A FEW LESSONS FOR FINANCIAL SUCCESS AT ANY
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Young or old, there’s always something new to learn.
If you’re interested in acquainting yourself with some basic financial strategies, you’ve come to the right page. We promise there’s no test at the end.
Going to School
Investing in Education.
School isn’t getting any cheaper.
Right now, a student living at home pays an average of $4,000 per school year. That amount is expected to reach $37,000 per year in less than two decades. While costs are estimated to go up drastically, there are many different types of investment strategies to help you prepare. These are just a few:
Retirement Education Savings Plans (RESPs)
While they are not tax deductible like RRSPs, RESPs do offer some unique tax benefits. Interest earned on an RESP is tax-free and when your child starts using the money for school, only the accumulated interest is taxable as income.
The biggest incentive to buy RESPs is the Canada Education Savings Grant. RESP investors receive an additional grant of 20% from the government on the first $2,000 of an annual investment. This means that the RESP can collect an extra $400 a year towards the child’s education, for a possible lifetime difference of up to $7,200. The earlier you start putting money toward a child’s RESP, the more he or she will benefit from the annual grants and tax-free interest.
A family can set up a plan in which one or more of their children are listed as beneficiaries. It’s also important to note that anyone can contribute to an RESP, not just the parents of the child. And don’t worry; in the event that the child listed as beneficiary does not choose to attend a post-secondary institution, there are other ways to put that money to use.
Term Deposits vs. Mutual Funds
Guaranteeing you a set return on your money over a fixed period of time, Term Deposits can be very beneficial when saving for post-secondary expenses. Short-term deposits usually require a higher investment than long-term deposits, and often have a slightly lower rate of return. Term deposits pay out interest monthly on any term longer than 90 days.
Conversely, Mutual Funds are a bit more complicated. The potential exists to make more money, but returns are never guaranteed. Even with a mutual fund that invests in guaranteed government bonds, there is some element of risk. The important thing here is to consider all of the factors, including management fees and exit costs.
Purchasing Property During School
Instead of subsidizing the rental of an apartment or paying for student housing, the purchase of a home off-campus can be partially subsidized by additional renters, used to build equity, and may even serve to recoup some or all of your child’s post-secondary expenses at the time of sale. It’s a strategy that’s gaining popularity with many parents, but it’s also a significant investment that requires conscientious planning.
TFSAs versus RRSPs.
Canadians are fortunate to have two options for saving: Tax Free Savings Accounts (TFSA) and Registered Retirement Savings Plans (RRSP).
Types of TFSA investments.
A TFSA is an account in which investment or interest income is earned tax-free. Since contributions are made from funds that have already been taxed, there is no tax payable when money is withdrawn from a TFSA. There are a few rules that are important to understand when contributing to a TFSA:
A TFSA may contain any of a number of eligible investment vehicles, including deposit-type savings accounts, mutual funds or self-directed plans. Your Wealth Your Way advisor can help you choose the right one based on your goals and your tolerance for investment risk.
The types of investments eligible for TFSAs are restricted under the Income Tax Act. Options available through credit unions vary and may include:
- Term deposits and GICs
- Variable interest savings accounts
- Credit union shares
- Index-linked term deposits
- Mutual funds
- Publicly traded securities
There are restrictions on holdings in a self-directed TFSA. Entrepreneurs and small business owners should check these rules carefully, particularly regarding investments in companies or ventures where you hold a significant financial investment (generally more than 10%) or where there is a nonarm’s length relationship. There are punitive tax measures that discourage holding non-qualified/prohibited investments and asset transfer transactions (swap transactions).
Types of RRSP investments.
Almost any type of investment can be held in an RRSP account. Two common investments are Variable Rate Deposit and Fixed Rate GICs.
- Variable Rate Deposit: This type of deposit ensures your investment return keeps pace with current interest rate trends. Interest rates are reviewed and adjusted regularly by your credit union. This option is beneficial if you expect interest rates to rise.
- Fixed Rate GICs: A Fixed Rate GIC locks in the interest rate you will receive. This provides the security of knowing your rate of return is guaranteed for a fixed period of time. You can choose the term that best fits your financial plan.
Mutual funds and other market investments are also options for RRSP accounts. Speak with your Wealth Your Way advisor to discuss which investment vehicle is right for you.
Do you want to build savings as quickly as possible?
The TFSA contribution limit is not determined by income but rather is the same for all who qualify for a TFSA. The contribution maximum for an RRSP is based on income and therefore varies per person. This means, depending on your income, you may have greater contribution room in an RRSP than in a TFSA, allowing you to accumulate savings faster.
Planning for a secure retirement.
It’s never too early to start planning for your retirement. The best way to ensure that you’re making the right decisions with your investments is to talk to someone who can give you sound advice. Wealth Your Way is here to help.
With modern medical advances and increased standards of living, people can plan on spending one quarter of their lives in retirement. Everybody has heard it before: It’s never too early to start saving for your retirement. It’s true. The effect of compound interest is significant.
What Does an RRSP Mean to You?
An RRSP allows you to invest money when you can most afford it – during your peak earning years – to build up a comfortable tax-sheltered retirement fund. Not only do you receive a tax deduction for a contribution to an RRSP, but the earnings of your plan are not taxed until you withdraw them. Since 100% of these earnings can be reinvested and compounded, the growth of your RRSP can increase rapidly over the years. Your retirement savings will also increase significantly if you make each RRSP contribution as soon as allowed, for example, early in the year.
It starts with a plan.
At Wealth Your Way, we can help you organize your finances so your retirement will be secure. Together, we’ll build a personalized savings, investment and insurance plan to help you realize your goals.
Saving and investing for retirement.
You’ve saved up for your golden years, but now that you’re retired, what do you do with your money? Your Wealth Your Way can help you explore whether instruments such as RRIFs and reverse mortgages may be right for you.
What Happens at Retirement?
The first stage of an RRSP is to accumulate retirement savings. The next stage is to provide retirement income. Your accumulated savings may be invested in a variety of ways to provide a retirement income. Only the retirement income payments are taxed each year as you receive them, thus spreading the taxation of your accumulated savings over your retirement years.
A RRIF is basically an RRSP in reverse. You put money into RRSPs while you were working to save on taxes every year. When you eventually switch your money over to RRIFs, you’ll be drawing money out, and paying taxes on that money as you do.
This is simply a loan against your house that you don’t have to pay back as long as you live there. To qualify, you must be 62 years or older and own your own home.
Explore your options.
Wealth Your Way can help you learn more about reverse mortgages, RRIFs, and other annuities. Doing your homework and consulting with the right advisors will make it easier to select any option that may make your retirement more comfortable.
Insurance during retirement.
It’s just as important to have your assets protected when you’re retired as it was when you were a full-time wage earner. Consider some insurance changes you may need to make.
A good life insurance policy will cover many of the expenses and concerns that will arise when you die. It will protect your assets for your heirs and continue any income for the people who depend on it. It will also cover funeral costs, legal and executor fees, as well as pay any taxes you owe at death.
Just as with life insurance, you’ll benefit greatly from obtaining a health insurance policy early. This type of coverage can be a great help if you become sick and need special medical care. A good policy can help cover the costs of prescription medications or any medical supplies you need. It will also cover extended hospital stays and any special home care that you may require.
Know your needs.
Make sure you choose the policies that are right for you and your family, and don’t get talked into getting more than you need. Wealth Your Way can help you find good insurance coverage you can afford.
If you’re a Canadian wage earner over 18 years of age, you’re eligible to receive a pension from the federal government. Find out more about how this applies to you.
Canada pension plans (CPP).
Every Canadian over the age of 18 that earns a wage has contributed money toward the Canada Pension Plan. This is an earnings-related social insurance program designed to help people and their families financially after they retire, become disabled or die. It ensures that all contributors are protected.
How much money you’ll receive from the Canada Pension Plan depends on the amount of pension credits you build up. These credits are based largely on the total amount of money you contribute. The higher your annual salary and the more years you work between age 18 and retirement, the larger your pension will be.
In the event of divorce, the pension credits earned as a couple can be evenly split, even if one spouse or common-law partner did not pay into the Canada Pension Plan. A retired couple can also share pension credits for tax purposes, if one of their pensions is significantly higher than the other.
Organizing your estate.
Planning an estate isn’t something exclusive to eccentric billionaires. Everyone should have some sort of estate plan in place to ensure their financial matters are resolved quickly and expediently, and their family and loved ones lose as little as possible to taxation.
The importance of a will.
The most important part of estate planning is ensuring that you have a valid, up-to-date will. If you die without a will, the government will distribute your estate in accordance with provincial law. Only a will can ensure your wishes are fulfilled.
The best and safest way to create a will is to work with an expert, as many do-it-yourself will packages can leave details open to legal interpretation. Your will should be updated periodically and in consultation with your professional advisor, especially as you acquire new assets. You should also update your will if you have a new child. You should also be aware that if you marry, your existing will becomes invalid.
How to distribute your estate.
Distributing your estate is more complicated than simply dividing things among your heirs. You’ll need to determine all of your assets from pensions, investments, stocks and bonds, real estate and personal property. You’ll also need to note which assets you own jointly as well as who the beneficiaries are for your RRSPs and insurance policies.
Having a beneficiary matters because it helps your loved ones navigate tax implications of your estate, and gives you peace of mind that you’re leaving all your assets as you intended to.
What to name a beneficiary for:
It’s a good idea to name a beneficiary for your TFSA, RRSP, and/or RRIFs.
- You can have more than one beneficiary
- It’s a good idea to consult a tax expert
- There can be complexities with naming beneficiaries who aren’t adults
- If your beneficiary predeceases you, their children don’t automatically take their place
- Keep provincial and federal regulations in mind when you’re planning your estate
Once this is done, decide on your goals. You’ll obviously want to maximize the value of your assets and protect them as much as possible from taxation. You’ll also want to make sure you have enough liquid assets to handle your liabilities, so your heirs won’t have to sell off physical or investment assets.
Gifting assets before your death and establishing trusts are two good ways to help protect your assets from taxation. However, keep in mind that both strategies can be complicated by the individual tax circumstances of your survivors.
We understand that no one looks forward to planning their estate. We also know how important it is to you and your family that it’s done right.
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Mutual funds are offered through Credential Asset Management Inc. Wealth Your Way is a program provided by Credential Financial Strategies Inc. offering financial planning, life insurance and investments to members of credit unions and their communities. Trade-mark(s) of Wealth Your Way are used under license by Credential Financial Strategies Inc.