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.

FP: How retired seniors can use their spouse as a tax asset

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My latest Financial Post column has just been published in the print edition of the Wednesday paper (Feb. 27, page FP8), under the headline Top tax asset in Retirement? Think Spouse. Click on the highlighted text to access the full story  via the National Post e-paper. Or for the website edition, click on this clever headline: Your biggest tax asset in Retirement may be sleeping right beside you.

The column looks at how senior couples approaching Retirement or semi-retirement face a slightly different tax situation than when both were working in full-time jobs. There’s limited scope for income splitting when you’re working but Pension Income Splitting — introduced more than ten years ago — is a real boon for senior couples that enjoy one fat employer-provided pension and the other does not.

For tax purposes, up to half of the pension can be “transferred” to the lower-income spouse’s hands, thereby reducing some of the highly-taxed income for the pension recipient, and putting more of the pension into the low-taxed hands of the spouse receiving some of the transfer. Note this doesn’t actually mean they receive the pension: it all happens on the tax returns, and is easily handled by tax software when you choose to file your taxes jointly as a couple. Note that unlike in the United States, there is no formal joint tax return for couples in Canada: each spouse must file on their own but the tax software makes it relatively smooth by creating so-called “Coupled Returns,” which helps optimize who claims deductions like charitable or political contributions and the like.

Because the column has to fit in the paper and included several sources (some of whom blog here at the Hub), I’ve taken the liberty of adding some of the points made that did not appear in the column or had to be truncated.

Income splitting options limited under age 65

Under age 65, the options for income splitting are very limited, says Aaron Hector, vice president of Calgary-based Doherty Bryant Financial Strategies.  “Generally here you are only looking at payments out of defined benefit plans (of which  up to 50% can be split) or spousal loans from non-registered investments.”

Doherty Bryant’s Aaron Hector

More from Aaron Hector:  “If each spouse has their own registered plan (RRSP/RRIF/LIRA/LIF) then the withdrawal from their own personal plan can be taxed fully to them. So if one spouse is working, they may not need or want to draw any additional income from their registered plans, but the spouse who is not working can choose to draw down their registered plan. It is important to note that regular RRSP withdrawals will never qualify for income splitting, even after 65. The withdrawals need to come from a RRIF to be eligible for income splitting. Sometimes people are hesitant to convert their RRSPs into RRIFs because they don’t yet want to commit to the subsequent forced annual taxable RRIF withdrawals. What is less commonly known is that someone can convert only a portion of their RRSP into a RRIF, leaving the remaining RRSP balance untouched until it is forced into being converted into a RRIF by the end of the year in which they turn 71. Furthermore, if someone converts to a RRIF early (ie. before 71) then they will always have the option to convert their RRIF back into a RRSP anytime before 71. Doing so would allow them to ‘turn off the taps’ that is the RRIF income stream. Once you turn 65 (but not before) withdrawals from RRIFs and LIFs become eligible for income splitting. Only the spouse who’s RRIF/LIF is being drawn upon needs to be 65; the recipient of the income splitting can be younger than 65. However, in this case the recipient spouse will not get the “pension income tax credit” until they are also 65.

It’s also important to note that when it comes to these income splitting provisions, age 65 at any point of the year is sufficient. If you turn 65 on December 31, then the same 50% splitting provisions apply to you as if your birthday was on January 1. (ie. the splittable portion does not get pro-rated in the year you turn 65 depending on your specific birth date). Because of the age 65 significance, and also as a hedge against future governments changing the tax rules (ie. taking away pension income splitting rules, which have not always been allowable) I try to have my client couples have an even amount of money in their registered plans. Spouse 1 should add up their RRSP, LIRA, Spousal RRSP, etc.. and the total should be close to the same total of spouse 2. If there is a discrepancy, then Spousal RRSP contributions should be utilized to even things out. This allows flexibility in income planning and withdrawals in the years prior to age 65. I caution on Spousal RRSP contributions the closer someone is to needing the money because of the 3 year-rule. The 3-year rule is such that if a withdrawal is made in the year of a contribution, or either of the next two calendar years, then the income from that withdrawal will be attributed (ie. taxed) back to the contributing spouse instead of the Spousal RRSP account holder.”

Taxation of Non-registered income works differently

Income from non-registered accounts works a bit differently, Aaron notes: Continue Reading…

Are current beliefs about RRSPs costing Canadians money in the long term?

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By Edward Kholodenko

Special to the Financial Independence Hub

A recent study we conducted with Leger (www.leger360.com) asking what Canadians wanted in relation to their RRSP investments unearthed some compelling findings demonstrating that many Canadians have misconceptions that could be costing them money, especially in the long term.

Our research confirmed 78 per cent would be willing to switch to a lower-fee RRSP investment, if the lower fees could ensure a superior rate of return.  When we asked if they were able to move their RRSP easily, which factors would be most important, 66 per cent once again said they would move accounts for lower fees and better returns.

In addition to lower fees and higher returns, 31 per cent of people we talked to identified the ability to easily manage their RRSPs and make contributions online as a factor to consider in a switch (highest in those between the ages of 25 – 44 years), speaking perhaps to the rising appeal of newer fintech companies who offer the ability to do everything online.

When asked for other reasons they might consider switching their RRSPs, respondents cited frustrations including feeling like they’re being upsold (28 per cent), having to book an appointment and visit their financial institution in person (27 per cent) and not knowing what their RRSP is invested in (26 per cent).

This strongly suggests Canadians are far from content with their current RRSP contribution process and provider and would be willing to switch; however, there are misconceptions that are holding people back.  Most interesting — only 50 per cent believe their RRSPs can easily be transferred between financial institutions.

Common misconceptions

Why? Common misconceptions included high transfer fees (32 per cent), incurring a tax penalty (24 per cent) and even the fear of an uncomfortable conversation with their current advisor or financial institution (16 per cent).  While only 50 per cent of Canadians told us that they believe their RRSP can be easily moved between financial institutions, the reality is that RRSPs are easy to transfer.  There are no tax penalties incurred when an account is transferred and furthermore, most institutions would cover the cost of any transfer fee that may be charged and by consolidating your RRSPs at an institution with lower fees, you may reach your retirement goals faster. Continue Reading…

Retired Money: What retirement savers can learn from the finances of pro athletes

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My latest MoneySense column looks at the seemingly enviable situation of professional athletes, and what us ordinary folk can learn about what it’s like to retire from a (typical) five-year career of earning big bucks, but then having a half century ahead of them. Click on the highlighted text to retrieve the full story: Why so many athletes run into financial trouble.

The article is based on an interview with Chris Moynes, a financial planner who specializes in managing money for NHL and other pro athletes, and reviews his book After the Game. it is available at Amazon.com or directly through his web site at www.onesports.ca, as is an earlier book called The Pro’s Process.

Most pro athlete careers average about 5.5 years. The median is just 4 years (so half have careers that last less than that) and of course a sudden critical injury could end it all at any moment. Of course, while it lasts the pay is astronomical compared to what mere mortals can generate in regular jobs: an average US$2.4 million per season. That means the average pro athlete will earn about $13 million over that short career. However, citing sportrac.com, Moynes says 200 of the 683 players in the NHL earn less than US$1 million per year, because the stats are skewed by the huge salaries of the biggest stars.

The 6 financial “Landmines” facing pro athletes

The opening chapter of After the Game outlines the six biggest “landmines” facing pro athletes. First is overspending and the combination of big paycheques spread over a short career. They seldom understand finances and often make poor investment choices, typically being prime targets for those selling “can’t miss” investments like nightclubs, casinos, real estate ventures and other private-equity type deals. Continue Reading…

5 common financial mistakes Millennials are making

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By Noel Gonzales

Millennials have many opportunities in their hands today. With their skills and talent, they can earn more and do more with their lives. However exciting this is, it also becomes quite a challenging task for millennials to use wisely what they have.

Today’s trends on consumerism entice people to buy and spend more when they earn more, and this is where the trap of debt begins. Aside from this, here are five other common financial mistakes that millennials are making:

1.) Millennials don’t invest in the stock market or other financial markets

Millennials are tech-savvy, and most own a smartphone. Hence, investing in the stock market is not difficult to do nowadays. However, a lot of people, including millennials, still consider traditional savings as the way to go; they’re unaware that stocks grow more income than savings.

If you’re confused with how to start, you can take advantage of online resources and tools that can do the following:

  • Teach the basics of financial markets and investing.
  • Maximize your income, like a great position size calculator, that decides the estimated amount of currency units to buy or sell.

In investing, the younger you start, the better. If you start early, you’d surely thank your young and smart self 10 years from now.

2.) Millennials don’t invest in health insurance

Health insurance is a good investment for your future, as you have a shield that covers all your costs in the event of any health issues. Remember, health is your greatest asset. Illness can be very expensive, but when you have health insurance, your expenses are covered and you can focus on recovering.

There are now easy payment plans on health insurance, depending on your salary. You’ll be surprised to know that paying your insurance premiums can cost you less than the money you spend on your daily coffee run.

3.) Millennials don’t have an emergency fund  

As a millennial, you’re at the top of your health and age. Hence, you forego saving for an emergency fund. An emergency fund refers to money set aside to cover:

  • Emergency travel, such as when you need to go home because a family member died
  • Home repairs after a natural disaster
  • Sudden job loss

You should have at least three to six months’ worth of your monthly expenses as savings for emergencies. For example, if you spend a total of 500 USD every month to cover living expenses, home loan, etc., 3000 USD should be your emergency fund.

4.) Millennials don’t write a monthly budget

Not writing down a monthly budget is a mistake that can lead you to overspend. When you write your budget down, you can visualize it better and stick to it; hence, you know where and how to allocate your money efficiently. Continue Reading…

Which All-in-one, One-ticket Portfolio Is right for you?

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By Dale Roberts, CuttheCrapInvesting

Special to the Financial Independence Hub

In February 2018 Vanguard Canada changed the investment game in Canada with the launch of complete Balanced Portfolios that you can purchase by entering one ticker symbol. For example, once logged into your discount brokerage account you would enter the symbol VBAL, and press buy to get a complete globally diversified Balanced Portfolio. The Portfolio is 60% Canadian, US and International stocks with 40% of those shock absorbers known as bonds.

Vanguard offers One-ticket Portfolios at five different risk levels.  With an MER of .22% these portfolios are a game changer. (In the pie charts below, Orange shows equities and blue fixed income percentages). 

 

iShares has also had One-ticket solutions available for several years. The asset allocation was ‘weird’ and the fees were not that low. considering the low fees on the underlying ETF assets. In response to Vanguard, iShares recently took the scrub brush to the funds, cleaned up the asset allocations and then cut the fees. In fact they undercut Vanguard just slightly with an MER of .20%. Here’s the link to the iShares product page; this will take you to XBAL, their Balanced Portfolio.

And then last week along comes one of the big banks with their own One-ticket offering. Here’s my review at the Hub: BMO keeps it simple with its One-ticket Portfolio Solutions.

 

 

The one-ticket solutions are the most cost-effective managed portfolios available in Canada. This should be the final dagger in the heart of the high fee mutual fund industry.

Which One-ticket provider is best?

Let’s call it a draw. The portfolios are equally great. They include the basic and sensible asset allocation building blocks of Canadian, US and International stocks supported by a bond component. All the One-ticket providers use Canadian and foreign bonds to manage the risks.

How to select the right portfolio

Nothing is more important than investing within our risk tolerance level. We could argue it is the most important ‘part of it all.’ The Portfolios do not come with an owner’s manual for when and how to use them. Matching the appropriate portfolio to your risk tolerance level, time horizon and objective is key.

We have to invest within our risk tolerance level; bad things happen when we invest outside of our comfort level – usually permanent losses. We must be comfortable with the percentage and dollar value that the portfolio could decline.

Are you comfortable with a portfolio that could decline by 5% in a major correction, 10%, 20%, 30%, 40% or 50%?

Remember those bonds work like shock absorbers to soften the blow and smooth out the ride during periods when the stock markets tank.  And tank they can; Canadian and US and International markets have declined by some 50% or more twice in the last 20 years. Continue Reading…