Hub Blogs

Hub Blogs contains fresh contributions written by Financial Independence Hub staff or contributors that have not appeared elsewhere first, or have been modified or customized for the Hub by the original blogger. In contrast, Top Blogs shows links to the best external financial blogs around the world.

RRSP deadline today: Choosing between a TFSA and an RRSP

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By Micheal Davis, H&R Block Canada

Special to the Financial Independence Hub

The registered retirement savings plan (RRSP) contribution deadline is today!

Many Canadians may be making last-minute contributions before the deadline of midnight March 2nd  in hopes of unlocking a bigger tax return [if investing online; if at a physical branch, you need to act during business hours — editor.]

In fact, a recent survey from H&R Block reveals that 32 per cent of Canadians plan to contribute to an RRSP this year, a six per cent increase from last year where only 26 per cent of Canadians reported their intentions to contribute.

While RRSPs can offer tax advantages to help you reach your savings goals, it’s also important to note that they aren’t the only option available.

RRSPs vs. TFSAs

While RRSPs – a tax-deferred retirement savings vehicle in which contributions are tax deductible – can be a great investment, you do have to pay income taxes when you withdraw money, which makes this option a bit less flexible should a sudden need to access your funds arise.

Another investment tool to consider is the tax-free savings account (TFSA). Because TFSA contributions are made from after-tax income, the TFSA is a simpler tool in that it allows your investments to grow tax-free. And, since taking money out of it has no tax consequences, it can be much more flexible.

How to decide between these two investment options

The main differences between the RRSP and TFSA are their contribution limits, withdrawal restrictions, and how and when you pay taxes. Both are investment vehicles that can shelter taxes on your investments, but depending on your circumstances, one might suit you better than the other. Continue Reading…

What are Liens and how do they work?

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By Emily Roberts

Whenever you borrow a significant amount of money from a lender, they will do their due diligence beforehand. This means ensuring that you are able to repay the money that you borrow on time and in full. A lien is a tool that lenders can use to secure their loans and lend money more confidently. Here is a short guide that explains a bit more about what a lien is exactly.

What Does a Lien Entail?

When a lien is placed on a property, it gives someone – usually a lender – the legal right to the subject’s property. With a lien in place, creditors are able to take property from borrowers in order to cover the money that they are owed. Liens are nearly always the result of a default on a debt, although they can also be awarded as judgments following some legal proceedings.

For example, let’s say that you take out a loan in order to purchase a new home. Often when you take out a loan, you will be required to put up some form of collateral: assets that can be used to cover the money you owe if you are unable to keep up with your payments. For the most part, lenders don’t have a tremendous amount of leverage and are therefore eager to find some way of protecting their loan.

What exactly can you offer that would satisfy the bank’s anxieties? The answer is to allow them to become the lienholder on your property. This doesn’t mean that they automatically have any rights to your property, but it does mean that if you don’t keep up with your debt repayments, then they can come for your property as recompense.

Liens are a matter of public record: something else which is important to know for borrowers and lenders alike. For lenders, publicly available lien records can indicate that an individual has already granted someone else rights to a property. You can have multiple liens, but many creditors will be reluctant to lend to you if they know that they are at the back of the queue when it comes to repayment of debts.

You can search for lien records, among others, by using the following site: https://publicrecordsreviews.com/lien-records. [Site is in the US and aimed at Americans: editor] Public Records Reviews enables you to search through a variety of public records for information about specific individuals – you can even use the service to check for your own records. Note that the lien records on Public Records Reviews are attached to individuals rather than properties. In other words, you will have to search for the homeowner rather than the home itself.

When are Liens used?

Liens are most commonly associated with loans and money lending. We have already covered home loans, perhaps the most common arena for liens to be used for, but another important category is auto loans. Continue Reading…

A cure for the headaches of fixed income investing

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By Ahmed Farooq, Franklin Templeton Canada

(Sponsor Content)

Many advisors I speak with continue to struggle with the increasing complexities of today’s fixed-income environment and are looking for guidance. The combination of interest rate fluctuations, inflation threats, trade tensions and political upheavals is a challenging environment to make the right call for their clients’ portfolios. There is a real concern that volatility is on the horizon and fixed-income mandates will be needed to provide that cushioning to the overall portfolio.

Active management may be the best way for advisors to navigate this market. For advisors who want an expert’s opinion when it comes to managing future interest rates, credit quality or duration calls in their fixed-income allocation, I like to remind them that this is something that may be best left to a manger who can effectively deal with these factors and risks.

The trend towards active continues

This trend of more advisors switching to actively managed fixed income solutions can be seen in monthly ETF inflow reports over this past year.  Within the world of fixed-income ETFs, actively managed products have seen the biggest area of growth. For example, National Bank of Canada’s January 2020 ETF Research & Strategy Report showed that at the end of January, the total AUM of fixed-income ETFs was $73.4 billion in Canada. Of that $22 billion was put into actively managed funds, which now amounts to nearly a third of all fixed-income ETFs.

Active strategies seek to achieve a specific investment outcome

The goal of passive indexing strategies is to minimize tracking error to the index, maintain index exposure by either fully replicating the index or though a stratified sampling approach; one thing a passive investment cannot do is adjust to any type of market events. This can certainly be a headache for most advisors as the onus on making any changes to their portfolio will be on them. Further, with the vast number of options available, this headache is something that cannot be easily solved. Active managers can adjust to different type of market events, changes to monetary policy and yield curve, adjustment from geopolitical events, and duration management. Outsourcing your fixed income exposure to align with your client’s outcomes will provide relief in this ever-tougher fixed income environment.

Improving client portfolios

As more advisors look at their options within the active fixed income space, I think they will be pleasantly surprised by the pricing of active fixed income funds. Continue Reading…

How much would the Home Buyers’ Plan help in your market?

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By Penelope Graham, Zoocasa

Special to the Financial Independence Hub

For those trying to scrape together a down payment in Canada’s hottest housing markets, the Home Buyer’s Plan is known as an effective tool. Offered by the federal government, it allows first-time buyers to pull funds from the RRSPs completely tax-free to put toward their home down payment. If you’re lucky enough to have RRSP matching via your employer, or have been saving for retirement for some time, it can seem an especially attractive method to amass down payment funds.

However, there are a few restrictions buyers should be aware of:

  • Buyers must have a signed Agreement of Purchase and Sale to buy or build a property before applying to access the funds.
  • They can pull up to a limit of $35,000 from an individual’s RRSP, and up to a combined $70,000 from RRSPs held by two individuals buying together (assuming the funds are saved in the first place).
  • The funds must have been sheltered within the RRSP for a minimum of 90 days before they can be accessed.
  • Buyers are required to “pay themselves back”, contributing one fifteenth of the withdrawn amount on an annual basis over a 15-year timeline, or be taxed on that portion at their full rate.
  • Buyers must qualify as “first timers,” which the Government of Canada defines as not having owned a home, or occupied one that your spouse has owned, in the four consecutive years before this home purchase is made. (However, there are exceptions in the case of a marriage or common-law relationship breakdown where former partners can restore their first-time buyer status.)
  • Buyers must intend to dwell in the home as their permanent residence within one year of its purchase or completion.

How long would it take to actually save for the HBP?

Assuming a buyer satisfies all the criteria above, they also need to actually save the funds in the RRSP in order to use them for their home purchase: and that’s easier said than done in some urban centres than others.

To see how long it would take to actually set aside the maximum $35,000 in an RRSP, Zoocasa sourced individual income thresholds in 14 cities across the nation. The data was based on 2017 tax filings as reported by Statistics Canada, and assumed the income was earned income, eligible to create RRSP contribution room, and that individuals contributed the maximum to their RRSP annually (18% of earned income, to a maximum of $26,500). The study also compared how long it would take for those in the top 50%, 25%, and 10% income groups to save $35,000.
According to the findings, for a median-income household contributing the max amount to an RRSP, it would take between 4.3 – six years to pull together $35,000.

(See Infographic at the top of this blog).

How far would $35,000 go in your Housing market?

As well, the extent that the maximum HBP funds would actually aid in a home purchase varies across Canada; it’s no surprise that in the priciest markets, such as homes for sale in Toronto or Vancouver, that it’s hardly a drop in the bucket – just 4.3% and 3.5% of a benchmark home price, respectively. Continue Reading…

A million reasons young people should contribute $6,000 to their TFSAs the moment they turn 18

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My latest Financial Post column looks at how Millennials and other young people can create a million-dollar retirement fund if they start contributing $6,000 to a Tax-free Savings Account (TFSA) the moment they turn 18. You can find the full column online by clicking on the highlighted text: The Road to the million-dollar TFSA is getting shorter for Millennials. It’s also in the print edition of Wed., Feb. 26th, under the headline “The road to saving $1 m for millennials: TFSA likely the best way to start.” (page FP3).

I’ve always been enthusiastic about the TFSA since it was first possible to contribute money to them in January 2009. My wife and I, as well as our daughter till recently have contributed the maximum to them from the get-go, always early in January to maximize the power of tax-free compounding. All three accounts have done very well. (I won’t reveal the balances but they’re consistent with heavy equity exposure through most of the bull market we appear to have been in at least until this week.)

Suffice it to say that our daughter’s TFSA has done better than ours, despite her not having contributed in the last two years because she has been working out of the country. She insisted in owning most of the FANG stocks (including Apple) and even Tesla, which was underwater until very recently but began to make headway in recent months.

It’s purely by chance that having been born in 1991, our daughter became 18 just in time for her first TFSA contribution, which naturally we funded in the early years. We viewed this as maximizing our wealth and minimizing taxes for the family as a whole.

And that’s exactly the thrust of the FP article, which cites several experts who will be familiar to most readers of the Hub: Aaron Hector of Doherty & Bryant Financial Strategies, Matthew Ardrey of TriDelta Financial, Adrian Mastracci of Lycos Asset Management. Mastracci created the chart below that appeared in the FP story:

There was also valuable input from BMO Private Wealth’s Sylvain Brisebois, who created a spreadsheet to estimate the impact of missing contributions in early years. If you can’t start until 25, a six per cent return generates $1,049,000 by age 65, $600,000 less than the $1.63 million earned with the extra $42,000 you’d have saved and compounded starting at 18. Another scenario is contributing for seven years between 18 and 25, then using it to buy a home. Assuming no more contributions the next 10 years and resuming $6,000 contributions at 36, by age 65 you’d have $829,000. Brisebois also created a scenario where you only contribute $3,000 a year, which generates $815,000.

As we experienced in our family, a long time horizon favours Millennials, who can afford to take a little more risk in return for stronger returns. That in turn translates into either a bigger nest egg 40 to 45 years from now, or it means you can get to the magic $1 million mark 5 or even 10 years ahead of schedule. Of course, if you’re even younger than a Millennial (technically they must be age 24 in 2020 to qualify) so much the better, and all these principles apply equally to Generations X, Y or Z.

For that matter, as I have often written, TFSAs are equally attractive for those already in Retirement. Unlike RRSPs, you can keep contributing to your TFSA long into old age: I had a friend who proudly told me she was still contributing after she turned 100!

Mind you, after the Coronavirus fears of the past week, who can really say? Not so good for aging Baby Boomers and retirees but of course if you’re a Millennial any young person with multi-decade time horizons, it should be viewed as good news when stocks go on sale.