bracket.
The increased UCCB of $60 per month per child will increase Ashley’s income in 2015 by $1,440.  Because the UCCB is taxable, Ashley will have to repay 25.8% of it in increased income taxes.  The increased income will also reduce the couple’s Family Tax Cut.
As a consequence of the increased UCCB, Matthew’s claim for the two children will be eliminated for 2015, increasing his tax bill by just under $700.
If the couple pays more than $14,000 in Child Care Expenses, their claim will increase in 2015 as the upper limit for children under 7 increased from $7,000 to $8,000.  This will decrease Ashley’s taxable income and increase the Family Tax Cut.
As a young couple, Matthew and Ashley could benefit greatly from the increase in TFSA contribution room.  At $80,000, Matthew’s first avenue for retirement savings should be the TFSA, at least until his income increases.
This couple could have benefitted from the increase in the Amount for Children’s Fitness in 2014 – if their expenditures exceeded $500 per child.  The 2015 change to make the credit refundable will have no effect on this couple as this change really only effects couples who are not taxable.
 
 

Scenario 1: Young Couple No Children

Scenario 1: Young Couple No Children-www.aliko-aapayrollservices.com/blog

Scenario 1: Young Couple No Children


By: Walter Harder
Michael and Jessica are a young couple living in their condo in Vancouver.  How will the budget affect them?
 
Michael and Jessica are a young couple living in their condo in Vancouver.  Condo fees are $250 per month. They have no children and both work earning a total of $100,000.  Michael has a registered pension plan at work but Jessica does not.  Jessica has accumulated a small RRSP.  The couple has no TFSA savings.
Will Michael and Jessica be better off in 2015 than in 2014?
This couple is generally unaffected by changes announced in October 2014 or the 2015 Budget changes.  If income in 2015 is unchanged from 2014, the couple’s taxes will be reduced slightly as a result of indexation of personal amounts and tax brackets.  Depending on income levels, Michael or Jessica may pay slightly more in Employment Insurance Premiums and contribute more to CPP in 2015 as a result of the increase in the maximum insurable and pensionable earnings.
This couple has the potential to derive major benefits from increase in TFSA contribution room.  As a young couple, they have a significant period to make contributions to their own TFSAs to generate a significant tax-free retirement income.  If fact, with Michael’s pension plan, their TFSA accumulations could be more than enough to support a comfortable lifestyle in retirement.  Jessica need not use her RRSP contribution room at all – at least until her income is in the highest tax bracket.
 
 
 

6 Costly Pension Mistakes and How to Avoid Them

6 Costly Pension Mistakes and How to Avoid Them- www.aliko-aapayrollservices.com/blog



6 Costly Pension Mistakes and How to Avoid Them
Written by Sean Cooper
 
 
If you have  a pension plan at work consider yourself fortunate. Only about a third of Canadians have a workplace pension plan today – a far cry from a couple decades ago. Workers  face a number of retirement challenges today. The low interest rate environment coupled with longer life expectancy means we need to sock away even more money for our golden years or face a drop in the standard of life we’ve become accustomed to.
If you have a decent pension plan, there are still mistakes you can make along the way. Having worked as a pension analyst for five years, I’ve seen my fair share of costly pension mistakes. Here are three costly pension mistakes that can cost you dearly and how to avoid them.
Not Returning Your Paperwork on Time
When you decide to retire or your employment comes to an end, you should receive a pension benefits statement in the mail shortly. If you’re eligible for an early retirement, the package will include forms of pension to choose from, such as life only, guaranteed  periods and joint and survivor options. If you’re too young to retire (and not considered a small benefit), you’ll be able to defer your pension (start it at a later date) or transfer your commuted value.
Mistake #1: 90 Day Deadline: Deferred Pension
While you should take the time to carefully review your package for any errors and carefully consider your options, it’s important to watch the deadline on your package. You’ll usually only have 90 days to return your completed paperwork. If you fail to return your paperwork your pension could be deferred until retirement.
For a 30-something-year-old this can be a costly mistake. If you’re not going to retire for another 30 years or longer, your pension will have lost a lot of its purchasing power by then. Remember the rules of 72 – if inflation only goes up by a modest average of 2 per cent per year, prices will double in 36 years, while your pension will be frozen. $1,000 per month may seem decent today, but when you go to retire it may not be a lot. Most private sector pension plans don’t offer indexing in retirement.
Mistake #2: 6 Month Deadline: Recalculation
Although some pension plans still allow you to transfer the commuted value after 90 days, there’s another important deadline you should be aware of. If you fail to return your paperwork in 6 months (90 days in Quebec), your commuted value will be recalculated. Depending on current interest rates, your commuted value could go up or down .
The commuted value represents a lump sum payment you’ll be able to invest to end up with an equivalent pension at your normal retirement date (NRD). The commuted value and interest rates have an inverse relationship. When interest rates go down your commuted value will increase (you’ll need to invest more money to end up with an equivalent pension at NRD), but if interest rates go up your commuted value will decrease (you’ll need to invest  less money to end up with an equivalent pension at NRD).
If interest rates go up by a lot by the time you return you paperwork, you could see your commuted value drop by hundreds or thousands of dollars. If you had simply completed it on time, you would have received your full commuted value with interest. If you’re transferring your commuted value to a financial institution, it’s important to follow up to ensure the paperwork is completed. You should phone the pension administrator to make sure your completed paperwork has been received and is being processed. It is your responsibility to make sure your financial institution returns your paperwork on time.
Mistake #3: Quitting Before You’re Fully Vested
Before you decide to leave your employer, it’s important to know the date you’ll be fully vested. What’s vesting? It’s the date you’re entitled to the full value of your accrued pension when you leave the pension plan. Leaving prior to reaching your vesting data can result in leaving hundreds or thousands of dollars on the table. Instead of receiving the commuted value, you’ll only be entitled to your contributions with interest. If it’s a non-contributory plan you won’t receive anything.
How do you find out your vesting date? Your vesting date can be found on your annual statement of pension benefits. Your vesting date depends on your work province, as well as how generous your pension plan is. In most provinces  the legislated minimum is two years before you became vested. That’s slowing changing as the provinces look to modernize. Provinces like Ontario and recently Alberta provide for immediate vesting. That means as soon as you join your company’s pension plan you’re vested.
To get around the new vesting rules, some employers may look to extend the eligibility for joining the plan. Instead of being able to join immediately, you may have to wait two years to be enrolled. If you’re a new employee, it’s important to ask if you’ll be enrolled in the pension plan right away. If you’re unsure, be sure to ask human resources or your pension administrator.

3 More Costly Pension Mistakes and How to Avoid Them

 

Written by Sean Cooper •

Last month we looked at three costly pension mistakes to avoid. Common pension mistakes include not returning your paperwork on time and quitting before you’re vested. This month we look at three more pension mistakes that can cost you dearly. Although it may not seem like a big deal, simple things like not updating your spouse and beneficiary and not joining your pension plan right away can come back to haunt you. Here are three more costly pension mistakes and how to avoid them.

Mistake #4: Not Updating Your Spouse and Beneficiary

It’s important to keep your spouse and beneficiary on file up to date. If you pass away in retirement and elected a pension with a guarantee period (i.e. 5, 10 or 15 year guarantee), you’ll want to make sure the remainder of the guarantee payments goes to the person you want. Just because you chose your daughter to be your beneficiary when you retired, doesn’t you won’t want to change it. What if you get remarried and decide to make your new spouse your beneficiary? Unless you complete a new beneficiary form, your beneficiary will stay the same. That means your daughter will still be entitled to your pension death benefit when you pass away, leaving your new spouse with nothing.

Things get even more complicated if you pass away before retirement. The pension death benefits for a pre-retirement death (or active death) depend on your pension plan and province of employment. Your spouse is usually entitled to the death benefit even if you beneficiaries on file. Even if you have a spouse, it’s still a good idea to name beneficiaries; if your spouse and you were to pass away at the same time (for example in a car crash), your beneficiaries would receive the death benefit instead of your estate. Again, it’s a good idea to complete a new beneficiary form.

Mistake #5: Not Joining Your Company’s Pension Plan Right Away

While a lot of employers enroll their employees in the pension plan right away, some employers leave it up to their employees to enroll. If you have a defined contribution plan, sometimes your employer will only deduct the minimum contributions off your pay cheque (for example, 2 per cent instead of the maximum 5 percent of your earnings).

As soon as you’re eligible to join your company’s pension plan, you should walk, no run, to your company’s human resources department to sign up. By not joining right away, you’re leaving free money on the table. You may prefer to invest your own money in your RRSP, but if you’re one of the lucky few with a non-contributory gold-plated defined benefit pension plan, there’s no good reason not to join.

Mistake #6: Not Starting Your Pension When You’re Entitled to An Unreduced Pension

If you choose to defer your pension (leave it in the pension plan) instead of transferring it to your RRSP, it’s important to make sure you keep your address up to date with your former employer. When you’re approaching your normal retirement date, your former employer will usually try to contact you, but only if they have your most recent address on file.

If you’re approaching age 65, it doesn’t hurt to take the initiative and contact your former employer about starting your pension. You’ll want to make sure you start your pension on time; although you may still be able to collect your pension retroactively to age 65 if you commence it later on, in most cases you won’t receive interest.

 

 


 
 

Financial spring cleaning

Financial spring cleaning-www.aliko-aapayrollservices.com/blog

Financial spring cleaning

Written by Sarah Milton

 

Rearrange Your Goals

Given that research suggests that most of us will have abandoned our new year’s resolutions by mid-February, spring is a great time to revisit our financial goals and get back on track. One of the key components of successful goal setting is having a strong motivator; too often we set goals because we think we “should” do something rather than because we actually want to. Without a definite reason to save or to eliminate debt or to learn more about investing, it’s unlikely that we’ll stick at working on our goal long enough to achieve it. If you find that you keep setting the same goal over and over again and never making any significant progress towards it, it might be time to either give up on it completely or to find a solid reason to work towards it that actually motivates and inspires you to keep going.

Declutter Your Payments

Often when I meet with clients and we go through their statements, there’s at least one monthly payment that they’ve been meaning to cancel and never got around to. It might be a subscription to a magazine that you never have time to read, a monthly membership fee for a gym that you aren’t taking full advantage of, or one of those insurance policies that your financial institution persuaded you to take on a 30 day free trial and you forgot to cancel. Whatever it is, taking 15 minutes to review your statements and another 30 minutes to make some phone calls could save you a significant amount of money each month; money that could be “repurposed” towards a financial goal or that could be used for something that you’ll actually use and/or enjoy.

Tidy Up Your Spending

A spending clean up can be a powerful way to channel more of your money towards the things that matter most to you. Doing a clean-up of your spending means taking a look over your statements and finding all the places where your money is “drifting”. This drift might be the result of any number of things. For example: overspending at the grocery store, picking up lunch or coffee on a too-regular basis, random purchases of things you didn’t really need or too many cash withdrawals from the ATM. David Bach coined the phrase, “latte factor” to describe these small purchases that can add up to hundreds of dollars each month if we don’t pay attention to them. It’s not that treating yourself or indulging in the odd splurge is a terrible thing but the trick is to make sure that you’re using your “fun money” to pay for those things and not money that you might have intended to use for something else.

Try a Money Cleanse

If you find that you’ve got too much money drifting away each month, why not try a 28 day financial cleanse? Science suggests that it takes 28 days of consistent action to create a habit (good or bad) so taking four weeks off from random spending and trying really hard to develop (and stick to) a consistent spending/saving pattern can be a really powerful tool when it comes to taking your finances to the next level. The first few days are the hardest but if you can make it through the first week there’s a good chance you’ll be able to see it through all 28 days. Remember that the point isn’t to deprive yourself of everything that’s fun; that’s a sure-fire recipe for disaster in my experience! Rather, it’s about creating a balanced approach to spending and saving so that you can enjoy your money without overspending and ensure there’s enough left over for the future.

Effective money management hinges on building your understanding of basic money principles and creating simple systems that help you live within your means and pay yourself first. Taking a few hours every few months to check-in on those systems and make sure your spending habits aren’t slowing you down is a time investment that’s definitely worth making. If making some changes to your finances is something you’ve been meaning to do for a while, then why not take some time this week to think about what you could do to help spring clean your finances?

 

 

The Power of the TFSA

The Power of the TFSA -www.aliko-aapayrollservices.com
 
 
The Power of the TFSA
 
 
As the calendar year changed on January 1, so did the Tax Free Savings Account (TFSA) contribution room available to all adult residents of Canada. 
Although indexing did not increase the earned contribution room, everyone can now contribute at least $5,500 more to their TFSAs.  Those who made withdrawals in 2013 can now put back the money withdrawn in addition to the extra $5,500.  For those who have never made a TFSA contribution, the accumulated TFSA room is now $36,500 (less if they are between 19 and 24).
Through the power of tax-free compounding the TFSA can yield spectacular results, especially for those who are young enough for compounding to do its magic.
If you’ve put the maximum into your TFSA at the beginning of each year and it earned 5% income in each year, your current balance (after your last deposit) will be over $40,800.  See the table below.
YearContributionInterest EarnedEnding Balance2009$5,000$250.00$5,250.002010$5,000$262.50$10,512.502011$5,000$525.63$16,038.132012$5,000$801.91$21,840.032013$5,500$1,092.00$28,432.032014$5,500$1421.60$35,353.632015$5,500$1767.68$42,621.32
 
For the younger generation, consider the potential for a tax-free retirement.  Making the maximum contribution each year starting at age 19 would yield a nest egg of about $900,000 at age 60 (assuming 5% annual return, 2% inflation, no change in maximum contribution levels and no withdrawals).  Even in today’s dollars, that’s $400,000 in spending power.  For a couple that’s $1.8 million dollars.  Even assuming an extended 40-year retirement, that’s an indexed tax-free pension of over $74,000 a year ($33,000 in current dollars).
 
 
 

No Time To Waste: TFSA, RRSP or Both?

No Time To Waste: TFSA, RRSP or Both? -www.aliko-aapayrollservices.com/blog
 
 
 
 
 
No Time To Waste: TFSA, RRSP or Both?
 
 
It’s February – no time to waste. 
 
 
There are two very important investment opportunities to take advantage of now, but you’ll need to plan to put much of that February pay and your savings accounts to work for you now.  The smart money goal:  be sure to make your RRSP and TFSA contributions.
MAXIMIZE RRSP DEDUCTIONS – CONTRIBUTE BY MARCH 2.   Dig out your 2013 Notice of Assessment to check out your personal RRSP Contribution Room before the contribution deadline of March 2, 2015.  Did you maximize your RRSP Room?  If not, you could fatten up your tax refund. The maximum contribution room you could have earned for 2014 is 18% of earned income up to $24,270. But your room may be higher if you haven’t maximized your contributions in the past. 
But, be sure you don’t over-contribute. Excess contributions – the amounts over your RRSP room plus $2000 - are subject to a 1% per month penalty tax, which must be paid by March 31.  Form T1-OVP is a bit of a nightmare, so see a tax pro for help.
TFSA SAVINGS ROOM UP TO $36,500. Despite the fact that there were no increases to additional contribution room for 2015, you can and should contribute an additional $5,500 to your TFSA as soon as possible this year. TFSA contribution room became available to Canadian adult residents on January 1, 2009, providing a total of $36,500 of available room since 2009 (4 years at $5,000 and 3 years at $5,500).
Contributions to a TFSA are not deductible, however income earned within a TFSA and withdrawals made from it are not subject to tax. TFSA activity does not affect eligibility for federal income tested benefits and tax credits, such as Old Age Security, the Guaranteed Income Supplement, the Canada Child Tax Benefit, the Working Income Tax Benefit and the Goods and Services Tax Credit.
TFSA contribution room accumulates every year, if at any time in the calendar year you are 18 years of age or older and a resident of Canada. You do not have to set up a TFSA or file a tax return to earn contribution room.
It’s Your Money. Your Life. You have every opportunity to set up your future to maximize your choices and live a peaceful financial life.  Even if you can’t contribute the maximum to your RRSP or TFSA, try to increase your tax refund with an RRSP contribution before March 2. Then put that tax refund into a TFSA.  Check with your designated tax specialists and financial professionals to make sure you are eligible.