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Feb 09 2018

Do I Need RRSP’s?

To have RRSPs, or not to have, that is the question.

We’re in RRSP “season”, as 2017 contribution deadlines approach and many of us know we can use RRSPs for tax credits. But do we know exactly how RRSPs work?

When I ask small business owners why they have RRSPs, the most common responses are either “Someone told me I should” or “I want the tax break”. While it’s great to have the credits up front, we should also consider what happens in the long term when we take the money out.

Let’s start with RRSP basics.

WHAT IS AN RRSP?

An RRSP (Registered Retirement Savings Plan) is an account we can use to save and invest money for retirement. Since it’s a registered plan, all contributions and growth are monitored by the federal government based on our Social Insurance Number.

It’s important to note that the RRSP itself is not an investment, it’s simply a “container” that holds investments and these investments must adhere to the rules of the program.

HOW DOES IT WORK?

The idea behind the RRSP is that we invest our money in a tax deferred environment, so we have the advantage of higher compounding growth while the money is in the plan. When we are ready to use the money, we pay income tax on the withdrawals.

  • Can I open an RRSP?

To be eligible for an RRSP, you must be a Canadian resident for tax purposes, be under the age of 71 and must have contribution room.

  • What is my contribution room?

You can contribute 18% of your previous year’s income, up to a maximum dollar limit, plus any unused room from previous years.

Your 2017 contribution room will be calculated as 18% of income earned in 2016, up to a maximum of $26,010. You can get your total contribution room from your last CRA Notice of Assessment. All 2017 RRSP contributions must be made before March 1st, 2018.

  • What can I invest in?

GICs (Guaranteed Investment Certificates) and Mutual Funds are used by many Canadians. Stocks and real estate can also be used.

It’s important to note that your investments should be based on your personal risk tolerance and investment objectives and speaking to an advisor is a great way to make sure you are using a strategy that works for you.

How long can I contribute for?

You can continue contributing to an RRSP until December 31st of the year you turn 71. After that, you can

  • withdraw all the money and pay withholding taxes on the full amount.
  • purchase an annuity. There are no withholding taxes on purchasing the annuity, but you pay taxes on the income you receive from it.
  • convert the RRSP into a RRIF (Registered Retirement Income Fund). There are no withholding taxes on conversion, but you will pay taxes on the income you receive. Once your RRSP has been converted into a RRIF, the government will give you a schedule of the minimum amount you must withdraw per year.

 

What are some other features of the RRSP?

  • Spousal RRSP: if you have a spouse in a lower tax bracket and you are in a higher tax bracket, you can contribute to your spouse’s RRSP and have the tax credit go to you
  • Home Buyer’s Plan (HBP): You can borrow up to $25,000 tax-free from your RRSP to buy your first home. This must be paid back into the RRSP over 15 years, otherwise you’ll end up paying the taxes as if it were a regular withdrawal.
  • Lifelong Learning Plan (LLP): You can also borrow up to $20,000 to pay for your education but this must be paid back into the RRSP over 10 years.

WHO IS IT RIGHT FOR?

RRSP features can provide many benefits, but these may not necessarily benefit business owners in the long-term.

If your income during your working years will higher than your retirement income, contributing to an RRSP may be a good idea so that when you withdraw the money during retirement, you will be in a lower tax bracket and will likely pay less taxes (e.g. doctors, lawyers and other high-salaried employees).

If you are in a lower tax bracket in your younger years and expect to be earning a higher income during retirement, an RRSP may not be the best thing. As a business owner, this is usually the case – you are in a lower tax bracket in your younger years while you are building your business. As your business expands and becomes more successful, you are likely to have higher income in your retirement years and any withdrawals from an RRSP will be added on as extra income, therefore putting you in a much higher tax bracket.

Of course, there is no quick rule in determining whether to use RRSPs or not. The structure of your business (sole proprietorship, partnership or corporation) plays a major role in how you receive income, and as such it may take some detailed business planning with your lawyer, accountant and financial advisor to figure out the best route for you. It really boils down to the question “Do I want to pay the taxes now, or later?”.

Another option to consider investing your money is a TFSA (Tax Free Savings Account), which I will cover in another article.

To learn more about RRSPs: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/rrsps-related-plans.html

 

—————

Kim Lowrie is an insurance agent and mutual fund representative with World Financial Group.

She and her husband have made it their lifelong mission to help families, individuals and business owners succeed financially.

To find a solution that best fits your needs and goals, connect with Kim:

647.231.9052

klowrie02unjc@wfgmail.ca

Website | LinkedIn | Facebook | Twitter

Written by Dwania Peele · Categorized: Kimberlei Lowrie · Tagged: finance, financial, Kimberlie Lowrie, rrsp, savings

Jan 19 2015

TIPS TO PAYING OFF YOUR MORTAGE FASTER!

Amina

 

I had a great meeting last week with a prospective client.  They wanted to know how to pay off their 25 year mortgage in 10 years.  It was a huge focus for them, as they wanted to take the money left over after paying off their mortgage and put it towards their retirement savings.  They are both in their 40’s and want to be debt free by their early 50’s.

hour glassThey, like many people did not take savings seriously and so now in their 40’s find themselves with a hefty mortgage and not much in the way of savings.  I assured them that to do so would mean making sacrifices, such as less traveling, which they both love to do and eating at home instead of eating out, which they also love doing.  They assured me they were committed.  Of course there were many more sacrifices they would have to make but these were two of the biggest in their particular scenario.

Paying off your mortgage is the single most important step towards financial independence and a healthy retirement. Owning a principal residence outright gives you the financial freedom to channel money that formerly went to your mortgage into your savings or to pursue lifelong dreams or to invest in real estate, which in my opinion is the thing to do as it provides one with extra cash flow, which is another form of retirement savings.

If paying off your mortgage as quickly as possible is your goal you want to make sure you pay attention to the following tips.

Tip #1. First you want to make sure you have a good credit rating.  You can pull your credit report from Equifax here: (http://www.equifax.com/equifax-credit-score/)

By pulling your own credit bureau, you will be sure that when you speak to your mortgage agent or broker, there won’t be any surprises and if there are, you have already taken care of them.  You want to make sure that there are no “monsters in the closet” and that you are aware of your past credit problems, so that you can be prepared to discuss them with your mortage broker.

A good mortgage broker, will make sure that they explain your past indiscretions to the lender and that it does not impact your ability to qualify. You also want to make sure that you are not behind on payments as these can impact your score. It can make the difference between getting a great interest rate and one that is not that great. This can also impact the amount of interest you are paying on your mortgage.

Tip #2. You should be pulling your credit bureau every six to twelve months before shopping for a mortgage, just to make sure everything is on the up and up and that you are not faced with disappointment when it comes time to shop for that mortgage.

Tip #3. Don’t quit or change jobs just before applying for a mortgage, as that can drastically affect your ability to qualify.  Lenders want to see at least 6 months on the job.

Tip #4. The next step is maximizing your down payment.  The minimum required for most mortgages in Canada is 5% (depending on your credit rating) but by paying at least 20% down upfront, you cut down on your principal and interest payments and also avoid having to pay CMHC fees. Remember CMHC insurance protects your lender and not you in case of default so why incur that extra cost?  Of course it’s not always easy to pay 20% down so what else can you do?

Tip #5. You can be mindful of the amortization period.  Many people confuse amortization with term.  Amortization is the life of your mortgage, while the tem can run from 1-10 years with a fixed-rate or variable-rate interest mortgage.  After each term expires, you renew for another term.  Amortization on the other hand, defines how much interest you will pay over the life of the loan.  For example, you might pay less monthly (Principal + Interest combined) with a longer amortization, but the interest portion will be higher. Amortization can run anywhere from 15 years to 35 years (with at least a 20% downpayment). Interest can be the killer.  It can amount to thousands of dollars over the life of your mortgage.  Imagine what you can do with that extra money?

Tip #6. When it comes time to get that mortgage, don’t just go to your bank.  It is understandable that people want to stay with the same institutions that they regularly bank with or have their credit cards and car loans with but it doesn’t always pay to get your mortgage there.  By speaking to a mortgage agent or broker, you can shop around or more importantly they can shop around on your behalf.   Your mortgage agent will get you the best product and rate that works for you.  They have access to more than 40 lenders with different solutions and products, while the bank only has one – themselves.  Furthermore, the bank will push you to insure your mortgage and just like CMHC, the beneficiary of this insurance is the bank not you.

I remember when my husband and I went to get our first mortgage more than ten years ago – just like most, we went to our bank, thinking that since we had all of our business with them, it would make sense to get our mortgage there.  We were shocked when they offered us a rate that was higher than prime at the time and would not even consider a rate reduction based on our years of patronage.

On the advice of a friend, I called a mortgage agent and he was able to negotiate a great rate that was 2% lower.  It saved us years of mortgage interest and was a less stressful expeience overall.

Tip #7. Furthemore, rate is not the only thing you should be concerned with; you want to know if the mortgage will be compounded monthly or semi-annually.  Again this comes down to how much interest you will be paying – the less often the interest is compounded the better—semi-annual compounding could save you hundreds of dollars or more in interest.

Tip #8. Make sure you understand the difference between the variable rate and the fixed rate products, but more importantly how the penalties could affect you if you were to break the mortgage beforfe the term ends.  A variable rate mortgage will cost you 3 months interest, but a fixed rate mortgage will cost you the IRD, which is the difference between the posted rate and the discounted rate, multiplied by the number of months left on the mortgage.  In some cases it can cost you thousands of dollars in fees.

Tip #9. You want to take advantage of any and all prepayment privileges.  This can also help you pay your mortgage off faster as you can make annual prepayments of 10% to 20%, which goes directly towards the principal.  Not all mortgages allow this option so make sure that your broker factors this in, if this is important to you.

Tip #10. Finally and maybe most importantly, as it also has to do with budgeting and savings, is your payment schedule.  Don’t choose something that you can’t stick to, as it will make your life and that of your budgeting very difficult.  By paying bi-weekly instead of monthly, you put more money towards the principal as you have two extra payments every year.  However, if get paid monthly and you are now paying bi-weekly, you may find yourself stretched too thin.  Ask your broker to run different scenarios for you so you know what you can and cannot afford.  The last thing you want to do is get into a mortgage that you can’t afford.

Paying off your mortgage early will take lots of sacrifice, great budgeting and keeping steadfast to your goal, but if you can follow these tips, the rewards will be aplenty!

To Your Wealth!

Amina

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Written by Dwania Peele · Categorized: Amina Mohamed · Tagged: 25 year mortgage, Amina Mohamed, amortization, broker, Budget, Canada, Canadian Small Business Women, cash flow, client, CMHC, credit, credit breau, credit rating, downpayment, entrepreneur, equifax, financial independence, fixed rate mortgage, fixed-rate, good credit, interest, mortgage, mortgage agent, mortgage broker, principal, retirement savings, savings, small business development, small business owners, variable-rae

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