Tuesday, August 30, 2011

Uncover hidden investment money

Facing what seems to be a never-ending flow of day-to-day living expenses, it can appear difficult to set aside money for investing. But you know you should – ‘paying yourself first’ by contributing regularly to your RRSP eligible investments and other investments is the best way to achieve your retirement and long term financial goals.

To help you do the right financial thing, here are three do’s and dont's for uncovering hidden money you already have that you can use to regularly fund your investments.

Do consolidate debt Gather up your small loans and credit card debt and combine them in a larger debt consolidation loan at hopefully a better interest rate and a lower overall monthly payment. Another option: Transfer your credit card balances to a personal line of credit at an interest rate that is lower than the 18 to 28 per cent annual rates of most credit cards.

Use the ‘found’ money now available from your lower monthly loan/debt payments to fund your investments.

Do make your life less taxing “Great,” you think. “I just got a big tax refund cheque.” Well, really not so great. By having too much tax withheld from your pay each month, you are actually lending the government your money, interest-free. Instead, apply to reduce the amount withheld from your cheque (file a T1213 form with the Canada Revenue Agency) and invest that extra money each pay period.

Don’t make that a double-double You buy a coffee on your way to work each day – probably paying two, three, or even four dollars or more for that large latte. Seems like a small amount – but cut your coffee habit and invest those small dollar amounts in your RRSP and here’s what happens: Thanks to the magic of compounding, the price of your daily coffee will add up to an additional $11,000 in your plan in 10 years (based on an annual return of six percent). Over 30 years, you would accumulate $67,000 – and that would provide an annual pre-tax annual retirement income of approximately $5,000 over 25 years. And that’s just for investing the price of a regular coffee. Cut your (more expensive) latte habit and you would have an additional $22,000 in your RRSP after 10 years and over $132,000 after 30 years – for a pre-tax annual retirement income of $10,000 for 25 years! Besides, your nerves won’t be as jangled.

It can be tough to discipline yourself to invest those hidden dollars – make it easier with a Pre-Authorized Contribution Plan (PAC) where direct withdrawals are made from your bank account to an investment account. And remember: Your professional advisor can help you use these and other strategies to get the most out of your money and reach your financial goals faster.

The rate of return is used only to illustrate the effects of the compound growth rate and is not intended to reflect future values or returns on investment.

Monday, August 22, 2011

Thinking about handing over the cottage? It could be less ‘taxing’ these days

Your vacation property has always been a prime place for family fun and enjoyment. And you want it to continue to be your family’s happy gathering place for many years to come – even after you are gone. If you’re considering ways to make the transfer to your children, an economic downturn could actually be to your advantage – your tax advantage, that is.

When you die, your assets can usually be passed to your spouse or common-law partner without incurring a tax liability. But if you leave capital assets – such as your cottage – to anyone else, including your kids, you’re deemed to have disposed of those capital assets at fair market value. If your cottage property has appreciated in value, your estate could be hit with a significant capital gains liability.

If you leave your cottage to your children in your will, you have no way of knowing how much of a tax hit they’ll take – maybe a big enough hit that they won’t be able to afford to continue owning the cottage.

While real estate values are ebbing, it may not be an entirely bad thing. Real estate prices may rebound in the future – historically, that has been the case. Instead of leaving the property as a bequest in your will, you can transfer cottage ownership to your kids now, either as an outright gift or by selling it to them. The transfer will trigger an immediate capital gain but the property will be valued at the current reduced market level, which could save a significant amount of tax.

If you are going to sell the property to your children, be sure to sell it to them for fair market value. When you transfer a property to a close family member, you will be deemed to have received fair market value even if you actually receive much less than that on the sale, meaning that you will still have to pay tax on the capital gain regardless of whether or not you have received any cash. Also, selling a property for less than fair market value can actually result in some double taxation, so speak to your tax specialist before transferring the property. If you want to spread out the capital gains tax (and make the payments more manageable for your children), consider making the payments payable over a 5 year period and claiming the capital gains reserve, so that only 20% of the capital gain is taxable in any one year.

If you are more comfortable with leaving the property to your kids in your will, one good way to alleviate the inevitable capital gains tax hit is with permanent life insurance. The death benefits are usually tax-free and can be used to cover capital gains and/or any other estate taxes – so your executor won’t be forced to sell your cottage or any other assets to pay taxes.

Your family cottage is an important part of your life. Make it an important part of your overall financial plan, too. Your professional advisor can help you make the right choices for your personal situation.

Wednesday, August 10, 2011

Market Update

When we hear news of big drops in the stock markets it's easy to think the worst, especially coming out of the very difficult period through 2008 and 2009.  While there might be a sense of 'deja-vu' accompanying the reports of highly volatile market activity, the reasons for that volatility are quite different.

The events of the past few weeks should be viewed as global economy working through some persistent and long-standing problems. One should never make snap decisions or make major changes to your portfolio in the middle of a market correction. Focus on your long-term goal, not on day-to-day fluctuations. A well-diversified and appropriately balanced investment portfolio focused on your long term objectives remains the best solution.

Pat Foran of CTV helped share a similar message here: Sympatico.ca

Thursday, August 4, 2011

Get the most from your child’s RESP

You thought investing in a Registered Education Savings Plan (RESP) was a good idea. And now, as another school year is nears and you look deeper into the real costs of that education, you know that your investment was a great idea. Now it’s time to get the most out of that RESP – here’s how.

Hand the income to your student to save on taxes When you elect to withdraw RESP income as a part of Education Assistance Payments (EAPs) – which consist of plan income, the Canadian Education Savings Grant (CESG), the Canadian Learning Bond (CLB), and any provincial grants1 – they will be taxed in the hands of the student beneficiary, who will likely be in a lower tax bracket than you.

Take out plan income first If your student completes (or leaves) a post-secondary program and there are earnings remaining in your RESP, you might be required to refund some CESG grant money. Avoid potential clawbacks by using the plan’s earnings and CESG before withdrawing contributions.

Wait until your student begins school to withdraw contributions Taking them out earlier may trigger a CESG repayment.

Spread out EAPs By spreading EAPs over the expected length of your student’s educational program, instead of taking them as a lump sum, you’ll avoid saddling your student with a huge taxable income in the first year and take advantage of your student’s (very likely) lower marginal tax rates over a number of years.

Limit initial withdrawals Government restrictions typically cap plan income withdrawals in the first 13 weeks of your student’s program at a maximum of $5,000 including CESG (or, in some cases at $2,500). You can supplement these limits by redeeming a portion of your RESP contributions – but try not to because removing contributions harms the plan’s tax-deferred growth and could trigger a CESG payback.

Do it now! Your RESP carrier can’t release an EAP without proof of enrolment – so get that documentation in as early as possible.

Make a meal of leftovers Contributions that remain in your plan after your student finishes college or university can be used any way you wish. You can transfer the cash to another child’s plan or withdraw it for your personal use.

There’s no doubt about it, your RESP investment was a great idea that is about to provide some very welcome financial relief. Another great idea is to talk with your professional advisor who can help you make more good decisions that will achieve financial security for your family and a debt-free education for your children or grandchildren.

1 The Canada Education Savings Grant and Canada Learning Bond (CLB) are provided by the Government of Canada. CLB eligibility depends on family income levels. Some provinces make education savings grants available to their residents.