As parents, we all want to provide our children with the best possible future, and a big part of that is making sure we’ve saved enough for their higher education. As the costs of tuition continue to rise, it’s more important than ever to start saving early.
The first step is to get a clear picture of the potential costs. Tuition fees vary widely depending on the institution and program of study. You'll also need to account for additional expenses like books, supplies, accommodation, and living expenses. The earlier you start saving, the more you can leverage the power of compounding interest. Even small, regular contributions to a savings plan can grow significantly over time, reducing the financial burden when it's time for your child to head to college. In Canada, one of the most effective tools for saving for education is the Registered Education Savings Plan (RESP). Contributions to an RESP grow tax-free until they are withdrawn. When the funds are used for educational purposes, they are taxed in the student's hands, typically resulting in little to no tax due to their lower income level. Additionally, the Canadian government offers the Canada Education Savings Grant (CESG), which matches 20% of the first $2,500 contributed annually to an RESP, up to a maximum of $500 per year, with a lifetime limit of $7,200 per child. While not specifically designed for education savings, a Tax-Free Savings Account (TFSA) is another great tool that can be used to save for your child's education. Contributions are not tax-deductible, but the income earned within a TFSA is not taxed, even when withdrawn. When your child reaches high school, begin researching scholarships, grants and bursaries. These can significantly reduce the financial load of post-secondary education. Many private institutions offer awards based on various criteria, including academic achievement, community involvement, and specific talents or interests. For many families that I’ve worked with, they’ve gotten a lot out of involving their children in the savings process. This teaches them valuable lessons about money management and the importance of investing in their future. Whether it's through part-time jobs, saving gifts from relatives, or understanding the family's financial planning, their active participation can make the journey more meaningful. Every family's financial situation is unique, and what works for one may not be the best option for another. Consider consulting with a financial advisor to create a personalized education savings plan that aligns with your financial goals and circumstances. Remember, the path to saving for your child's education is a marathon, not a sprint. With careful planning, consistent saving, and the right financial tools, you can build a solid foundation for your child's future. CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Corp., and may differ from the opinion of CG Corp’s. Research Department. Accordingly, they should not be considered as representative of CG Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Corp. assume any liability. Tax & Estate advice offered through CG Wealth & Estate Planning Since approximately 2009, interest rates have been at rock bottom, while most rates are only about 2-3% whether to pay off debt or invest is not that significant. However, in the last year, interest rates have spiked upwards, and now this trade-off is far more important. Before diving in, it’s important to note that choosing whether to invest or pay off debt is really a question of what you should do with additional savings – which is a good problem to have. You’re meeting all of your expenses and are capable of saving money, trying to find the optimal solution for your savings. Also, it’s important to have an emergency fund. Have some money set aside that you can draw on during rough times. Ideally, you want an emergency fund that has 3-6 months of your living expenses. With the emergency fund intact, here are a few factors to help you decide whether to invest your money or pay off debt. This is the first type of debt: there is a difference between having a mortgage on a home and credit card debt from a vacation.
Over time, the value of your property will likely increase – it appreciates. A mortgage still needs to be dealt with, but seeing as you have an appreciation asset, there’s a difference between debt for appreciating assets and debt for consumer goods, such as vacations or clothes. Related to this is secured and unsecured debt. If your debt is backed by something, like an asset, such as a house or land, it’s known as secure debt. Personal lines of credit or credit cards are examples of unsecured debt. Typically, folks use unsecured debt to buy consumer goods or assets that depreciate. Unsecured debt is typically more expensive and subsequently has higher rates. As a general rule, the more unsecured debt you have or debt for depreciating assets, the quicker you want to pay it off in full. Usually, in most cases, paying off this debt is better than investing. Another key factor is the amount of debt you have. There is a term we use called “credit utilization”, which is a key factor in your credit score and is something the majority of banks and credit unions look at when determining whether you qualify for a mortgage. To put it simply, credit utilization measures your debt load compared to your overall available credit. If your car breaks down and you need a new one, you may find it hard getting a loan if you are already in a lot of debt. The less debt you have, the more flexibility you have in the end. The next factor to consider is arguably the most important factor: interest rate. The higher the rate you pay on debt, the more incentive you have to pay it off. Often folks compare their rates. I got 7% on my investments the last few years and my mortgage rate is at 5%, investments in this case are better. There is some validity to that math, but an essential part of the equation that’s missing is risk. Paying off debt is very low risk, you’re aware of the outcome, and the interest rate is stated, and you’re using after-tax dollars. So, paying off debt is much like a guaranteed after-tax return. Apart from the TFSA, most investment gains have some sort of tax involved. Also, investments vary in risk. If you are a more conservative person, the low risk option is to pay off debt. If you’re comfortable with a medium level of risk, I think a 6% threshold is a decent rule of this sort of environment. Debt with rates above 6% put extra funds into paying that off, and below 6%, extra funds to investing. There isn’t a one-size fits all approach when it comes to debt and investing. Chat with your financial professional so they can help you determine what makes the most sense for your financial situation. CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Corp., and may differ from the opinion of CG Corp’s. Research Department. Accordingly, they should not be considered as representative of CG Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Corp. assume any liability. Tax & Estate advice offered through CG Wealth & Estate Planning https://advisorweb.cgf.com/content/uploads/sites/67/Financial-Focus-May-2023.pdf Last month, I participated in a charity event organized by my co-worker Rob Tétrault, running a half marathon to support the Canadian CMV Foundation. Typically, preparing for a long-distance run requires a consistent regimen of logging miles week after week, gradually building up stamina for the event. Looking back, I regret not adhering to that disciplined training routine. Despite not achieving any remarkable speed records, I managed to complete the run. However, the lack of consistent training made it more challenging than necessary. Nonetheless, I am grateful for the experience, knowing it was all for a worthy cause.
Consistency is equally crucial in the realm of finance. With sensational headlines and captivating stories bombarding us, it's easy to get caught up in the drama. We often find ourselves swayed by short-term trends and daily market fluctuations, making it difficult to stick to a long-term strategy. A shining example of consistency and patience is Warren Buffet, widely regarded as one of the world's wealthiest individuals and greatest investors. Yet, the secret to his massive fortune lies not solely in his investment strategy or returns but rather in the factor of time. The story goes that Buffett purchased his first stock at the young age of eleven, becoming a millionaire by the time he turned thirty. Today, in his nineties, he continues to invest and remains one of the richest people globally, with Forbes estimating his net worth at over 110 billion dollars. When considering the substantial sums he has donated to charitable causes over the years, his total earnings likely approach 200 billion dollars. The majority—nearly 98%—of his wealth accumulated after he turned sixty. This exemplifies the power of compounding, where the largest gains in dollar figures occur in the later years. Numerous books and financial enthusiasts have extensively explored Buffett's strategy and his approach to valuing companies and the markets. While his approach is undoubtedly noteworthy, it is not the sole reason behind his immense fortune. Recently, I came across an illustrative hypothetical scenario shared by Morgan Housel of the Collab Fund. Let's imagine that Warren Buffet started with $25,000 in his thirties and retired in his sixties, aligning more closely with the average person's situation. Even if we assume he employed the same strategy and achieved similar investment returns, his wealth would have been a staggering 99.9% less than what it is today. Time emerges as the most significant factor, with Buffet's ability to let his money compound over 80 years playing a pivotal role in his wealth accumulation. When assessing our investment portfolios, we often fixate on the rate of return. Questions arise: Is the return higher or lower than last year? Did my neighbor achieve impressive gains? It's tempting to chase maximum returns, and there's nothing inherently wrong with such a mindset. However, the rate of return represents just one facet of the equation and must be considered in context. The duration for which we allow our investments to compound uninterrupted exerts the most substantial impact. Time reigns as the paramount factor. Unfortunately, these two puzzle pieces can sometimes conflict with each other. Buffet's story serves as a prime example. His strategy, like any investment approach, is not flawless; trade-offs are inevitable. Broadly speaking, Buffet employs a buy-and-hold strategy, seeking out undervalued companies with strong fundamentals that often pay dividends. This approach tends to be more conservative, but the trade-off is that it rarely emerges as the top performer in a given year, lacking the high-growth element. Like any investor, Buffet has experienced both prosperous and challenging years. Particularly during the 1990s dot-com frenzy, Buffett's strategy significantly underperformed. Instead of succumbing to the allure of the booming internet sector, Buffet remained steadfast in his approach. It took years, until the 2000s, for the dot-com bubble to burst and Buffett's strategy to regain favor. Ultimately, his consistency was rewarded. Had Buffet abandoned his approach and chased after dot-com stocks, who knows where he would be today? Consistency and time are the true secrets to achieving compound growth. While most individuals cannot allow their investments to compound for over 80 years like Warren Buffet, we can still apply some valuable lessons. Whether it's investing or preparing for a charitable half marathon, consistency and time remain vital. In my opinion, the most practical application of these lessons lies within the context of your financial plan. Your plan serves as a blueprint, articulating your financial goals and guiding you on the path to achieving them. Your investment strategy must align with the parameters of your plan. Every strategy involves trade-offs, but the best strategy is the one you can consistently adhere to over an extended period, long enough to fulfill your financial objectives. Engaging in conversations with financial professionals can assist in getting your financial plan on track and ensuring you have the appropriate investment strategy tailored to your needs. CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Corp., and may differ from the opinion of CG Corp’s. Research Department. Accordingly, they should not be considered as representative of CG Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Corp. assume any liability. Tax & Estate advice offered through CG Wealth & Estate Planning In a recent survey conducted by BMO, it was found that Canadians now believe a retirement fund of $1.7 million is necessary, indicating a 20% increase compared to previous surveys. While this figure grabs attention and makes for a compelling headline, it oversimplifies the intricacies of retirement planning. The truth is, there is no one-size-fits-all approach when it comes to preparing for retirement.
Retirement income is not solely reliant on savings. The landscape of work pension plans has evolved over time, and some individuals still benefit from the security of defined benefit pension plans, which guarantee them a fixed income during retirement. For those fortunate enough to have such pensions, their savings requirements are alleviated by this additional income stream. Furthermore, all Canadians are eligible to receive income from the Old Age Security (OAS) and the Canada Pension Plan (CPP). If both members of a couple have worked and contributed to these government pensions, they can anticipate an average of $1.5k each, or $3k as a couple if they retire in their 60s and start receiving pension payments at 65. The more pension income one receives, the less one needs to rely on personal savings to achieve a comfortable retirement. Timing is also a crucial factor to consider. Most Canadians retire in their 60s, aligning with the age at which many pension plans take effect. The earlier one chooses to retire, the higher their savings must be to bridge the income gap until pension payments commence. Another significant determinant of the retirement fund needed is personal spending habits. From my experience working with retirees, I have observed a wide range of lifestyles, spending patterns, comfort levels, and individual needs. What may seem like an extravagant monthly income for one retiree may be insufficient for another. Generally, the lifestyle one leads prior to retirement serves as a reasonable benchmark for estimating the required income during retirement. However, this figure varies for each individual, depending on their unique circumstances and desired standard of living. These are just a few of the factors that must be taken into account when planning for retirement. Although I have only touched upon pensions, retirement timing, and budgeting, it is evident that the required funds for a comfortable retirement differ for each person. The BMO survey appears to reflect people's sentiments rather than providing precise retirement data. Given the challenges we have faced in recent years, such as the pandemic, lockdowns, inflation, and market fluctuations, it is understandable that some individuals may feel discouraged and doubt the feasibility of retirement. It is advisable to consult with financial professionals who can assess your specific retirement goals and determine whether the amount you have set aside aligns with your needs. CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Corp., and may differ from the opinion of CG Corp’s. Research Department. Accordingly, they should not be considered as representatives of CG Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Corp. assume any liability. Tax & Estate advice offered through CG Wealth & Estate Planning Every January, the Canada Pension Plan (CPP) updates its figures. If you are already receiving CPP benefits, you will see a 6.5% increase to account for inflation. If you haven't started collecting CPP, there will also be an increase in your benefit. The contribution rate has increased from 5.70% to 5.95%, which means that if you are currently employed, you will be contributing more to your CPP, and your employer will match this larger contribution. For self-employed individuals who contribute to CPP, both components of the pension will need to be added, totaling 11.90%. In 2023, the maximum pensionable earnings have also increased to $66,600, and the 5.95% contribution rate applies to income up to this amount. Once you reach $66,600 in earnings for the year, you will have maxed out your CPP contribution. The maximum monthly CPP benefit has also increased to $1,306.57 at age 65.
Old Age Security (OAS) also makes adjustments, but unlike CPP, it updates quarterly in January, April, July, and October. The OAS pension increased in January, and the maximum monthly pension is now $687.56 at age 65. Canadians over the age of 75 receive a 10% bonus, and their maximum monthly pension is now $756.32. However, there is a clawback for OAS, meaning that if you are collecting OAS and your income exceeds a certain threshold, the government will reduce your OAS pension. For the 2022 tax year, the threshold is $81,761, and for every $1 above that, your OAS pension will be reduced by $0.15. If your 2022 income exceeds $134,626, all of your OAS will be clawed back. The current threshold for 2023 income is $86,912. For those still saving for retirement, the last day to contribute to your RRSP and use the tax deduction on your 2022 tax return is March 1, 2023. Your RRSP limit is determined by your income, with the formula being 18% of your previous year's earned income less the pension adjustment. There is also a maximum for this formula, which will be $30,780 in 2023. Your RRSP contribution room carries forward, so any unused portion will be added to your tally for the next year. You can check your RRSP room on your Notice of Assessment or by logging in to your CRA account online. The TFSA limit has also increased to $6,500 in 2023, and it is not income-dependent. The total TFSA contribution room since its inception in 2009 is $88,000. A new addition for 2023 is the Tax-Free First Home Savings Account (FHSA), which is expected to be available on April 1, 2023. This account is designed to help first-time homebuyers save for a house and combines some of the best features of an RRSP and a TFSA. You can contribute up to $8,000 per year to the FHSA, and a total of $40,000 can be added during the lifetime of the account. Contributions are tax-deductible, like an RRSP, and there is no tax on withdrawals for home purchases, like a TFSA. Make sure to consult with your financial professionals to ensure that your plan is updated for 2023. CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Wealth., and may differ from the opinion of CG Wealth’s Research Department. Accordingly, they should not be considered as representative of CG Wealth’s beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Wealth. assume any liability. Tax & Estate advice offered through CG Wealth & Estate Planning BMO recently released the results of its latest retirement survey, which found that Canadians believe they will need $1.7 million in savings to retire comfortably.
While this number may grab headlines, it's important to note that retirement savings are not one-size-fits-all. As a team that works with retirees every day, we have seen people retire comfortably with a few hundred thousand dollars in savings, while others require a few million. One important factor to consider when planning for retirement is income. It's important to remember that generating income in retirement is about more than just savings. Many Canadians have defined benefit pension plans that provide guaranteed income in retirement. If you're fortunate enough to have such a plan, you won't need as much in savings to cover your retirement expenses. Additionally, all Canadians are eligible to receive income from Old Age Security (OAS) and the Canada Pension Plan (CPP). For example, a couple who both worked and contributed to these plans and retired in their 60s would receive about $3,000 per month in government pension benefits. The more pension income you have, the less you will need to rely on your savings for a comfortable retirement. Another crucial factor in determining how much you need to save for retirement is your spending habits. Everyone has different lifestyles and levels of comfort, and what may seem like a sufficient monthly income for one retiree may not be enough for another. Typically, the lifestyle you lead before retirement is a good indicator of the lifestyle you can maintain during retirement. We often use pre-retirement budgets as a guide to determine the required income in retirement. However, this number can vary greatly from person to person. The more you plan to spend in retirement, the more savings you will need to achieve your desired lifestyle. In conclusion, while headlines may suggest that a certain amount of savings is required to retire comfortably, the reality is that retirement savings needs are unique to each individual. It's important to consider all sources of retirement income, including pensions and government benefits, as well as your individual spending habits when determining how much you need to save for a comfortable retirement. CG WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of CG Wealth., and may differ from the opinion of CG Wealth’s Research Department. Accordingly, they should not be considered as representative of CG Wealth’s beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or CG Wealth. assume any liability. Tax & Estate advice offered through CG Wealth & Estate Planning At the beginning of the year, contributing to a Tax Free Savings Account (TFSA) is usually at the top of your mind when it comes to your financial to-do list. And this is for a good reason: it is a phenomenal tax saving tool, afterall. According to recent data, however, it appears that Canadians are not getting full value out of their TFSA. The Canadian Revenue Agency (CRA) released some TFSA stats in 2021. They collected data from 2018, finding that there were 14.6 million TFSA holders that year, representing about 54% of the tax filers for the year.
TFSA adoption and usage are highest among older Canadians, but only 9.6% of TFSA holders have completely maximized their available contribution room. According to the data collected by the CRA, over 90% of TFSA holders aren’t taking full advantage of the TFSA. I’m glad so many Canadians are using TFSAs. But having said that, we get so few tax free tools in Canada, and I’d encourage Canadians to take full advantage of the TFSA. A quick review could help explain why it’s such a useful tool. The TFSA was introduced in 2009. Anyone who has a valid Social Insurance Number and is over the age of 18 can open a TFSA. in 2009, it started at $5,000 per person. Since then, the contribution limit has fluctuated over the years. In 2013, it was increased to $5,500. In 2015, the limit jumped all the way to $10,000 per person. However, that amount was short lived, as in 2016, the limit was reduced back to $5,500. In 2019, it increased to $6,000 per person. For 2023, the limit currently sits at $6,500 per person. If you don’t contribute the full amount to a TFSA in a given year, you don’t lose that contribution room. Rather, it rolls over to the next year. If you were 18 or older in 2009 and have never contributed to a TFSA, your total contribution room would be $88,000. Once the money is in the account, there are a wide array of investments permitted. Stocks, bonds, GICS, mutual funds, alternative investment such as music royalties and infrastructure. There is a large selection of acceptable TFSA investments to consider. I believe the name can be misleading, seeing as it is called a Tax Free Savings Account. However, there is such a large section of permitted investments, it is not really a savings account, it’s more of an investment account. If you contribute more than your available room, you can be penalized for it. There is a 1% per month and it’s charged on the excess contribution amount. If you’re not sure how much contribution room you currently have, you can always check. If you already have an account with the CRA, you can log in and check your TFSA room. As well, you can also check via phone at 1-800-267-6999. You don’t receive a tax deduction for your TFSA contribution, however, once the money is in the account, any growth on investment is tax free. Whether your investment grows by 2% or 7%, all of the growth is completely tax free. As well, you can withdraw the money at any time without tax consequences. Since you’re limited to the amount of money you can contribute to a TFSA, it makes sense to take full advantage of it and invest that money to receive a higher tax free return. Whether it’s a guaranteed investment, stock, bond, or alternative investment, maxing out your TFSA and using it for investing rather than savings is definitely the way to make the most out of the account. Savings are an important part of a financial plan, so don’t get rid of your cash cushion, simply use a different account for your savings and put your investments in your TFSA. Over the long term, your investments will grow at a much faster rate than your savings. The additional tax free growth will compound and provide a boost to your overall financial plan. With limited contribution room, investing in your TFSA is usually the best move. By doing this, you’ll be making the most out of your tax free buck. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning A question I often find myself getting is: “Should I give money to my kids now?” I appreciate the sentiment, why wait until you pass away after all if your goal is for your family to get your assets when you pass, you can help your family members now and see them enjoy the gift. Additionally, there are tax advantages to gifting money before you die, however, it’s a nuanced strategy. Let’s go ahead and tackle a few details.
A clear starting point to consider is your needs. Generally, this strategy makes the most sense when you are already a few years into retirement. By then, you should have a pretty good idea of what your budget is and how much you’ll need month to month. Having a good idea of your budget allows you to make reasonable forecasts and ensures you won’t need the funds you’re gifting. From a tax perspective this strategy is usually most beneficial if you have non-registered money. Most of the acronym soup of the financial world is for registered accounts: RRSP, RRIF, TFSA, LIRA, LIF, PRIF, etc – are all registered accounts. If you have money invested outside of a registered account, it is pretty much a “pay as you go” system for tax. Every year, you have to pay tax on the interest, dividends and realized capital gains from that account. If you give some of those funds away, since its no longer your money, you won’t have to pay the tax on those funds. Gifting non-registered funds can help lower your income. Having a lower income can help with income tested benefits, for example, the Old age Security (OAS) pension is clawed back once your income is above a certain threshold. A benefit of gifting non-registered money is that it could lower your income and keep you below the OAS claw-back threshold. In addition, with non-registered accounts, you aren’t permitted to name a beneficiary. With registered accounts, you can name the beneficiary and when you pass, the money bypasses your estate and goes directly to that person. You cannot name a beneficiary for non-registered investments, which means when you pass, the money in those accounts will go through your estate and could be subject to legal fees and probate. However, you are able to gift funds prior to passing. For example, if your goal was for your money to go equally to your son and daughter, if the funds are in a non-registered account, once you pass away, the money will be part of your estate and legal and probate fees could apply. However, prior to your passing, you could give some of the money in your non-registered account to your kids. Since its no longer your money, when you pass, those funds will not go through your estate and won’t be subject to legal and probate fees. The above strategy can only be considered because there isn’t any gift tax in Canada. You are allowed to give people cash, there is no limit either, you can gift as much or as little as you’d like. Of course, there are some hiccups that can occur, it’s never that simple. The above discussion assumes you’re giving cash, if you give an asset, there could be a deemed disposition which could create taxes. For example, instead of giving your son cash, you gift him 100 shares of Apple stock, even though you give those shares away, from a tax perspective, it will be treated as if you sold them for the current market value, which means you could end up with a capital gain. Also, there are attribution rules which have to be considered. If you give cash to a minor child or spouse and they use that cash to buy an asset, the income and capital gains from that asset could come back to you, you’d be stuck with the tax bill. So, even though they own the asset, since you provided the cash, you’d have to pay the tax. Attribution rules do not apply to adult children. Gifting cash to adult children is generally the best bet, since it avoids a deemed disposition and attribution rules. Of course, before going with any strategy, speak to your financial advisor to determine what works best for your financial plan. Clinton Orr is a financial professional operating out of Winnipeg, Manitoba. He provides professional counsel for his clients' portfolios so they can reach their financial dreams. Clinton Orr also writes for his community paper, the Clipper Weekly, which covers topics and events from across Winnipeg. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning https://advisorweb.cgf.com/content/uploads/sites/67/Financial-Focus-A-December-2022.pdf Stock market declines are nerve-racking. No investor enjoys seeing their portfolio decline. The old adage, however, is to buy low and sell high. A silver lining to a bear market is that it creates an opportunity to buy low. Math also supports this idea. It shows there are accelerated returns for those that invest during the market lows. Consider this example: if the stock market drops 35%, there must be a significant bounce off the bottom to fully recover. From the low point, the market must gain about 54% to fully recover. That is a significant gain and often the reason people try to invest during a downturn in the market.
However, that view is a little bit simplistic. No one knows where the exact bottom of the market will be, recoveries are often not immediate. They take time and bear markets can stir up a lot of emotions. Investing during turbulent times isn’t easy. Below, we review a few strategies for how to add money to your portfolio during a bear market. Lump Sum: The simplest method is to just dump your money in. You are not trying to pick the bottom, no second-guessing, when the money is available, it gets invested. While this method is the simplest, the downside is that it has the greatest chance of regret. If you invest a lump sum then the market drops further, in the long term, you’ll likely do just fine. But in the short term, you probably won’t feel so great. Strategic: Pick an entry point in advance. If stocks drop 20%, I am putting more money in, for example. You set a threshold and then invest when the market hits that mark. The negative of this strategy is that the market may not play along. We might set the threshold at 20%, but stocks may only drop 17% and never hit our threshold. If you follow this investment model, it’s a good idea to have a plan B. Average In: Once you’ve decided to invest, break the money up into chunks and then invest those pieces on a pre-determined schedule. Perhaps you want to invest $40,000 during the market lows, then break it up into $10,000 chunks and invest one every two weeks. How many chunks and the time period between each investment can vary, the idea is to create a schedule and stick to it. Mix and Match: All the above options have good features and drawbacks. It makes sense to combine them. Perhaps some of the money will be invested as a lump sum, a portion if the market hits a certain threshold and the rest will be put in on a pre-determined schedule. Investing during a bear market can be touchy and there is a lot of emotion involved. While in the long term the money you added might be profitable, in the short term it can be stressful. No one knows where the exact bottom will be and bear markets are turbulent, there is a good chance you will put money in, and, in the short term, the markets will move lower, which can make investing during turbulent times nerve-racking. The above strategies encourage you to form a plan and try and take some of the emotion out of it. You don’t have to put extra money into your portfolio during a downturn. To fully benefit from the investment, you must be able to tolerate a certain amount of risk and have a long-term time horizon. This isn’t for anyone. Like any investment, you want to chat with your advisor prior to investing to ensure it is right for you. About Clinton Orr: Clinton Orr is a portfolio manager from Winnipeg, Manitoba. Throughout his nearly 20 years of experience in the wealth management space, he has valued creating strong relationships with his clients through an empathetic and dedicated approach that is focused on their financial goals. He regularly writes columns for his local paper, The Clipper Weekly, which covers news across the Lac du Bonnet and Winnipeg River region. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning https://advisorweb.cgf.com/content/uploads/sites/67/investing-during-bear-market.pdf A common question I’m generally asked is how to draw down your portfolio in retirement. For years we work, save, invest, and build up a nest egg. Then, in retirement, we need to start drawing down our investments. Which do you draw down first? Your RRSP? Your TFSA? What about non-registered investments? Each account has different tax consequences. So, a withdrawal plan can help you minimize the taxes. The starting point of any withdrawal strategy is your needs. How much income do you need every month in retirement? Once the budget is sorted, we can determine the order in which to draw down your investment accounts.
Every situation is unique and requires an individualized plan. However, we frequently suggest folks start by drawing down their registered accounts. RRSPs, RRIFs, LIRAs, LIFs, PRIFs, most of the alphabet soup of the financial world relate to registered accounts. When you withdraw money from a registered account, it is usually treated as income, which means it is FULLY taxable. As well, when you pass away, most of these accounts can pass tax-free to your spouse. However, upon their passing, any balance in these accounts is treated as income and is thus fully taxed. For example, if you and your spouse pass away and there is still $300,000 in the RRSP, all of it is treated as income on your final tax return. This means you will have to claim 300,000 of income, pushing you into the highest tax bracket. I say it jokingly, but there is a grain of truth in this, I often tell folks: “Don’t die with lots of money in your RRSP!” RRSPs, LIRAs, LIFs – withdrawals from these registered accounts are usually the most heavily taxed and can create a tax liability for your estate, so we typically suggest you draw them down first. The second account to focus on for withdrawals are non-registered investments. After you top your TFSA and your RRSP, the additional funds are often invested in a non-registered account. Think of these accounts almost like a pay-as-you-go system. Every year you will have to claim some of the gains in the portfolio on your tax return, which means you withdraw from these accounts, and some of the tax has already been paid. As well, you can access capital gains and dividends in non-registered accounts, which are generally more tax-efficient than sources of income. All these factors mean withdrawals from non-registered accounts are usually not as heavily taxed as withdrawals from RRSPs or registered accounts. The last account we typically withdraw from the TFSA. The Tax-Free Savings Account is technically a registered account; however, it differs from all those mentioned above because withdrawals are completely tax-free. Additionally, unlike the RRSP, the TFSA is not a tax liability for your estate. Any funds remaining in the TFSA when you pass away simply transfer to the beneficiary tax-free. We typically suggest folks chip away at the accounts with larger tax consequences first and leave the TFSAs for last. So, we know how much we need in retirement, we have the order of the withdrawals, and the last piece of the puzzle is using the tax brackets to guide our withdrawals. For example, if you have withdrawn the amount you need, taking from the registered accounts first, and your total income for the year is $47,000, it might make sense to draw a little extra from your RRSP, or other registered accounts, to top up your bracket. The additional withdrawal helps you meltdown your RRSP faster, but since you are in the same tax bracket, your marginal income tax rate has not changed. The above is a general guide on how to draw down your portfolio in retirement. Contact your financial professionals to ensure you have a detailed withdrawal plan that helps minimize tax and meets your unique retirement needs. CANACCORD GENUITY WEALTH MANAGEMENT IS A DIVISION OF CANACCORD GENUITY CORP., MEMBER-CANADIAN INVESTOR PROTECTION FUND AND THE INVESTMENT INDUSTRY REGULATORY ORGANIZATION OF CANADA The comments and opinions expressed in this article are solely the work of Clinton Orr, not an official publication of Canaccord Genuity Corp., and may differ from the opinion of Canaccord Genuity Corp’s. Research Department. Accordingly, they should not be considered as representative of Canaccord Genuity Corp’s. beliefs, opinions or recommendations. All information is given as of the date appearing in this article, is for general information only, does not constitute legal or tax advice, and the author Clinton Orr does not assume any obligation to update it or to advise on further developments related. All information included herein has been compiled from sources believed to be reliable, but its accuracy and completeness is not guaranteed, nor in providing it do the author or Canaccord Genuity Corp. assume any liability. Tax & Estate advice offered through Canaccord Genuity Wealth & Estate Planning |
AuthorClinton Orr is a Senior Wealth Advisor and Senior Portfolio Manager with Canaccord Genuity Corp. Archives
July 2023
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