Who likes to pay taxes? I don’t! Actually, most people don’t like to pay taxes 😉 This is probably why we see so many people trying to legally decrease the amount written on the government’s cheque at the end of the year! One way to reduce your taxation rate is to earn income via a corporation or a holding. In most countries, INC structures pay fewer taxes than an individual with the same level of income.
However, it technically comes down to the same thing once it is time to withdraw money from the company… until you know about the split dollar strategy.
The thing is when you withdraw money from a corporation or a holding; it is taxable as income (additional to your current revenue) at your marginal tax rate. Therefore, unless you are retired and live off your company’s dividend, you will pay your share of taxes.
But, there is good news for those who want to benefit from the fruit of their labour while they are still working and earning money. The good news is called the split dollar strategy.This method requires cash flow within the company (you need water to drink, don’t you?) and that the company’s owner is healthy (huh?!?).
So here how the split dollar strategy works:
#1 you take a critical illness insurance contract on the company owners with premiums paid by the company.
#2 you take an option in the critical illness to get full reimbursement of the premiums if the individual doest not have a critical illness after 15 years.
#3 you name the individual (not the company) as the beneficiary or the premiums reimbursement.
#4 in 15 years, you will receive a nice cheque from the insurance company in your name that is not taxable.
Isn’t this too cool to be true? Not really. However, there are some things to know about the split dollar strategy:
#1 the insurance premiums require stead cash flow to be taken out of the company
#2 if you stop the strategy half way, the benefit won’t be that great (full reimbursement option seems to be only available after 15 years).
#3 if you ask for a premium reimbursement prior to the end of the contract, penalties occur.
#4 you will personally get taxed on the “benefit” received from your company in regards to the premium reimbursement option. However, the taxation is minor compared to a regular tax rate.
#5 this insurance is not to be considered as insurance by itself but as a tax saving tool. If you require critical illness insurance, you should do it separately as this contract is meant to be terminated in 15 years.
I’ll run some calculation and come back with a complete example of the split dollar strategy later on.
Disclaimer: I am not telling you to do the split dollar strategy and I am not selling insurance. Please contact a professional in order to determine if this strategy is applicable in your situation.
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With the recent credit crunch and the sub prime mortgage crisis, it will become more difficult to get a mortgage. However, there are key points that you can work on before meeting with your banker in order to present a clean application. Once you did your budget and that you know how much you can afford for a mortgage payment, the important part is to know what the bank will look for and try to improve those key points.
Cash Down for a house purchase
That will definitely be the first thing to look at if you plan to buy a house. The ear of 0% cash down mortgages is over and you better put money aside before meeting with your banker. A house cost always more than an apartment (for the same size) and saving money will be a good indicator if you can afford a house or not. In Canada, you can withdraw from your RRSP up to 20K per person in the case of a first buy. There are several techniques to increase your cash down and this topic will be discuss in a further post.
TDSR (Total Debt Servicing Ratio)
Your TDSR will definitely be another key point for mortgage qualification. In fact, your debt servicing ratio should not be over 35%, including your new mortgage payment. Some institutions will play with the numbers until 40% depending on the global picture. So you are better off consolidating your credit card into a personal loan and decrease our other debt before going to a banker. In order to calculate your TDSR, I suggest you click on the TDSR title to get a full post on this topic.
Do you make your payment on time? All the time? This is what the bank wants to know when you apply for a mortgage. Even though they are backed by a security, they certainly don’t want to repossess your house these days ;-). I actually created another blog exclusively on credit called The Credit Tool Box. You can go there for a better understanding of your credit bureau. I also write about building, improving or repairing your credit score.
If you are planning to do a career switch, I would suggest you do it after getting your mortgage. Employment stability is something banks love because it shows stable capability of making mortgage payments. The longest you have been in a job, the less (mathematically) chance you have to lose your job.
The next post on this series will be about different ways to have a sufficient cash down.
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Equity options have been gaining, like other derivatives, a lot of ground in recent years. They have many uses and can be used to complement a portfolio management strategy. However, they are risky instruments and must be used with great care. Since we have received several questions about options, we decided to write a little about what they are, how they work and how you can use them.
Equity options are as you can guess an “option” to buy or sell a given amount of stock at a given time for a given price. You will see call and put options. Simply, call options are the option to buy while put options are options to sell. In every such transaction, there is of course a buyer and a seller of an option.
The best way to understand how these products work is to compare them to lottery tickets. If you buy a lottery ticket, you cannot lose much, you can only lose the value you paid for your ticket. However, if you sell one, then you might be in for a big loss. The same applies to options. Buyers have a limited loss while in general sellers have a much greater potential loss.
The price that will determine if the option is exercised (lottery ticket is won) is the strike price. The price of the stock is greater then the strike price, then the call option (buy) would be exercised while the opposite is true for put options. And finally, the options have a maturity, a month at which time the option becomes worthless. The specific day is the 3rd Friday of that month.
Here are a few strategies that could be used with options:
-Long call: A risky but simple gamble. Basically, you will be able to take a much greater position in a stock you believe will rise because you are not paying for the stock, only for the option. However, if the stock does not rise, you will lose your money.
-Long put: same for a stock you believe will go down
-Covered call: This strategy had been discussed in a previous article (a play on volatility – it has returned 3.5% so far) – you use this when you already have a stock, and want to gain additional return. The risk you have is that you might sell your stock for less than it is worth but the upside is more money in your pocket every time you use it
-Protective put: Let’s say you felt a few months ago that some of your stocks might have a steep decline (yeah, you are smart in that way), you could have bought a put option, which in effect is a like buying an insurance for your portfolio in case of a downturn…
A lot more could be discussed but this was a good start wasn’t it? In the meantime, you can always check out Market Club Video section about options (see add below)
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Life is beautiful. You just turn 55 and you are finally able to say “bye bye boss!”. You have accumulated enough money to trade your office for a golf cart and your pen for a Callaway X Driver (that’s my dream anyway!). You thought you would have to work until the age of 60 but that cool guy from that mutual fund company you met at a “informative retirement meeting” told you about a revolutionary product.
This amazing product is a well balanced mutual fund giving you 5%, 6%, or 7% guaranteed in your pocket year after year! Is it because they were able to clone Buffet brains? (Actually Validea Capital is trying to do so). Do they found the last GIC on earth giving a 7% yield? Or are they simply not telling you the whole story? GOT IT!
I recently met a client with this “wonderful product” in his portfolio. He told me how the “financial analyst” who presented the product answered all his questions and that everything seems pretty good. In a world where the stock market is diving faster than Michael Phelps during the Olympics, who would ignore such investment proposition?
So the guy invested 50K in early 2006. He never made a single withdrawal (the 7% return was deposited in his cash account which he used to buy more shares of the same fund). So technically, his investment should worth 59K (50K*7%/12month*32 months). However his investment portfolio was showing 55K! Where the other 4K disappeared? What happen? Where is that 7% return Guaranteed?
The 7% return is actually a fixed amount of $3,500 (7% of 50k) that the client did receive in his cash account. When the fund is not making 7%, where to do you think they found the money to send the client 3,5K? A Donation? Return on Capital (ROC) !
Imagine, you are receiving 7% return and you are not even fully taxed on it! For someone who doesn’t understand ROC, this sounds like a perfect world. Unfortunately, there is no free lunch in finance. The poor guy was getting his capital back to buy more shares of a fund not making the promised return.
The idea itself is not bad, but you must be aware that you might touch your capital and that the nice graph showing 8% returns might not happen. I know, life sucks and financial advisors are part of life 😉 Fortunately, you have The Financial Blogger to help you out seeing those things before they happen to you!
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In the past few months, we’ve discussed in some details hedge funds, what they are, how they work. And also commodities, how to invest in them easily (we’ve discussed gold, oil, etc). And with commodities being so volatile in the past couple of years, you would think the hedge funds investing in these would be making tons of money right?
Well, partially. Many funds have been having very volatile returns of their owns. For a while, commodities were usually going in only one direction, up… But as they start to have less of a clear direction, funds invested in them have had very volatile returns of their own.
One example that has been making headlines (partially because one of its big owners is Lehman Brothers (LEH) who already had enough issues of their own is the biggest hedge fund ran by Ospraie Management LLC. The fund has been closed after a dismal 39% loss this year!!
The Ospraie Fund lost 26.7 percent in August, after a “substantial sell-off in a number of our energy, mining and resource equity holdings,” Anderson, 41, wrote in the letter today.
“I am extremely disappointed with this result and the fund’s sudden reversal in performance,” he said. “After nine years of striving to be a good steward of your capital, I am very sorry for this outcome.”
Another good example was Amaranth, a fund ran by Canadian Brian Hunter that got into huge positions thanks to a 8 to 1 leverage on 9 billion dollars. And guess what…? They ended up losing 6.5$B out of the 9$B and closing their fund.
And guess what, Brian Hunter did not even have to wait long to get a new job as he joined Solengo Capital Advisors although the fund managers said they would keep him on a tight leach… yeah right. Read an interesting article about it here.
Of course, some other funds have been on the other side of these trades and been putting on great returns. But usually those funds try to stay out of the spotlight as such big fund are usually not looking for new investors..!
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