All posts by Financial Independence Hub

Loaning, Leasing and Owning: Know the Differences

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By Sia Hasan

Special to the Financial Independence Hub

The terms “lease” and “loan” are often used in conversations about personal finance, and you may not be sure of the difference between them. You may have even less confidence about when you should take out a loan, lease an item or just buy whatever you need out of pocket. By finding out the differences between these options, you can figure out which choice is best for your situation.

Loan

A loan is an amount of money that you borrow from a bank or another financial group. They give you the money and you agree to pay it back over time, almost always with interest. A loan is right for you if you need to make a payment on something that you cannot afford all at once or that involves education or another kind of service.

Within this broad term are many specific kinds of loans. Loans can be classified as secured or unsecured based on whether the recipient has to provide a piece of property for collateral. Loans can also be closed or open. If a loan is closed, the person borrows a certain amount of money and then pays it back without taking out more money from the same lender in the process. Student and mortgage loans are often closed. If a loan is open, the person can continue to borrow more money from the same lender. Credit cards are a common type of open loan.

Another type of loan is a solar loan. If you want solar panels but cannot afford to buy them flat-out, you can borrow money that is specifically for your solar panels. When you take out this kind of loan, you can have solar panels installed without having to have all the money necessary to purchase them flat-out. Using this kind of loan does not prevent you from participating in any incentive program the government creates to promote reusable energy. All you have to do is remember to make your monthly payments so that eventually you can own your solar panels without having to repay the money you initially borrowed.

Lease

While loans involve one party lending money to another, leases involve a lending of possessions between two people. One person gives another a certain sum of money and in return, he or she receives the right to use a piece of property. Farmers may lease equipment from larger corporations that own their land. If you have rented an apartment or another dwelling place owned by a landlord, you have participated in a lease before. Leases are less open-ended than loans because they cannot be used to pay for any expense but instead involve a specific piece of property. Continue Reading…

Healthy Aging: 8 tips for staying healthy after Retirement

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By Kelsi Burley

Special to the Financial Independence Hub

Just because you get into your old age it doesn’t mean you have to slow down and stop exploring and living your life. A study by the U.S. Center for Disease Control found senior adults who were still in employment had better health than retirees of the same age. And older adults who worked in physically demanding jobs had the best health overall.

Physical activities are great for promoting health and keeping your mind sharp after retiring. The following are eight simple and fun things you can do to an awesome retirement:

1.) Find other people to exercise with

What makes a fun activity even more interesting is doing it with good buddies. If you can find just two people who share your interest for biking, mountaineering, cycling, bowling, or even fishing, you will find that your days start to get more interesting; and you will feel more energized and creative.

2.) Combine physical and mental exercise for healthy aging

One of the ways you can take care of both your physical and mental health is by taking up a less strenuous activity that engages both body and mind. So swimming can be great for your mental and physical health, but yoga is even better because it strengthens the muscles and joints, helps you to build energy, and promotes calmness and mindfulness: both qualities we need to stay healthy.

3.) Start watching TV with friends

Perhaps at a local joint where you can then walk home and grab some food on the way (basically establishing a routine that allows you to stay in contact with other people, and not withdrawing to yourself). Simple things like watching football in your neighborhood with people whose company you enjoy may not appear so important when you’re younger and obsessed with growing your business or attaining career goals, but when you’re older and left with few physical pursuits, finding time to enjoy the little things will help to keep you grounded and content. Continue Reading…

Do Spousal RRSPs still have a place in Retirement Planning?

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By Matthew Ardrey

Special to the Financial Independence Hub

One of the more frequent questions I get from clients regarding their retirement planning is, with the pension income splitting legislation, are spousal RRSPs worthwhile anymore? The answer is yes, in several situations.

Before I outline the planning situations that are useful for spousal RRSPs, first a little primer on what they are and how pension income splitting changed the view of them.

Spousal RRSPs

A spousal RRSP is an RRSP account in which one spouse makes contributions based on his/her room to a RRSP in the other spouse’s name. This is a way to income split in retirement, as future withdrawals, subject to restrictions noted below, would be in the recipient spouse’s name and presumably in a lower tax bracket than the contributor spouse.

The restriction is on the withdrawal timing. If the recipient spouse withdraws any amount from the spousal RRSP in the year of a contribution or the two years following, the amount withdrawn attributes back to the contributing spouse. The only exception to that is a minimum RRIF payment.

In summary the contributing spouse receives the RRSP deduction at his/her current marginal tax rate and the future income is withdrawn at the recipient spouse’s lower tax rate in retirement, maximizing the RRSP tax deferral advantage.

Pension Income Splitting

The pension income splitting legislation introduced in 2007 allowed not only defined benefit pension income to be split between spouses, but also RRIF payments after the age of 65. No matter who owned the RRIF, both spouses could share equally in the income for tax purposes. As the RRIF payment could be divided 50/50 between spouses, the income splitting advantage of the spousal RRSP diminished.

The Case for Spousal RRSPs: Tax Efficient Decumulation

After years of saving, much of today’s tax planning is around decumulating assets. My clients not only want to drawdown their registered accounts but do so in the most tax efficient manner possible. For many, this opportunity often lies in time period between retirement and the receipt of CPP and OAS.

This is one of the most advantageous times to employ an RRSP meltdown strategy. With no further employment income, before receiving government pension income and with presumably little to no other income, RRSP withdrawals can be made with minimal tax consequences. Continue Reading…

How to use your retirement plan to fund your dream business

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By Eric Goldschein

Special to the Financial Independence Hub

If you’ve decided to take the leap and start your own business, you probably have one pressing question on your mind: Where will you get the money to fund it? 

Startup costs can drain personal bank accounts, and few business owners are in a position to qualify for affordable small business financing right away. Lenders tend to prefer long-established businesses. 

If you’ve been a diligent financial planner and have been saving up for retirement, you may have access to a low-cost source of business funding: your own retirement plans. Here are three ways to use your retirement to fund your dream, whether that’s an e-commerce business or a restaurant: 

1.) Use a 401(k) business loan

Some 401(k)s and other eligible retirement plans in the U.S. — 403(b), and 457(b) plans and profit-sharing plans — allow you to loan yourself either US$50,000 or up to half of your vested balance (whichever is less). 

If you are testing out your business as a side hustle and will remain employed and contributing to your retirement plan, this is an excellent option. A 401(k) loan gives you access to low-cost funding (interest rates are usually the prime rate plus 1%) that you can use to see if your idea is worth investing in further. 

You also won’t pay any additional fees or penalties for taking out this money, unless you default on your payments: in which case the IRS will treat it as a regular withdrawal, incurring penalties. 

If you need $50,000 or less to improve your new business, contact your plan administrator to get the ball rolling.  

2.) Use a “rollovers as business startups” plan

Do you need more than US$50,000 in business funding, and are you ready to work on your business full time? If so, you can use a rollover as business startups (ROBS) to access funds from a 401(k), IRA, or other eligible retirement account without penalty. 

There are a few qualifications you need to meet to use a ROBS plan:

  • Your business must be a C-corporation (if it isn’t, you must restructure it). 
  • Your retirement account needs at least $50,000 in it, and it cannot be a Roth IRA. 
  • You must be an employee of the business and receive a salary. 

The next steps are a bit complicated, but the basics are as follows: Set up a new retirement plan under your C-corp. Roll over your funds from your existing retirement plan to your new one. Then, your C-corp sells stock to the retirement plan, and you use the proceeds from that sale to fund your business—buying new inventory, renovating your space, or any other general business needs. An accountant, lawyer, or financial service can help you do this. 

This isn’t a loan, but a constructive use of your retirement funds. The biggest risk here is losing your retirement funds in pursuit of small business success. If you think that’s a risk worth taking, this is a good bet.    Continue Reading…

Personality, Progress and Promise in Japanese Leadership

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Mt. Fuji, Japan

By Jesper Koll, WisdomTree Investments

Special to the Financial Independence Hub

Prime Minister Shinzo Abe’s Japan is a forward-looking, pragmatic bastion of stability in an increasingly uncertain world. The cabinet reshuffle in September cements the unique position that Japanese politics and policymaking occupies relative to most other democratically elected governments. Abe is in complete control of his destiny, picking and choosing competent and loyal elected parliamentarians to further advance his agenda.

Right from the start in December 2012, the goal of “Team Abe” has been single-minded, echoing the rallying cry that inspired the leaders of the Meiji Restoration: “Fukoku Kyohei — Strong Country, Strong Army”. Don’t get me wrong: this is not about rearmament like it was during the 19th century Meiji era. I draw attention to the Fukoku Kyohei rallying cry to stress that Team Abe is perfectly focused and capable of using political capital for both a strong economy and constitutional reform. In fact, without the first, the second may never happen.

In my experience, Abe’s leadership team has always remained relentless in pursuing strategies that aim to restore Japan’s place in the world as a respected, admired and worthy top-tier nation. They know that a strong, growing and competitive economy is the most necessary condition to achieve that goal. The second condition is a stronger, smarter and more independent sense of national self-determination and pride among the Japanese people. This is where Team Abe is convinced constitutional reform is necessary as a powerful symbol and catalyst for greater national unity and understanding of what Japan is and wants to be.

The “Abe–Aso–Kuroda” master class in Policy Pragmatism continues

First, for economic policy management, the Abe–Aso–Kuroda central axis got reinforced. Nowhere else in the world of global policymaking can you find such a consistently well-coordinated and decisive axis of power between the prime minister, the fiscal authority ( Finance Minster Taro Aso) and the central bank (Bank of Japan Governor Haruhiko Kuroda). The Abe–Aso–Kuroda triumvirate will continue their master class in policy coordination. Where the U.S. and Europe are wasting time debating terminology and procedure, Japan is way ahead in actually implementing “fiscal dominance” and “modern monetary theory”. The Abe–Aso–Kuroda axis simply gets on with it because they have something that both Europe and the U.S. appear to have lost: political and policy consensus.

At least to this observer, Europe and the U.S. bring to mind the fumbling and growing desperation that Japan went through during the long period of political instability before strongman Abe arrived. To turn modern monetary theory into practice, you need functioning and decisive fiscal coordination and plans that go beyond the expediencies of annual budget cycles or election cycle pork-barreling. No fiscal policy vision, no fiscal dominance … make no mistake! Abe–Aso–Kuroda do know what they want to spend on.

In clearer terms, watch for a boost in fiscal spending if or when global or local economic momentum loses steam. The Bank of Japan will finance the added borrowing requirement if excess savings fail to absorb it.

What about “Structural Reform?”

Here, the cabinet reshuffle opens the door for new ideas and initiatives. Both the ministers for Economy, Trade and Industry (METI) and for Economic Policy have been replaced with U.S.-educated, highly competent young leaders. It is right to expect a pickup in the metabolism of structural reform policy proposals, with a particular focus on boosting entrepreneurship, speeding up industrial reorganization (e.g., M&A, MBO and spin-out rules), regional revitalization and special economic zones, etc. Importantly, the new METI minister, Sugawara Isshu, served as vice-finance minister before, which could lead to closer linkages between tax incentives and industrial reorganization. Continue Reading…