February 29, 2008, 7:00 am

Last Day For RRSP Contribution

by: The Financial Blogger    Category: RRSP

Say what? You didn’t contribute to your RRSP account yet? Well you still have another 10-12 hours to do so. Today, most branches will open their doors all day in order to get as much RRSP contribution possible.

 

running

What’s funny is that the RRSP campaign starts in late November in the financial industry but no matter how much effort they put into advertising, the best RRSP period is always the last week of February. So here are some tricks for a last minute contribution.

 

Be ready

Take a quick look at your budget, your credit cards statement and chequing account. You will have a better idea if you can contribute form a line of credit or your bank account. If not, you have the possibility of having an rrsp loan. It is still not too late to get approved for an rrsp loan. You can always go with the bank’s pre approved program which takes 10 minutes to complete.

If you don’t know if you can contribute or not, just bring your 2006 Notice of Assessment to your advisor. He will show you how to calculate it (it’s at the bottom of this document).

Don’t invest right away

Both you and your banker have no time to review your investment profile and your risk tolerance. The important part today is to get the money into an RRSP account. So you can simply deposit the money into your existing RRSP account and schedule another meeting in March in order to make a wise investment. You will avoid making stupid decisions and your banker will thank you to save him time on his busiest day of the year.

You still better off to schedule a meeting

If you get there last minute without a meeting, your advisor might not be able to find enough time to meet with you. If you call this morning and ask him, he will surely find a spot between two clients at one point in time. You could be surprise how flexible people can be at that period of the year.

Don’t skip your RRSP contribution

If you skip your RRSP contribution this year, you will miss a real good opportunity to invest when the markets are down. In addition to that, the power of compounding interest will loose a year in order to work out its magic.

Prepare yourself for next year

All right, you are last minute this year but this could be a different situation next year. While you are planning a second meeting with your advisor in order to invest your money, why don’t you ask him how to avoid this kind of stressing situation? He will surely has some trick to show you.

So pick up the phone, schedule a meeting and get some RRSP contribution today before it’s too late!

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

 

image source : geocities.com

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Comments: 0 Read More

Related Post

February 28, 2008, 7:00 am

The Tax-Free Savings Account (TFSA) – A Creative Financial Approach

by: The Financial Blogger    Category: Personal Finance

The Canadian Government deposited their 2008 budget this February 26th. So at the same time that the Montreal Canadiens were showing their inability to be creative enough to bring Marian Hossa (!) in our team, the Canadian Government were including a nice innovation called the Tax-Free Savings Account (TFSA) in their 2008 budget. This measure will take effect as of January 1st 2009.



What is the TFSA?

The TFSA is an account where you can put money (up to $5,000 per year per person) and all gains (interest income, dividend and capital gains) are non taxable. Even better, you can withdraw the money from your account at any time under no restriction and without being taxed on the amount of the withdrawal.

You can save up to $5,000 per year and unused TFSA contributions room can be carried forward to future years. You can also contribute to your spouse and benefit from income splitting strategies.

As previously mentioned, you can withdraw money at any time from your TFSA and this does not affect your contribution room. You always have the possibility to put back the money into the Tax-Free Savings Account at any time without any penalties.

Comparison between an RRSP and a TFSA

At first, the RRSP and the TFSA could look alike. However, when you take a moment to analyse both of them, you will find several differences. I completed the following chart to help you out determining which account is best for your personal finance.

RRSP

TFSA

Minimum age to start contributing

No minimum. The individual must declare income.

Minimum age of 18.

Maximum amount of contribution

$19,000 or 18% of declared income. The maximum amount is increasing year after year.

$5,000 per year.

Contribution is tax deductible

Yes.

No.

Investment gains (interest, dividend and capital gains) are not taxable

Yes.

Yes.

Spousal contribution are permitted

Yes.

Yes.

Withdrawals from the account are taxable.

Yes. They are not taxable in a case of a Home Buyer Plan and to go back to school (those 2 programs work under certain restrictions).

No. Withdrawals from the TFSA are not taxable.

Unused contribution room can be carried forward.

Yes.

Yes.

You can “reimburse” your withdrawal in the account.

No. You can only reimburse under the HBP and return to school program under certain restrictions.

Yes. You can reimburse your withdrawals from the TFSA at any time without penalties.

According to Million Dollar Journey the account would not serve the Smith Manoeuvre Strategy since the interest paid on the borrowed amount would not be tax deductible. He took his information from The Financial Post. I will go deeper into this as it would simply be amazing to combine the Tax-Free Savings Account to a Smith Manoeuvre Strategy.

If you are looking for more information on the TFSA or the 2008 Canadian Budget, I suggest you read those articles:

Million Dollar Journey

Canadian Capitalist

The Globe and Mail

Fours Pillars

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Comments: 19 Read More

Related Post

February 27, 2008, 7:00 am

Why Using a HELOC as an Emergency Fund

by: The Financial Blogger    Category: Personal Finance

One of the good feelings when you have a blog is when people link back at one of your article. I always look at the blogger who linked to my post. It is usually very positive. Usually. Two days ago, when I logged into my blog to post updates, I noticed that one of the link was called “I think this is bad money advice. I thought I would give a little bit more interest into this post written by Ana at Debt Free Revolution.

money house

Four Pillars brought a good argument on his blog yesterday and I’ll bring another one today as well.

Let’s take 2 people again, Mike (it’s not my fault if FP and I both have the same name 😉 and Ana. They are both making 50K and wish to have 25K available in case of an emergency (6 months salary). They also have the ability to save $377 per month and both wish to retire in 30 years.

If Ana wish to have a 25K emergency fund, she would need to invest $377 per month over five years at a 4% rate of return. As this account needs to be highly liquid and the investment must be stable overtime, I assume that the maximum rate she could get would be a 4% savings account at ING. If she would be to invest in more aggressive mutual funds or stock, she would become very dependable of the market and this is not what we want when we are looking for an emergency fund.

After 5 years, she leaves the 25K into the same savings account earning 4%. She can now use the $377 and invest in a more aggressive portfolio (giving 7%) since she will be retiring in another 25 years. At retirement (so 30 years later), her 25K into her savings account is now at $66,6K and her retirement account show a balance of 305,4K for a total amount of 372K.

Mike doesn’t want to save for an emergency plan as he will use his HELOC if he has any problem along the way. Then, he starts investing his $377 at 7% right away. At the end of the 30 years, he will have 460K into his investment account.

So if you depend on a HELOC for your emergency fund, you will get $88,000 in your investment account at retirement. This is the equivalent of 50 years of interest on $25,000 debt at a 7% interest rate.

So I think that everything goes well, you will make 88K more by not having an emergency plan. If you have to withdraw 25K from your line of credit, it will cost you $1,750 per year at a 7% interest rate charge.

Ana was also mentioning death and severe injuries in her post. These incidents should not be covered by an emergency fund but by insurance as 25K will be far from enough to cover for the financial lost of your spouse’s income.

Please note that this was a quick calculation. In order to be precise, I would have to calculate when and for how long Mike and Ana would need their 25K and also to take in consideration that the tax rate would be higher on the interest earned in the savings account than the investment account (which would include mostly dividend and capital gain).

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

 

image source : www.saltlakespeaks.com

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Comments: 13 Read More

Related Post

February 26, 2008, 7:00 am

The Advantages of Contributing To Your RRSP With A Low Income

by: The Financial Blogger    Category: RRSP

Believe it or not, there are still advantages of contributing to your RRSP even if you have a low income. I know that, most of the time, when you income is low, there is no place for savings. However, some people are very disciplined and frugal (not like me!) and they still manage to put a few bucks aside. Then, they decide to put into their bank account since they would not get a high tax return. So here are some reasons why you should contribute as early as possible.


You can defer your tax return

Many people think that when they receive their RRSP slip, they have to put the full amount in their income report. In fact, you have to choice of contributing right away but using your tax deduction for another year. Therefore, your investments will still qualify as RRSP’s but you will not get a tax return on the very same year. You are allowed to defer your tax reduction later on in order to benefit from a bigger tax return. This method is especially efficient for student who has a small income but will surely hit bigger tax brackets when they start working full time.

Your investment still grow tax free

An RRSP account is a tax sheltered account where you are allowed to deposit money. Even thought you did not ask for your tax return, your investment will still grow in a tax free environment (I wish I could live in such environment!) So interest income, dividends or even capital gains stay fully invested in your RRSP account and you don’t have to pay taxes on it until the day you start withdrawing. Isn’t life beautiful?

The power of compound interest

I wrote a post a while ago about what Einstein qualified as “the most powerful discovery”. Did you know that if you invest $1000 at the beginning of the years for 30 years at 7%, you will get $101,073 in your RRSP account? Then, if you wait 10 years before contributing, you would have to put $2,465 (so 2,5 times the original amount) over 20 years to get to the same result. This would result into a total contribution of 30K in the first scenario and 49K in the second one for someone who waited 10 years before starting to contribute.

The bottom line is that you must contribute as fast as possible in order to have a nice nest egg when you retire. Don’t wait until you’re in the highest tax bracket. Invest now, benefit from the tax sheltered environment and the power of compound interest; you will have plenty of time to claim your tax return later on!

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Comments: 2 Read More

Related Post

February 25, 2008, 7:00 am

The Drawbacks Of Withdrawing From Your RRSP Before Retirement

by: The Financial Blogger    Category: RRSP

One day or another, you will have to take your money out of your RRSP account. However, there are several drawbacks of doing it before retirement. Sometimes, you simply have no other choices but use this money but I still think it would be good that you know all the consequences before doing such thing.

 

 withdraw

 

Hurting your retirement plan

The first impact of making early withdrawals is obviously that it will affect your retirement plan later on. If you leave your $15,000 in your RRSP account for 20 years at 7%, you would get $58,000. This represents $39,000 in today’s dollar (considering a 2% inflation rate). Therefore, taking $15,000 out of your RRSP account today means losing $24,000 if you plan to retire in 20 years.

 

Getting taxed right away

Whenever you withdraw money from an RRSP account, the financial institution will take a provision for taxes before giving your money. It is usually around 21%. Therefore, by taking 15k, you will only get $11,850. In addition to that, you will have to add 15K to your year end income when you fill in your tax report. Hence you will end up paying more taxes if your marginal tax rate is over 21% (which it probably is!).

 

You cannot put this money back in your RRSP account

Another severe consequence of withdrawing from your RRSP’s is that you cannot put this money back in. You are allowed to contribute a certain amount per year according to your income and once it is done, you cannot contribute again in order to “reimburse your RRSP account”. This means that a part of your investment may not be tax sheltered at one point in time.

 

Ways to get around this

Fortunately for us, there are two programs that allow us to withdraw money from our RRSP without getting taxed and without burning our contribution room. With the Home Buyer Plan (HBP) and the school plan, you are allowed to withdraw a certain amount of money (20K per eligible person for the HBP) and you benefit from a certain period of time to put it back into your RRSP account without paying taxes.

 

The only thing that you still have to consider in this situation is that you will still hurt your retirement plan. Sometimes it worth it, sometimes you can find other solutions for your money problems. I personally withdraw money from my RRSP without the HBP plan (it was for my second property) but it allowed me much more flexibility for my mortgage. When we talk about finance, it is not always black and white.

 

If you liked this article, you might want to sign up for my FULL RSS FEED. Then, you would get my daily post in your email and can read it at any time. To subscribe, please click HERE.

 

image source : coolest-gadgets.com

If you liked this articles, you might want to sign for my FULL RSS FEEDS. Then, you will get my daily post to your email and can read it at any time. To subscribe CLICK HERE

Comments: 2 Read More

Related Post