WHY IS THERE A BIG DEBATE BETWEEN RRSP’s & TFSA’s?

WHY IS THERE A BIG DEBATE BETWEEN RRSP’s & TFSA’s?

In 2009, the Tax-Free Savings Account (TFSA) was introduced to Canadians. Since that time, TFSA’s have grown in popularity and as a result, there are lots of debates over which is better the RRSP or the TFSA. 

What does each investment do for you Immediately?

RRSPs give you an immediate tax deduction…

The most attractive feature of the RRSP is the immediate tax savings you get when you put money into the RRSP.  The value of this tax break is determined by the marginal tax rate that you are in.  This short-term tax gain is offset by future taxes when you take the money out of your RRSP.  When you take money out, you will pay tax based on your marginal tax rate at the time you take the money out (which should be a lower tax rate than at the time you originally put the money in).  Any growth inside the RRSP, grows tax deferred but eventually there will be taxes paid when withdrawn from the RRSP.

Tax Free Savings Accounts give you Tax Free growth…

Unlike the RRSP, there is no immediate tax deduction when you put money into the TFSA but there is no tax paid when you take the money out either. The appeal of the TFSA is actually the TAX-FREE growth on your investments within your TFSA portfolio. You don’t pay tax on any of the growth inside a TFSA.  That is its best feature.

Below we have the reasons…

What do you need this money for?

If you need to spend the money in the near future for a car, a kitchen renovation, or maybe for a vacation, the TFSA is a better option because using the money does not trigger tax.  However, putting money into a TFSA and then taking out on a regular basis kind of defeats the real benefit of the TFSA which is its long-term TAX-FREE growth. If the Tax-Free growth is the goal, then you might be better off using a high interest savings account instead of a TFSA as the savings vehicle.

Emergency Funds…

Most people will agree that a TFSA, conceptually, can be a great place for emergency money.  However, an emergency fund should not only be readily accessible but also a safe investment.  Putting safe investments in place with lower returns to remove market volatility concerns will also negate the true benefit of the Tax-Free growth.  If you want your TFSA to be a safe haven for your investment then you will probably get better results from a High Interest Savings account for your emergency money with zero risk involved.

Saving for your first home or for education…

While the TFSA and the NON-RSP (non-registered savings plan) seem like logical ways to save for a home or for education because they are not taxed, your RRSP does offer two opportunities to withdraw money through the First-Time Home Buyers Plan and the Lifelong Learning Plan. This requires you to pay back the loan overtime giving you a chance to pay yourself back in the long run. The only thing lost is the gain on the money while it is not in your portfolio.

There is no right or wrong answer…

One of the problems with the outcome of the TFSA or RRSP debate is it seems like people have to make the choice between one or the other which really is not the case. Both the TFSA and the RRSP have merits and a place in your financial plan.  

Why can’t you have both?

Both the TFSA and the RRSP have strong financial benefits that are good for you. One way to invest in both the RRSP and the TFSA is to invest in the RRSP first and then use the tax refund to invest into the TFSA.  

An example:

You could invested $5,000 into an RRSP, or you could invest the entire $5,000 into the TFSA.

But should you?

What should you do?

Well if you invest $5,000 to the RRSP this will generate a tax savings based on your marginal tax rate. 

Let’s say the marginal tax rate is 30% (this marginal tax rate has been chosen for ease of calculation), that is equal to a tax savings of $1,500. Now take the $1,500 of tax savings and invest that return into a TFSA.

So now you have $6,500 invested into your portfolio from your original $5,000 that you invested in your RRSP. Most people in reality just spend the tax savings on a trip or something they want which is normal when you find free money. But why not take advantage of that free money to increase your future investment portfolio.

So, which is better? 

TFSA investments which grow TAX FREE, or RRSP investments which grow TAX DEFERRED. They both have their own merits in your portfolio and it depends on what you need out of each. Tax savings today which is important to most at tax time, or if tax savings is not a concern then would you would want tax-free growth for the future. Now you can see why there is a debate.

Why does one have to be better than the other?

Why can’t you have both? Well you can but you have understand what each represents in your investment portfolio.

The decision is yours to make choosing one or the other or even both make great wealth sense where your investment portfolio is concerned. Is the debate over? No! But now you have an understanding of the merits of each investment and how they work…

As always seek professional advice when creating a plan for the future. The value found in the advice given could provide a bigger pot of gold at the end of the rainbow.

HOW MUCH MONEY SHOULD YOU BE SAVING?

HOW MUCH MONEY SHOULD YOU BE SAVING?

If you ask yourself that question your answer should have been as much as possible, of course. But with so many debits coming out of your bank account saving up for your future is a daunting task. How can you prioritize your options, without knowing the importance of saving and investing your pay check or any extra cash, as you work towards reaching your financial goals.

As we have discussed in previous articles the answer to the question above is only a simple one if you implement and follow a strategic plan… Here is a look at things you should be doing when you start thinking about saving.

Pay down your credit card and other high-interest debt first

The average Canadian household carries a credit card balance of nearly $8,600 with interest rates that can be as high as 21 percent. Be sure to make minimum payments on all accounts to avoid accumulating more fees. The next step is to work on paying down your consumer debt from the highest-interest accounts to the lowest. Use any extra cash to pay down your credit card balances or any other loans, prioritizing those with high interest rates. Paying down high interest consumer debt will allow you to start saving for the future as the interest on this debt is lost potential.

Employer matching on your RRSP

When it comes to finances, there is nothing worse than leaving free money on the table. That’s why getting the most out of your employer’s RRSP match program is one of the most important “must do” strategies for your financial planning. Many employers will match your contributions up to a certain pre determined percentage of your gross pay dollar-for-dollar. Therefore you should be contributing up to the amount your employer matches because this is easy money and a winning strategy you will never regret.

Did you know that 85% of Canadians do not max their RRSP contribution…

Contribute to your RRSP

We’ve already covered how important it is to make the most of your employer’s RRSP matching program, but it’s also important to max out your tax-deferred RRSP contributions. For the tax year 2020, you can contribute up to $27, 230 in pre-tax dollars which will defer paying taxes on that money until you withdraw funds during retirement. That means you’ll pay less in taxes today, and depending on when you plan to retire, allow the money you invested in yourself this year time to grow. The advantages of paying yourself first have been covered in previous articles.

Contribute to your TFSA

Maxing your TFSA yearly can help save you money from taxation in the future. Your 2021 max limit is now $75,500 the benefits of a TFSA can be substantial: Your contributions grow as they would in an RRSP but the withdrawals you make in the future are tax-free. You have the same flexibility to invest in a range of investments, such as individual stocks or active management. Be careful not become a day trader on the stock market with a TFSA account as the government can change the status of your TFSA if they deem it to be a trading account. This account was set in place to be a buy and hold type of stock account – buy stocks that pay dividends and have the dividends reinvested into your portfolio. That is free money that will help you grow your portfolio.

Build up an emergency fund

2020 was a strange year that no one saw coming years earlier. You never know if or when you’ll experience a job loss, a major medical procedure, a housing emergency or other challenging life event. That’s why you should be establishing a “rainy day” fund to get you through until your next pay check. No amount of money could have been saved for what happened in 2020, but keeping cash for three months’ worth of expenses would go along way if needed.

The most efficient way to meet your long-term financial goals – retirement, university/college for your kids, or emergency fund. – is to take the short-term view of paying yourself first. Automatically funding your financial goals before your other expenses will help you adjust daily and monthly spending habits.

  • Setting up RRSP or TFSA auto deposits
  • Monthly RESP auto deposits
  • Setting up a regular monthly transfer from your checking account, to a high interest savings account

After paying yourself first, you may find that you don’t notice the difference in income, but your investments and nest egg will be steadily growing all the while. All of which means you’ll be saving for the long term, and seeing your financial security become more stable.

A smart approach is to think of your savings plan as consisting of two separate figures: one for things you must have, the other for things it would be nice to have. The first and most important part of financial savings is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital during your retirement years.

So how much should you be saving? As much as you can afford!

WHAT DO YOU HAVE TO DO TO BECOME WEALTHY?

WHAT DO YOU HAVE TO DO TO BECOME WEALTHY?


We often find ourselves lured by the thought that there are shortcuts to living a wealthy lifestyle. We may dream about winning the lottery, investing in the next enormous stock tip, or having that one business idea that becomes the latest hit. If only you had jumped on that stock tip that was guaranteed to make you rich. We have all been given the stock tips that will make us rich – but the only people getting rich on the tips are the people who truly know what they are doing. If getting rich is so easy, why are only 4% of the Canadian population considered rich?


What can you do right to accumulate wealth in Canada?


Wealth is not built overnight and since only one percent of our population’s wealth has been inherited. Most wealthy Canadians have built their wealth one step at a time. One of the key habits of wealthy people is their ability to create a systematic disciplined savings plan. If you want to succeed then develop a plan that pays yourself first. Put a percentage of your paycheck into a savings portfolio before any other expenses or deductions are incurred. Just think if you could save 5% – 10% of your income before expenses how much money would you have saved in a year? Continue that over a few years with the added value of compounding interest you would have created a savings portfolio with incredible growth potential.


Keep debt in check

Ever wonder what a wealthy person looks like. The typical wealthy person might not be the one that drives the nice new Mercedes, lives in the biggest house, or wears the top designer clothes. Rather, the millionaire next door is the person that has lived in the same bungalow they have lived in for the past 20 – 30 years, they may drive a nice car but it is an older well-taken care car with lower mileage. They live within their means.


Know where your money is going

Most wealthy people not only live below their means but also are very conscious of where they spend their money. If you want to become wealthy, you should develop a habit of tracking where you are spending your money every month. Budgeting can be a very intimidating word but the fact remains, it is an essential habit for wealth accumulation.


Avoid debt

Wealthy Canadians make a very conscious effort to avoid, minimize and pay off debts. It is so easy in our society to access debt. But if don’t spend money you don’t have. You will be able to build wealth with the money you do have.

Maximize income

There is a correlation between wealth and income. While this makes sense, it may not always be easy to just go out and increase your income so you can increase your wealth. Building wealth will take some effort and your wealth will be directly correlated to your situation. Wealth has a different value for everyone, for instance, if you earn $50,000 a year and you managed to put $5,000 into your savings portfolio that would be incredible. Now, what if you could earn a 6% return on investment compounding interest per year on that investment (strictly stated for illustration purposes) – that would mean over the next 8 years you would have saved just over one year’s salary. Given the same time frame and math, the same can be said for someone earning double the amount and saving $10,000 a year. It’s all relative when it comes to maximizing your savings.


Own things that appreciate

A majority of wealthy people are on their way to owning their own home. Owning your residence creates a positive net worth on your balance sheet. This intern creates a positive asset that is used when discussing wealth. Besides, having equity in your home, your newly found saving plan is also considered an appreciating asset. The next time you put your money into something, ask yourself if it is an appreciating asset or a depreciating asset.

Get professional advice

Wealthy people typically work with professionals to help them accumulate, manage and protect their wealth. This might include accountants, lawyers, and financial advisors. Although they use professional advisors, they ultimately make the final decisions themselves. If you want to become wealthy, you must seek help but understand that you are always the one to decide on when to move forward on the recommendations given.

DEBT?

DEBT?

Growing up watching my parents navigate their power of spending and living within their means is now a distant thought based on today’s immediate gratification of purchase within our society. Having debt was not something that had meaning to them 50 years ago there was only one thing that they were in debt for – that was our house everything else was paid by cash. If you did not have the money then you saved until you did. My mother would put stuff on “layaway” and make weekly payments until paid in full or if she used the Sears Roebuck credit card it was paid in full at the end of the month. 50 years ago, a mortgage was and still is today considered ‘good debt’, because your home is considered the biggest increasing asset that you own. A car was something of a necessity only and not a want. A Black and White television was the norm and if you could afford a Color Television you would have been considered rich. Fast forward 50 years and you will find the banks and credit card companies are big business empires now, the consumer is now encouraged to use credit cards, lines of credit and, a myriad of financing options because it has become increasingly acceptable and very easy to carry large amounts of consumer debt. The new generation of consumers requires immediate self-gratification and this has helped to shift the public’s perception about carrying debt which has been extremely profitable for lenders. Yes, society has changed drastically in 50 years. The reality is still the same you cannot continue to spend if you do not have the means to afford your need to spend so you can be accepted in society.

Acceptable or not, when talking about finances, people who are carrying large amounts of debt understand their reality but unfortunately without the understanding of basic budgeting this is a cycle that cannot be broken. Until we as a society accept and understand that we need to live within our means if we are to succeed in our future – If not we will continue down a path of certain self-destruction.  

What can you do to reduce your debt?

How much debt do you have?

To pay down your debt and create a plan to reduce or eliminate debt you must first understand how much debt you have. To build a plan to get out of debt you should create a budget plan which lists each of your debts on a spreadsheet this will show you who you owe, what you owe, and your total debt, the minimum payment is the interest rate you’re being charged. You will need to get past the minimum payments to get out of the debt cycle.

Once you can see it on paper you will start to understand the process and value of this exercise. When you have all your debts written down, you’ll know exactly what you’re dealing with. The next part of the exercise and this is the most important step, is to implement change. It’s important to remember the only thing you can change is what happens from this point forward what you have done in the past is in the past it cannot be taken away. There must be a change in spending habits, there is no point putting energy into starting a plan to move forward if you plan on making the same mistakes from your past. Take positive action to better your situation.

How much debt is too much?

If you’re not paying your balances in full then where will you find the additional money to pay down your debt? This is where your budgeting skills start to come into play. You have to determine exactly how much you have coming in and going out each month. The simple math will show you either a positive or negative number. Either way, change has to come if want to remove your debt. There are only two ways to change your balance sheet at the end of the month: either you have to figure out a way to earn more or you have to find a way to spend less. Take a close look at your monthly cash flow; if you can capture money from other expenses and repurpose it to attack your debt, you’ll be able to get out of debts a lot faster. The simple answer for how much is too much? When you can’t pay your monthly bills comfortably, you have hit your threshold and you now need to put a plan in place which allows you to spend less and repurpose funds to pay down your debt. 

Understand how you got here… 

Debt is not a problem. It’s a symptom of a problem. If you focus on fixing the symptom rather than the root cause of your financial situation there’s a good chance that you’ll end up facing the same issues down the road. It’s not uncommon for people to consolidate credit card debt with a loan or line of credit and then to run their credit card balances up again. Effective money management isn’t grounded in strong math skills; it’s grounded in our psychology. Understanding the psychology of money and how spending habits are created will help you create new patterns and new habits that will not only help you get out of bad debt but will also help you stay somewhat debt-free from the credit card companies in the future.

The plan moving forward…

Without a plan, you will never achieve success. Without a budget in place, you will find yourself back where you started in no time. Once you know how much you have each month to pay down your debt, then you can create a plan that will allow you to pay down each debt systematically, starting with the smallest balance of your highest interest debt. Keep your expectations realistic. Once you have successfully started to pay down your debt, removing any temptation to spend which is the cause of that debt in the first place is required. If it’s a credit card try removing the card from use until the debt is gone. One solution is to freeze the card in a zip lock bag full of water. When you want to use that credit card you will have to defrost it first giving you time to decide if you need what you are buying.

Implement your plan…

You have to start somewhere change will not just happen. Change involves stepping out of your comfort zone and into the unknown. Taking the first step to getting out of debt is usually the hardest. Be prepared for the fact that you’ll feel like giving up more than once. Don’t give up if you falter or get off track in the beginning; just remind yourself of what you’re moving away from and all the great things that lie ahead and then make the choice to get back on course. Always revaluate your plan make changes and refine your plan if necessary. Celebrate every step of your progress towards your end goal of being debt-free and by learning the power of self-discipline where spending is concerned.

WHAT IS FINANCIAL SUCCESS?

WHAT IS FINANCIAL SUCCESS?

We find ourselves in a position to reset some goals that may have slipped during a year of ups and downs. 2021, is a time to think about the things that went right last year and the opportunity to change the things that did not go so well. Some things that happened were out of our control but there are always some habits and activities that can help make a difference towards improvement. In some ways you have a chance to start over and do things differently. Think about how you can hone in on your own mental health, a healthy lifestyle, personal fitness, and your personal finances. While we are not personal trainers or health councillors, we can give you some tips to help you get financially fit. Please enjoy our thoughts below.

What financial success?

In personal finance, there are too many pieces of financial planning like net worth, investment assets, income, life insurance, estate planning, tax planning, income, budgeting, and banking that make it difficult to find an easy answer to financial success.

You can invoke change in your financial success but it requires a change in habits and lifestyle!

Have you heard of the acronym KISS (of course you have but we have modified it a little to suit our needs) see below… 

  1. KNOWLEDGE – Seek out professionals that are specific to your needs that can help you with a starting point and help to design an end goal. You need a plan and someone to lead you down that path to the success you seek.
  2. INTENT – There must be a need to change from your present plan if that plan is not working.
  3. SIMPLIFY – If your plan is too complicated, you will never succeed in reaching your own financial success.
  4. SUCCESS –It’s important to understand your plan and its goal. For example, if you want to reduce your debt, you have to come up with a realistic amount you can afford on a monthly basis and a realistic time frame for completion. If you try to do too much, it will not happen. We live in a busy world and the best way to make sure things get done is to plan for success and make that a priority. 

Make some financial changes this year

Here are some practical ideas for improving your finances and tips to help you find financial success.

1. CALCULATE YOUR NET WORTH

In order to asses your future progress of wealth accumulation, you will need to know your net worth. The calculation is this simple, take all the assets you own and subtract the debts you owe. If the answer is a negative one, then the first thing you will need to do is reevaluate your lifestyle.

As simple as this sounds very few people actually take the time to calculate their net worth. We should be aware of our net worth. We live in a society where we have become okay with increased indebtedness, material things and living for now have become more important than that of our own financial future. The lesson here is not that we have to do without and stop living in the moment but we must decide what is important as our future gets closer as every day passes. Your time is now, calculating your net worth will help make the changes necessary to create a positive financial future!

2. PAYING DOWN DEBTS

Now the holiday season is over, many of us may have accumulated a little holiday debt, and especially the high-interest credit card kind of debt. There are three rules for paying down your debt. First, pay off the highest interest debt first like credit cards. Second, continue to pay off the big-ticket items like Cars, Vacations, Lines of Credit, and Third think before you spend – Maybe this should be First! Do you really need what your buying? Debt will crush your net worth.

3. LIFE INSURANCE

One area of personal finance that is often overlooked is the area of life insurance. There are three basic reasons why you need life insurance. The first is to ensure your debts like mortgages, lines of credit, and cars will be paid off if you are gone. This way if something happens to you, your loved ones will not have the burden of debt payments. The another reason for insurance is for income replacement. If you were to unexpectedly die, would your family continue to need your income? If so, put life insurance in place to create future income. This is the area most overlooked for proper insurance coverage. Finally, insurance can be used to cover expenses like funeral costs, education, emergency fund, and taxes. Make sure you have the right amount of insurance coverage in place to protect your loved ones and their future.

4. FORCED SAVINGS PLAN

RRSPs are a great way to save for the future while also decreasing the amount of tax you will pay for your previous year’s income to the government. The unfortunate part of this equation is that 85% of those that file taxes have unused RRSP room. The reason for this is, we as a society are paying way too much to service our own debt. Just imagine if you could some how remove your debt with a solid plan, but continue to pay the same money out monthly that you are presently paying to service that debt into your future instead. would that change your financial landscape in the future? RRSPs are not the only place to save money besides the immediate tax deferred benefits, you can also look at TFSA’s – Tax Free Savings Account can be either a compliment or an alternative to your RRSP savings. Pay yourself first by maximizing your RRSPs/TFSA and your net worth will increase drastically.

5. ESTATE PLANNING

The most basic aspect of an estate plan is the Will the most underrated aspect of financial planning. The Will ensures that your assets will be distributed according to your wishes. Proper Will Planning will help you to minimize taxes and ensure that you maximize the assets that can be distributed to your benefactors. Make sure you have a Will and that your Will gets updated regularly.

It’s also a great idea to review your beneficiary designations on your RRSPs, TFSAs, and Life Insurance policies periodically to make sure they are up to date with your life circumstances. Avoid future Probate payment wherever you can.

6. LIVING BENEFITS

Living benefits insurance refers to insurance that protects against the risk that may occur while you are still living. Disability insurance protects you in case you get disabled and can no longer work. Another living benefit insurance is Critical Illness. Which was designed to help if diagnosed with cancer, heart attacks, strokes, and other major illnesses. Which in today’s society are on the rise and therefore the need for critical illness insurance increases. If you do not have critical illness insurance, be sure to look into some coverage. It may not be cheap but your chances of collecting are better than you dying first.

7. BANKING

High-interest banking. There are two key benefits to high-interest banking. First, you start earning a much higher interest rate than your conventional bank account. Secondly, most high-interest bank accounts have no fees. If you are not earning interest in your bank account and have monthly fees, be sure to learn about alternatives. We lose money willingly and unknowingly – losing money willingly is defined as credit debt, mortgages, lines of credit, we know this when we sign on. Losing money unknowingly is not educating yourself about things that could make you money. A penny earned is a penny saved – our parents loved that expression.

8. EMERGENCY FUND

We all know the importance of having an emergency fund.  If anything 2020 was a wake up call regardless of having savings on hand for that rainy day.  An emergency fund is liquidity, money that is easily accessible when needed.  There is lots of debate over how much you should keep in an emergency fund – truthfully no such amount could have been put away for 2020. But how much will depend on your ability to save for that unforeseen circumstance. Something saved is better than nothing!

9. FINDING BALANCE

It sounds so basic because it is. The formula is so simple – spend less than you make. With financial institutions so readily willing to give out credit cards and lines of credit, it is so easy for all of us to spend more than we earn. The problem is that spending eventually catches up with us to the point where we have too much debt. No matter who you are and how much debt you may or may not have, budgeting is an essential part of life. Take the time to track your expenses for at least three months and you’ll have a pretty good idea of where your money is being spent.

Coming up with a financial goal is one thing but sticking with it and making it happen is another. The results of financial goals depend on the habits and routines you use daily. We are all creatures of habit. In order for your financial goal to work, you need to become diciplined in your daily routine. These saving habits need to become second nature. The reason most financial goals do not work is simply that we fail to follow a plan. In order to follow your new plan, you need to understand the process. 

Where do you start?

Keep It Simple for Success – you need to set goals and stay focused on those goals! There’s something to be said about Keeping It Simple for Success!

  1. Change your lifestyle – To be successful, you must make everlasting changes and the only way you can do that is to change your habits. If it takes 21 days to change a habit, then how long does it take to change a lifestyle. In my opinion it’s a want not a need for change to happen, you must want to change in order to create change.
  2. Do more – The best ideas in the world are the ones that are put to work. You are better to do something and fail then to do nothing at all. You have to want to do more to create the change that is necessary for your financial future.
  3.  Take ownership – It’s much easier to blame other people or circumstances, but if you hold yourself accountable, the future is yours and yours alone! Stop making excuses, stop whining, stop blaming. Focus on the things that help you stay accountable for your own financial future. 
  4. Stick with the plan –The key is to have a plan in place. Once you have the plan, then you need to keep on track until it becomes a habit. Whatever that time frame is, the bottom line is changing your habits requires continuous effort, and significant discipline.
  5. Find Support – Most things we accomplish in life, we accomplish with the help of others. If you want to get ahead financially, it often helps to have someone with knowledge in that field that supports you. Some say knowledge is power but at the end of the day, it’s up to you if you want less debt, more money, more wealth or whatever your financial goal you desire. Find an advisor that can help you put together the plan that best suits your needs.

It’s almost that time again! Taxes will be due soon enough…

It’s almost that time again! Taxes will be due soon enough…

A new year means new limits. Here’s a list of new financial planning data for 2021 (In case you want to compare this to past years, that data is included). Pensions, RRSP, TFSA, CPP, OSA, New Federal Tax Brackets.

Pension and RRSP contribution limits

  • The new limit for RRSPs for 2021 is 18% of the previous year’s earned income or $27,830 whichever is lower less the Pension Adjustment (PA).
  • The limit for Deferred Profit Sharing Plans is $14,605
  • The limit for Defined Contribution Pensions is $29,210

Remember that contributions made in January and February of 2021 can be used as a tax deduction for the 2020 tax year.

Tax YearIncome fromRRSP Maximum Limit
20212020$27,830
20202019$27,230
20192018$26,500
20182017$26,230
20172016$26,010
20162015$25,370
20152014$24,930
20142013$24,270
20132012$23,820
20122011$22,970
20112010$22,450
20102009$22,000
20092008$21,000

TFSA limits

  • The annual TFSA limit for 2021 is the same at $6,000.
  • The cumulative limit since 2009 is $75,500 (assuming you were over the age of 18 in 2009)

TFSA Limits for past years

YearAnnual LimitCumulative Limit
2021$6000$75,500
2020$6,000$69,500
2019$6,000$63,500
2018$5,500$57,500
2017$5,500$52,000
2016$5,500$46,500
2015$10,000$41,000
2014$5,500$31,000
2013$5,500$25,500
2012$5,000$20,000
2011$5,000$15,000
2010$5,000$10,000
2009$5,000$5,000

Contribution amounts for 2021

  • Employee contribution = 5.45% (up from 5.25% in 2020)
  • Employer contribution = 5.45% (up from 5.25% in 2020)
  • Self employment = 10.9% (up from 10.5% in 2020)
  • The maximum employer and employee contribution to the plan for 2021 will be $3,166.45 each and the maximum self-employed contribution will be $6,332.90. The maximums in 2020 were $2,898.00 and $5,796.00.
  • CPP Benefits
    • Yearly Maximum Pensionable Earning (YMPE) – $61,600
    • Maximum CPP Retirement Benefit – $1203.75 per month
    • Maximum CPP Disability benefit – $1413.66 per month
    • Maximum CPP Survivors Benefit
      • Under age 65 – $650.72
      • Over age 65 – $722.25

Reduction of CPP for early benefit – 0.6% for every month prior to age 65. At age 60, the reduction is 36%.

YearMonthlyAnnual
2021$1203.75$14,445.00
2020$1175.83$14,109.96
2019$1154.58$13,854.96
2018$1134.17$13,610.04
2017$1114.17$13,370.04
2016$1092.50$13,110.00
2015$1065.00$12,780.00
2014$1038.33$12,459.96
2013$1012.50$12,150.00
2012$986.67$11,840.04
2011$960.00$11,520.00
2010$934.17$11,210.04
2009$908.75$10,905.00

Old Age Security (OAS)

  • Maximum OAS – $615.37 per month
  • The OAS Clawback (recovery) starts at $79,845 of income. At $129,075 of income OAS will be fully clawed back.

OAS rates for past years:

YearMaximum Monthly BenefitMaximum Annual Benefit
2021$615.37$7,384.44
2020$613.53$7,362.36
2019$601.45$7,217.40
2018$586.66$7,039.92
2017$578.53$6,942.36
2016$570.52$6,846.24
2015$563.74$6,764.88
2014$551.54$6,618.48
2013$546.07$6,552.84
2012$540.12$6,481.44
2011$524.23$6,290.76

New federal tax brackets

For 2021, the tax rates have changed.

Lower Income limitUpper Income limitMarginal Rate Rate
$0.00$13,808.000.00%
$13,808.00$49,020.0015.00%
$49,020.00$98,040.0020.50%
$98,040.00$151,978.0026.00%
$151,978.00$216,511.0029.00%
$216,511.00

CAN THE GRINCH REALLY STEAL CHRISTMAS?

CAN THE GRINCH REALLY STEAL CHRISTMAS?

As we continue to move through Covid-19 as a society we are often reminded of the times when we could do things we wanted without circumstance. Since the middle of March or 266 days ago, we can now describe ourselves as living in a suppressed environment. As difficult as that has been for many, we must understand that even if our reality has changed during this time our outlook on life should not be broken. We will survive this and this too shall pass as we are a resilient society.

Knowing that with every passing day we are one step closer to understanding that we will not be able to celebrate Christmas with family and friends as we can already see the writing on the wall. The toughest part of this conversation is that someone else other than ourselves is making that decision for us. We must believe that these chosen officials are not trying intentionally to separate us from family on this special holiday as some would believe, but they are truly trying to keep us from having to endure any pain and suffering that would come from us failing to understand the severity of the circumstance if we fail to listen.

We already know there will be complaining. The only thing anybody should be complaining about is their health in this circumstance. Short of the death of a loved one, a terminal illness, or some other horrible tragedy, everything is controllable. If we’re in control of it, we have the ability to fix it. 

Where is the value in complaining? 

Instead of complaining about what could happen or when it does happen…Why not asses the situation, and find a solution. 

What if you could…

– Organize a catered dinner for loved ones who you cannot see this Holiday Season. 

– Create a Zoom, Google Chat, Face time, or just a simple phone call to create that festive moment with a cheer for the holiday season knowing that you will soon be able to get together as a family in a safer environment sometime in the future. Life is way too short to risk any lives because you fail understand why.

With this also comes with a lack of optimism about our future. There are a million reasons why not, but there is one good reason why, our future is bright we just have to persevere and understand there is a light at the end of the tunnel.

No matter what happens, we have to keep going we have a choice. We have come this far and yes; we are tired of not being able to do what we have done in the past. But isn’t this where the optimism lives knowing we will one day rise above this to return to what we know. If we truly believe as a society that we can do it no matter what, we’ve got this. The only reason we might bring up any excuses about the future is because you don’t believe there will be one. Do not let that kind of thinking ever get in the way of our success because we already know this, we are resilient and we will persevere. Many things have stood in the way of our success lately and we have found a way to move forward to this point in time. So, don’t give up now as this too shall soon pass!

To be able to get through this holiday season, We, need to have optimism. Every day is hard, and we all have to fight to win.

To that I say Happy Holidays and a Merry Christmas to all! So long 2020 and bring on 2021 I’m ready!

What is a Tax-Free Saving Account (TFSA)?

What is a Tax-Free Saving Account (TFSA)?

The Tax-Free Savings Account (TFSA) was introduced in 2009. The account can let anyone above the age of 18 enjoy tax benefits that can help accumulate significant wealth without paying the Canada Revenue Agency (CRA) a single penny on the income gained in the account.

However, the CRA will keeps a close watch on these accounts to catch you if you make any mistakes. While the TFSA can let you enjoy tax-free wealth growth, it comes with certain rules and regulations you need to comply with to enjoy the tax-free status. Failing to comply will allow the CRA a chance to collect tax, which they will gladly do.

How can they do that you ask ?

  • Over-contributing

Canadians that make the mistake of disregarding the maximum contribution limit in their TFSAs. The government introduced a limit to which you can contribute to your TFSA each year. The government increases the contribution limit annually, and with the 2020 update, the maximum contribution limit for your TFSA is now $69,500. That means if you have never invested in a TFSA since its inception, you can contribute $69,500 in cash or equivalent assets to the account in one lump sum.

Unfortunately, there are some Canadians that have made the mistake of contributing a lot more to their TFSAs than they should. The CRA charges you a penalty of 1% on the excess amount you hold in your TFSA each month. You can effectively lose the tax-free status of your account by making this mistake.

  • Trading too much in the account

Another more common mistake you never want to make with your TFSA is using it as a day-trading account. Yes, you can use the TFSA to hold assets equivalent to $69,500. However, you can’t use the tax-free status of your TFSA to make trades for the short-term gains. If you plan on using the account for day trading, you can expect the CRA to take action as it was never intended as a tax-free way to trading stocks. If considerable money is made by day trading The CRA can consider any account used frequently in trading stocks to have taxable income, and will subsequently consider this a trading account and not a TFSA.

There is no definitive limit to how many trades you can make in your TFSA in a year, but you should not act as a day trader with the account. Ideally, you should use the account to buy and hold long-term investments. If you were to buy a stock which pays an annual divided and keep it in your portfolio for the long term then this is seen as a tax-free investment as you are allowed to investment in the stock market. 

What is the advantage of the TFSA?

Think about this you have $69,500 that you are able to investment in any funds or stock that you would like and under the Umbrella of a TFSA that can grow to a value much greater than your original investment. Let’s assume that this money grows by 6% on average during the next 15 years… plus with the additional moneys the government lets you deposit annually without penalty. You could have in excess of $382,251 of tax-free savings depending on the type of investment you choose. This is tax-free money and can be withdrawn without taxation which would make this another piece of the puzzle to consider in your retirement planning portfolio.

How did we get here?

Start with $69,500

Added.      $90,000 = $6,000/year for 15 years

Total Inv.  $159,500 x 6% (on average over 15 years) 

Total Value $382,251

The numbers are based on a continued estimate of what the government will do moving forward, the government has the ability to raise or lower the TFSA deposits allowed moving forward so we have estimated the present-day value moving forward for 15 years. If we take into account the compounding interested on money invested through deposits over 15 years our simple calculations @ 6% on a yearly average for a moderate investment you could grow this account to $382,251 of Tax-free Savings. 

Note:

We made this very general in the nature of simple math so we could show the effects of compounding interest. There will be years above and below 6% growth on your investment but we chose to look at an average rate of return throughout the 15 years of investment for the simplicity of explanation.

Financial Security, What is it?

Financial Security, What is it?

Financial security refers to the peace of mind you feel when you aren’t worried about your income being enough to cover your expenses. It also means that you have enough money saved to cover emergencies and your future financial goals. When you are financially secure, your stress levels goes down, leaving you free to focus on other issues.

Budgeting for Success

Feeling financially secure requires knowing what your assets and liabilities are, as well as how your income compares to your expenses. If you aren’t tracking these, you might not know you’re struggling, but that’s like an ostrich sticking its head in the sand and hoping for the best. For true financial security, create a budget that addresses both your current needs, like food, clothing and shelter, and your long-term goals, like paying down debt and saving. You should also include insurance to cover the what-ifs in life.

Prioritizing Long-Term Goals

Pay yourself first, when it comes to making your budget. No, that doesn’t mean take the first fruits of your paycheck and go out to eat. Instead, it means make sure you’re setting aside money for long-range goals, like an education fund for your kids, a down payment for a future home or a retirement account for your golden years. If you’re struggling to find enough remaining money to pay down debt, look for discretionary expenses that you can cut.

Building an Emergency Fund

Whether you call it an emergency account, your safe money or a rainy day fund, setting aside several months worth of living expenses is critical for your financial security. That way, when something unexpected like a job loss, refrigerator breaking down, or a child having to go to the hospital pops up, you have the funds to deal with it rather than having to go into debt, especially high interest debt like a payday loan or a balance on your credit card.

Tracking Long-Term Goals

You can’t just set it and forget it when it comes to your budget. Instead, your budget requires maintenance and fine tuning over time to make sure you’re adhering to your goals. For example, if you haven’t been tracking your spending in the past, you might think you’re only spending $100 a month eating out, but could be spending two or three times that amount if you’re not tracking it. If you need help staying on top of your money, contact us at info@henleyfinancial.ca for your free budgeting template. Let us help you achieve your financial goals.

Get started on your Estate Planning

Get started on your Estate Planning

 

By Henley Financial and Wealth Management

As we journey through the various stages of life, we spend considerable time building relationships and accumulating assets. Passing on a legacy to family and friends and avoiding unnecessary taxes and administrative delays takes good planning. Your estate plan is as individual as you are, and taking the time to complete your arrangements now will give you control over how you provide for those closest to you.

We would like to send you a free booklet on Estate Planning including a step by step checklist.  Please contact us at info@henleyfinancial.ca for your copy.

Estate planning

Estate planning is about life – in the present and in the future. Most importantly, estate planning is about the life of your family and loved ones – and the peace of mind you get from helping to preserve their financial security. By its very nature, estate planning is a difficult subject to discuss – even more so to plan for because it forces us to come to terms with our own mortality. Yet it’s something you need to talk about openly with your loved ones today because you can’t do so after you’re gone – or after they’re gone.

Each person will approach estate planning differently, with personal motivations and expectations. No estate plan will be exactly like another. Estate planning should be reflection of your personal priorities and choices.

Estate planning is generally guided by three rational motivations

  1. Provide adequately for family members and/or other loved ones
  2. Ensure that your estate is distributed in the timeliest manner possible after your death
  3. Minimize taxes – during your lifetime and, equally important, for the beneficiaries of your estate

…and three emotional motivations

  1. Gain comfort from knowing your loved ones are well looked after
  2. Feel secure knowing that settling your affairs will not add more stress to those grieving for you
  3. Rest assured that your estate will be distributed the way you wish

Why you need an estate plan and the Benefits of estate planning

  • Distributes your assets as you intended; provides funds to cover funeral expenses, as well as immediate and/or long-term family living costs
  • Keeps more of your money in the hands of your heirs
  • Minimizes income tax and probate fees (no probate fees in Quebec); designates charitable gifts; declares your personal care preferences, including terminal medical treatment and organ donation intentions
  • Provides for the tax advantages of income splitting
  • Ensures business continuity for business owners
  • Identifies the people chosen to carry out your last wishes and care for your children

Taking action now 

Too often, advisors and estate planning professionals hear, “I wish I’d known about this sooner” from distressed family members. Whatever your status – male, female, married, widowed, divorced, single, young, old, middle class or wealthy – everyone can benefit from estate planning. Unfortunately, too few people follow this advice. Planning your estate and communicating your wishes as appropriate can protect your estate and, as importantly, allow your heirs the opportunity to prepare themselves for their changed circumstances. The “do nothing” option is not in the best interests of your family, your business or other relationships. As the world we live in becomes increasingly characterized by legal action and government intervention, estate planning is something everyone should do.

Creating your estate plan – step by step 

Step 1: Consult and retain appropriate professionals. The complexity of your situation will determine the assistance you will require from professionals to create your estate plan. Your team should include an advisor, lawyer and tax planner

Step 2: Draw up a household balance sheet. A household balance sheet is a summary of your financial situation that ultimately determines your overall net worth. Your net worth is the value of your assets (what you own) minus your liabilities (what you owe). If you don’t already have one, work with your advisor to develop your household balance sheet.

Step 3: Understand your life insurance needs. It’s important to work with your advisor or insurance expert to match your long-term financial objectives with your insurance needs.

Step 4: Draw up your Will.

Contact us at Henley Financial and Wealth Management  if you would like us to provide you with a Will Kit.

Step 5: Establish power of attorney for property. At some point in the future you may be unable to make your own financial or personal care decisions. But you can prearrange for someone to make these decisions according to your wishes by having a lawyer draft a separate power of attorney for property and personal care.

Step 6: Establish power of personal care. Medical and lifestyle decisions must often be made quickly when someone is seriously ill; hence, one or more family members are often granted this power of attorney to make decisions for you.

Step 7: Minimize taxes and administration fees. Your estate may encounter certain obligations for income tax and probate taxes on your death, which may reduce the proceeds intended for the beneficiaries of your estate. If any part of your estate must go through probate to validate the Will before transferring ownership of assets, the entire estate value may be subject to probate taxes.

Step 8: Keep track of accounts and important information. One of the most difficult roles for an executor and family members is gathering the information required to settle the estate. Eliminate this concern by centralizing all household information from birth certificates, passports and other legal documents, to bank accounts and insurance policy numbers, to phone company and hydro account details. Once you have documented your important information, store a copy in a safe place and let someone close to you know where it is.

Step 9: Let someone know.  After you have gone through all the steps of developing an estate plan, the final piece of the puzzle is communication. It’s really important to communicate your plans to a family member or close friend whom you can trust, and who is capable of working with your advisor to execute your estate plan. There’s nothing more disturbing than for someone to have to deal with incomplete information or requests. As such, not only is it important to share your plans with someone, but it can also be very helpful to document your plans to help eliminate any potential misunderstandings. As difficult as it may be, making sure that those affected by your plans know what is expected of them and where critical information is kept is essential to the smooth execution of your estate plan.

Step 10: Review and update regularly. Review and, if necessary, update all information at least once a year. By updating your estate plan, you’ll get a snap shot of where you are on an annual basis.