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Seventy-one and Earning an Income? – You May Still be Able to Make an RRSP Contribution

Written on February 15, 2012 at 9:41 am, by admin

If this is the year you turn 71, you may be fully into the swing of things as a retired person, or maybe you’re just “somewhat” into the swing of retirement as you have decided to continue working (perhaps on a part-time basis). You enjoy your work and the extra cash flow is nice. However, your financial advisor has let you know that since you are 71 it’s time to make some choices about your RRSP (Registered Retirement Savings Plan). You can either withdraw the full amount as cash and incur a potentially hefty tax burden, transfer it to an annuity or a Registered Retired Income Fund (RRIF), or do some combination of all three.

Multiple Sources of Income

You could potentially have money coming in from your government pensions, your company pension, your job, investments and from your RRSP. As a result, you may be in a higher tax bracket, resulting in your Old Age Security (OAS) payments being partially or fully clawed back. Is there anything you can do to help offset some of this tax burden? You still have earned income and want to continue to make a contribution to your RRSP….Is this still possible?

Well, if you’re turning 71 in 2012, you’ll have to the end of the year to wind up your RRSP. However, you may still be entitled to RRSP contribution room in 2013 if you have earned income in 2012. Consider making your 2013 RRSP contribution in December of this year. You will face a one percent penalty per month on the over-contributed amount that is in excess of the $2,000 allowable limit. The good news is that the overall tax savings from your RRSP deduction in 2013 should be greater than the small penalty you will have to pay.

Contribute to Your RRSP After Age 71

Dianne, a family therapist, continued to work into her 71st year and in doing so, was able to qualify to make an RRSP contribution of $20,000 for the following year. However, Dianne is supposed to wind down her RRSP by the end of her 71st year. What should she do?

Well, Dianne could make the $20,000 contribution to her RRSP in December of her 71st year. This would mean that Dianne would have over-contributed to her RRSP. Under the existing rules, Dianne would incur a one percent per month penalty on any over-contribution above the $2,000 allowable amount. So Dianne’s over-contribution of $18,000 ($20,000-$2,000) would be subject to a one percent penalty for the month of December, or $180.00. In January 2013, the penalty would drop off as Dianne would now have an allowable contribution limit of $20,000 for 2013 based upon her earned income from the prior year.

If Dianne is entitled to receive 40 percent tax rebate on her contribution, this would mean that for a penalty of $180.00, Dianne would receive an $8,000 tax refund. In this instance, paying the penalty makes sense.

Dianne might also consider contributing to a spousal RRSP if she is married to someone under the age of 72 and continues to have earned income well into her 71st year. She could also take advantage of the same over-contribution strategy in December of her spouse’s 71st year.

If you are entering into your 71st year and have earned income which qualifies you for the RRSP contribution deduction, consider this strategy. Talk to your financial advisor or accountant to make sure it is right for your particular situation first. Don’t forget to discuss other tax savings options with your financial professional, such as splitting your qualified pension, annuity or RRIF income with your spouse, as well as the $2,000 pension income tax credit.

RRSP Advice for Women: Invest or Pay Down Your Mortgage?

Written on February 6, 2012 at 11:03 am, by admin

Our home is an important investment and our mortgage is probably the largest financial obligation we will ever have. However, our RRSPs are also very important and are for many the vehicle enabling us to have a comfortable retirement. So what should we do if we find we have surplus cash – pay down our mortgage or invest into our retirement?

Your mortgage is expensive- plain and simple. It is a long term debt paid with your after-tax dollars. The rule of thumb is to pay down those expensive debts first. So if you had a 25 year $250,000 mortgage with a 5 year term rate of 3.29% at the end of the 25 years you would of paid $116,187.11 in interest payments. If you made an extra $5,000 payment each year you will have saved $44,206 off your mortgage and 9 years off your amortization. That is a huge savings!! Another way to look at it, is a 3.29% return on your investment each year.

Hopefully, you will have enough time when the mortgage is paid to start aggressively saving towards your retirement. Remember, your house is a great investment but if your not generating enough income in retirement you will have to consider downsizing and using the equity to help with retirement costs. Or continue working.

So now let’s look at your retirement savings, what will you have coming in in retirement and what how much will you need to cover your essential and lifestyle costs? Do you have a company pension you’re contributing to? Do you feel comfortable replying on government pension income to supplement your shortfall? Do you have RRSPs or other savings? Finally, how far off are you from your desired retirement date? These are important factors in deciding whether or not to contribute to your RRSP versus your mortgage. Also what is the estimated rate of return you might get on your RRSP investment? If you’re an aggressive investor and potentially could return say 6 or 7% on your investment and you’re paying 3.29% (after tax dollars) the RRSP might be the obvious choice. And visa versa, if you have low risk tolerance and want to invest into a 1% GIC then paying down the mortgage may be the better choice.

The bottom line, you should meet with your financial advisor before making any choices. It is so important to have a financial plan in place that addresses all your goals. In the end, the best option may be to invest the most you can in your RRSP and then use the tax rebate to make an extra payment each year on your mortgage. By the time retirement rolls around you will be mortgage free and will have money in the bank. You CAN achieve both financial goals.

Retirement Planning for Women: RRSP Basics

Written on January 31, 2012 at 12:57 pm, by admin

To play any game, it is important to know the rules and how they may affect the outcome or result of the game. Not to suggest that planning for retirement is a game, but knowing how RRSP rules can affect your retirement planning is very important. Below are a few of the “must knows” for your RRSP planning.

1. Maximize your contribution

The more you put away the more you will have. It is important to know the maximum allowable limit for your financial situation. Currently for 2011, you can contribute 18% of your prior year’s earned income up to a maximum of $22,450 less your pension adjustment (PA) and your past service pension adjustment (PSPA). Remember also that carry forwards of unused contributions from 1991 onward can also be contributed.

2. Contribute Today

The sooner you contribute, the sooner your savings start growing for your retirement. The compounding of interest returns can make a big difference on your RRSP balance over time.

3. Spousal RRSPs

Contributions can be made to a spousal RRSP that will allow income splitting at retirement which in turn will reduce the amount of tax that you will pay. Contributions are limited to your personal limit.

4. No More Foreign Content Limit

• 30% foreign content limit in RRSPs and registered pension plans is now a thing of the past.
• Canadian investors now have the option to invest up to 100% of their retirement plans into foreign securities, without penalty.
• Opportunities for money managers to seek out the best investment opportunities wherever they exist is wonderful news for Canadians – provides the opportunity for greater diversity and more attractive risk-adjusted returns.

5. Consolidation

Consolidating your assets leads to more efficient asset management as well as reduced costs. You should discuss with your advisor why consolidation would be right for you

Alert! The RRSP Contribution Deadline is Approaching!

Written on January 25, 2012 at 10:13 am, by admin

RRSP Contribution Deadline: February 29, 2012

With the deadline fast approaching, it’s important to remember that the maximum contribution limit for 2011 is $22,450.

RRSP Contribution Room:

RRSP contribution room is based on prior year’s earned income. It is the lesser of 18% of earned income or the maximum contribution limit. If you are a member of a Registered Pension Plan or Deferred Profit Sharing plan, your contribution room will be reduced by a pension adjustment.

Not sure on how much you can contribute?

The limit can be found on your Notice of Assessment that Canada Revenue Agency (CRA) sends after processing a tax return. It also includes any unused room.
The Tax Information Phone Systems (TIPS) also gives current contribution limit – Toll Free Number 1-800-267-6999. SIN and previous year’s tax return must be handy.
In addition, the new “My Account” online service on the CRA website can be used to check your RRSP deduction limit for 2010. My Account lets you get personalized information about your RRSP contributions and deduction limits as well as information about payments, installments, outstanding balances, statements of accounts and much more.

For more information, please contact me at 604-661-1532 or rhonda_sherwood (at) scotiamcleod.com.

How to Plan for a Terrific 2012

Written on January 18, 2012 at 1:34 pm, by admin

Now that 2011 is over it’s time to look forward to what 2012 may bring us. As suggested last year, even though there’s no crystal ball to foresee market directions, there are a number of things we can do to ensure that we are financially better off than last year.

TFSA

We can help reduce your taxes with the Tax Free Savings Account (TFSA). You are now able to shelter an additional $5000 from taxes. If you haven’t opened a TFSA yet you now have a total of $20,000 you can invest tax-free. Considering the taxman can take up to 46% in interest income it’s wise to fully take advantage of a TFSA.
If you bank with Scotiabank you can make contributions easily through Scotia On-line. You have to use the contribution button to register it with the government. Otherwise you can send a cheque made out to ScotiaMcLeod just make sure you put your TFSA account number in the memo section.

RRSP

Your RRSP contribution room for 2011 is found on the bottom half of your notice of assessment or 18% of your annual income.The annual RRSP contribution limits are as follows:

Year              2009           2010              2011 ­
Limit         $21,000    $22,000     $22,450

RESP

Most of the time the government is taking money from us so when the government offers to give us money, we should all be lining up to take advantage of it. For those of you with children, don’t forget to take advantage of the Registered Education Savings Plan (RESP). The government will add 20% of your-annual contribution (up to a maximum of $500 per child annually) towards your child’s post secondary education. You may also receive the grant from unmade RESP contributions from previous years as well.

Image credit: Ludie Cochrane

Financial Planning: It’s that time of year again. How do you measure up?

Written on December 19, 2011 at 1:45 pm, by admin

As the year comes to an end, it’s a good time to step back and seriously ask ourselves, “Have I achieved all that I wanted to?” It’s important to check in with yourself – in your relationships, career, health or overall well being. You can’t improve what you don’t measure!

It applies to your finances as well. If you were a business, you’d be preparing your year-end financial statements. You’d be cross checking your goals that you set at the beginning of the year and measure them against what you’d achieved. If you fell short, you’d look over your last year’s plan of action to see where things took a turn.

You need to do the same thing with your personal finances as well. Your family and your home are like a small business. You need to set meaningful and realistic financial goals for your personal life. Your family members need to be on the same page in terms of your financial goals. You also need a way to measure your success and celebrate your achievements – just like you would with a business.

This is something everyone at every stage in life should be doing and doing every year.

If you’re a young family, you may be overburdened with the costs of raising young kids and paying for the basics. Your objectives down the line will include staying on budget, reducing debt and possibly saving for a home. The start of a new family is an ideal time to develop a relationship with a financial planner. Your family needs to have financial goals that can be discussed, reviewed and amended (if need be) at the very least, on an annual basis. A financial planner can help with this. It’s a great way for a young family to start healthy financial discussions and set and achieve financial goals from the get-go.

A more mature family may be overextended with soccer, hockey or other extracurricular expenses. As your family grows, debt may be increasing so you might be cutting back and finding ways to bring in more income. Helping the kids with college is also in the near future and so more sacrifices need to take place. Did you put your plans to cut back and save more into action? If not, what went wrong?

How about if you’re one of the many “sandwich generation” families who not only bear the costs of their adult kids still living at home but also are taking care of mom and dad. What financial changes did you want to see happen and did they occur? Was it time to encourage the kids to leave the nest or are they still at home but finally paying rent and pitching in for food and other costs?  Were you able to create a realistic budget for the family including cutting back on some of the more frivolous expenses? How is that going? Are mom and dad able to financially pitch in a bit to at least cover the costs of their care?

An empty nester may need to be seriously planning for their ideal retirement. This could mean setting up an aggressive savings strategy, or focus on getting the last of the mortgage paid down. Planning late in life for retirement will always mean sacrifices, such as thinking about down-sizing in the coming years, working later than you hoped to or retiring on less than you ideally wanted to? It’s all a numbers game and your financial planner can help with this.

An early retiree might need to revisit the budget that they set when their income dropped 30% to 40% after they stopped working. If you’re in this position, are you eating your savings away too  quickly or increasing your debt load at an awfully fast pace? Or have you maybe lived frugally over the years so you could save as much as possible for retirement – but now find yourself hesitant to finally spend and enjoy your nest egg? Are you taking the trips you envisioned you would or learning a new hobby you wanted to learn? At this stage of the game, your financial advisor can help you determine the best way to invest your money and how to pull out an income so as not to deplete the monies too quickly.

If you’re in the ‘elderly’ stage of retirement you may want to seriously look into later in life care options. Do you want to move into a care facility sooner rather than later? Is there somewhere in particular you would like to go? Or is staying in your house as long as possible the priority? Can your budget afford to bear all of the in-home care you might require? When it comes to your will and estate planning – is everything as you wish it to be or have you made some mental changes that need to be put to paper?  Do you want to start gifting some of your estate now and can you afford to be doing this?  Do you feel your adult children are financially responsible enough to receive a large inheritance or should trusts be considered?  Your financial advisor can help guide on this or direct you to the right people to deal with.

No matter what age you are, you should be conducting an end of the year review:

• First and foremost, the three most important elements of your financial health- emergency savings, income protection and your will and estate plan. Do you have at least six months of your monthly costs put away in a savings stash somewhere? Do you have enough insurance in place to protect against the loss of income due to disability or death and do you have a valid Will and powers of attorney/Representation Agreements in place?

• Review your budget (hopefully you have some type of family budget). Where did you overspend and under-spend? Was your budget realistic or too hopeful? Maybe a new budget needs to be created to more accurately reflect your spending patterns or keep to the existing one and cutback?

• What is your networth today (what you own minus what you owe)? What was it 12 months previously? Are you richer or poorer than you were a year ago? Understand why your networth either increased or decreased. Did it go up because you stuck to your budget allowing you to increase your savings or is it just a paper increase (such as the value of your home or stocks going up)?

• Review your financial goals. What are you saving your money for? Do you have a plan in place to achieve your goals? And how are you doing?

As we move towards the end of 2011, I encourage you to take time to review your financial goals, make changes where need be and continue on or set new financial goals for the coming year. By doing this, you’ll be more likely to achieve your long-term financial objectives you will feel more in control of your money, and you’ll enjoy the peace that comes from knowing you have a plan.

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Did Procrastination Kill Your Retirement Plan?

Written on December 12, 2011 at 11:36 am, by admin

You’re in your mid to late 50s, and are longing for the day when you can make some permanent life changes. You’re in the peak of your career and earnings potential but you can’t seem to save. You are hoping ‘retirement’ is around the corner but you know deep down inside that you have not been preparing as seriously as you should.  Procrastination seems to have gotten in the way of any type of retirement planning.

It is time to get serious about ensuring you have some type of income stream coming in should you decided to slow down or stop working all together- whether by choice or by circumstance. Boomers may be working into their late 60s and early 70s, but only if health permits. It’s important to start planning for changes in your health that may prevent you from earning an income. If you have not done any real planning up until now, it’s time to stop procrastinating and start facing the reality of the situation.

To begin, gather all of your financial papers. This includes insurance policies, company pension statements and group life and disability insurance information, bank and investment statements, Will and Powers of Attorneys and finally, your government pension statements (CPP and OAS). The first step in taking hold of your financial house is to ensure you actually have taken care of all of the above and that know where such important papers are kept.

Next, get a realistic picture of what your expenses are today and how these will change in the coming years? I would first look at costs that you must pay such as your mortgage, utilities, taxes, insurance, medical/dental and food. All the basics that you would have to remain in some type of employment to cover if you have insufficient pension or investment income coming in when you ideally would like to stop working.  Now what is your net or after-tax income today? Ideally at this stage in life there should be a good spread between what’s coming in and what must go out. Making savings not overly challenging, and a priority. If not, you will need to find a way to either be bringing in more income today to go towards savings or you might have to take a hard look at your life and see where you can start cutting back or scaling down. However, if you do have excess money after paying the monthly bills ensure that you’re challenging yourself to save the absolute maximum you’re capable of.  Especially, if your behind with your retirement planning and savings.

Basically, just write down all your ‘must pay’ or fixed expenses.  Cross off all the costs that should be gone by retirement. Add on any new expenses you might have such as medical and dental costs that may no longer be covered by your company. Now take that amount and add approximately 3% to account for the cost of living. Continue to add 3% to the figure for every year that is in between now and your ideal retirement date. The end figure is the amount you will need to be coming in in your first year of retirement.  Keep in mind that this will continue to increase to keep with inflation.

Now, look at what income you know will be coming in. If you don’t have your Canadian Pension statement, you can go on-line to see what amounts will be paid to you at 65 – http://www.servicecanada.gc.ca/eng/isp/common/proceed/socinfo.shtml

Do you have a company pension? If so, do you know when you can start taking it and how much you will receive? All this information can be obtained through your pension department. Also double check if it has a cost of living increase tied to it. This is common for Government pension, but isn’t always a given with company pensions.

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