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: RRSPs still have at least 3 advantages over TFSAs

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My latest Financial Post column has just been published. It being the height of RRSP season, it looks at some well-known and some less well-known advantages RRSPs still have over the new kid on the block: TFSAs. Click on the highlighted text for the full story online: Three reasons why RRSPs still matter — and one of them you probably didn’t know. The article is also in Wednesday’s print edition on page FP6 under the headline RRSPs still matter despite rise of TFSAs.

The Tax-free Savings Account (TFSA), which was introduced just over ten years ago, is often described as the “mirror imaqe” of the RRSP. That is, the RRSP provides an upfront tax deduction by lowering your taxable income for the year you make the contribution. The TFSA does not, which can be a strike against it in some eyes; on the other hand, once you reach retirement, the TFSA comes into its own by NOT being taxable, and therefore not resulting in clawbacks of Old Age Security (OAS) benefits or (for very low-income seniors) the Guaranteed Income Supplement (GIS) to the OAS.

On the other hand, as many seniors are discovering to their chagrin, all those RRSP tax savings you enjoyed during your (hopefully) high-income earning years come back to haunt you: once the RRSP becomes a Registered Retirement Income Fund (RRIF) at the end of the year you turn 71 (the alternative is the unpalatable act of cashing it all out and being taxed then and there, or annuitizing), then you’ll be on the hook for forced annual — and taxable — RRIF withdrawals. Ottawa giveth and Ottawa taketh away.

But, as the FP piece argues, some decades can elapse between an RRSP contribution and the ultimate RRIF withdrawals, and when you add in the ongoing tax sheltering of an RRSP — on top of the upfront tax contribution — then the experts quoted in the piece believe the RRSP comes out, certainly if you’re at or near the top tax brackets.

Below is the arithmetic provided by Mathew Ardrey, wealth adviser at TriDelta Financial, which was too long to include in the FP version. He cites the example of someone who has $10,000 of income and can invest in either a TFSA or a RRSP:

 

Same tax rate
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 50% $0 ($5,000)
After-tax available to contribute $10,000 $5,000
FV with 5% return for 25 years $33,864 $16,932
Tax at 50% ($16,932) $0
After-tax withdrawal in retirement $16,932 $16,932
Lower tax rate in retirement
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 50% $0 ($5,000)
After-tax available to contribute $10,000 $5,000
FV with 5% return for 25 years $33,864 $16,932
Tax at 25% ($8,466) $0
After-tax withdrawal in retirement $25,398 $16,932
Higher tax rate in retirement
RRSP TFSA
Income before taxes to save $10,000 $10,000
Tax at 25% $0 ($2,500)
After-tax available to contribute $10,000 $7,500
FV with 5% return for 25 years $33,864 $25,398
Tax at 50% ($16,932) $0
After-tax withdrawal in retirement $16,932 $25,398

 

Tridelta Financial’s Matthew Ardrey

“The part of the example I would focus on, is what is a reality for many Canadians, their income is higher while they are working than in retirement. Because of this, there is a clear advantage of receiving the deduction at a higher marginal tax rate and paying tax in retirement at a lower marginal tax rate,” Ardrey concludes.

Foreign income taxed less harshly in RRSPs than TFSAs

But that’s not all! As the FP column mentions, there are at least two other advantages RRSPs have over TFSAs. One is that foreign income is taxed more in TFSAs than in RRSPs: Continue Reading…

Vanguard unveils 2 more Asset Allocation ETFs

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A year after Vanguard Canada shook up the ETF industry with its ground-breaking suite of three Asset Allocation ETFs (VGRO, VBAL, VCNS) it today followed up with two new iterations, bringing the total to five.

As you can see from the adjacent illustration, the two new ETFs include an all-equity ETF, VEQT; and a very conservative fund, VCIP, dubbed the Vanguard Conservative Income ETF Portfolio, which is 80% in fixed income. (The previous conservative entry, VCNS, was 60% fixed income). Both new ETFs begin trading on the TSX today.

Note that the color key above applies to BOTH funds: that is, Orange refers to four equity ETFs contained in both funds; blue refers to the three fixed-income ETFs that are present only in VCIP, since VEQT is 100% equity/orange. At least one sharp-eyed reader has noted the potential for confusion here.

In any case, the original suite of three ETFs were hailed by the financial press, including Yours Truly here and for the MoneySense ETF All-stars. The newcomers are further along the risk spectrum (100% equities) or further along the conservative income spectrum. And consumers have responded, injecting more than $1 billion into them, according to Kathy Bock, Managing Director of Vanguard Investments Canada Inc. Vanguard Canada now offers 39 ETFs, containing a total of C$17 billion in assets under management.

Here is the description of the two new ETFs contained in a press release:

Vanguard Conservative Income ETF Portfolio (TSX: VCIP) – The Vanguard Conservative Income ETF Portfolio seeks to provide a combination of income and some long-term capital growth by investing in equity and fixed income securities with a strategic allocation of 20% equities and 80% fixed income, made up of seven underlying Vanguard index ETFs.

Vanguard All-Equity ETF Portfolio (TSX: VEQT) – The Vanguard All-Equity ETF Portfolio seeks to provide long-term capital growth by investing primarily in equity securities with a strategic allocation of 100% equities, made up of four underlying Vanguard index ETFs.

Vanguard Canada head of product Tim Huver said “Canadian investors have embraced our ‘all-in-one’ asset allocation ETFs based on their sound portfolio construction, low-cost and simplicity. These ETFs have been among our most popular over the past year and we are committed to giving Canadians greater flexibility by offering two new investing options on both sides of the risk profile spectrum.”

Pros and Cons of Vacation Timeshares  

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By Becky Williams

(Sponsored Content)

If you are like nearly everyone, the time that you spend on vacation represents some of the most pleasant and days of the year. You may spend a good deal of time trying to decide what will be the most amazing type of vacation you can take. One option you may want to focus on is obtaining a vacation timeshare. There are a number of significant benefits associated with a vacation timeshare.

A timeshare may not be for everyone and there are some factors that may make this type of vacation property not the perfect choice for you. However, by weighing and balancing the pros and cons of timeshare ownership, you will be able to make an informed, educated decision as to whether this type of vacation property makes the most sense for you. You will be able to find a vacation timeshare that is perfect for you today and into the future as well.

Guaranteed, reliable vacation

A primary benefit associated with a timeshare is that you have a guaranteed, reliable location to spend your precious vacation days. You do not have to spend an inordinate amount of time trying to find an ideal place to spend a vacation. You need only undertake that task one time when you select a vacation timeshare property the first time.

With a vacation timeshare, you know precisely what to expect. You will never again face a situation in which you are uncertain about what your vacation destination and lodgings really will be like. The reality is that this type of uncertainty, which is completely eliminated with a timeshare, has been a major reason why so many people have experienced vacation disasters.

An ideal location for you

Another key benefit of going the timeshare route when it comes to a vacation property is that you will have a destination and location that is ideally suited to you. There is a significant array of different vacation timeshare options in many, many locations across the United States and around the world.

On a related note, you can enjoy another benefit of getting a vacation timeshare. Many timeshare companies offer you the ability to swap your timeshare location for a particular year. In other words, you can trade your timeshare location with someone else at a different location. This provides you with both reliability and consistency as well as a degree of flexibility should you elect to try something different one year.

Entertaining family, friends, and colleagues

Although your main purpose in purchasing a timeshare is to be able to have a set vacation location for yourself and your immediate family, other people in your life can benefit from the timeshare experience as well.

For example, you may not have the need to use your timeshare for a particular period of time set aside to you. As a result, you can offer your timeshare to extended family members, to friends, and to work or other types of colleagues. Often, the owner of a timeshare will donate a stay to a charitable organization. The stay is auctioned off to raise money for the organization. In short, there really is a tremendous amount you can do with a timeshare, not only for yourself and your immediate family but for a broad spectrum of other people who may be important in your life as well. Continue Reading…

The touchpoint: on being “Packaged” out from the Corporation

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By Kevin Press

Special to the Financial Independence Hub

Since being restructured out of my 14-plus-year, rather comfortable position with a global insurance company, I’ve been asked one question more than any other.

Did you see it coming? The answer in my case is yes. I suspect that’s true for most 50- or 60-somethings who’ve found themselves accepting an invitation to “the touchpoint” from their boss, only to find that it’s been moved from their office to HR at the last moment.

Of course, if you’re anything like me (which is to say that you go to work every day like a Jimmy Stewart character in a Hitchcock movie) then nothing comes as a surprise.

I had two thoughts in quick succession when I received my summons. First, what day is it? Tuesday. Dreaded dead-man-walking Tuesday.

Second, how many documents can I email home between now and zero hour? (Nothing sensitive of course, for the record.)

It’s at this point that things began to turn a bit darkly comic. On my walk to HR, I’m stopped to commiserate with a colleague about the dumb email she just got from her boss. Smile and nod.

Young HR person hands me “The Package”

Turn the corner and my fears are realized. The boss is sitting with a too-young member of the HR team, both sporting the kind of sympathetic look that makes you wish you’d forgotten your glasses. I’m told I’ve “had a good run,” which makes me feel a good deal older than my 52 years. Continue Reading…

Why customizing a personal investment portfolio matters

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By David Miller, CFP, RFP

Special to the Financial Independence Hub

As we say goodbye to a tumultuous 2018 and hello to 2019, it is time for you to review your investment portfolio strategy to ensure it is set up for success in the New Year and for the long-term.

Below are some questions you should ask yourself as you review your investment portfolio:

  • Is your portfolio suitable for your personal situation?
  • What is your overall investment strategy and has it changed given the level of volatility you likely have experienced?
  • Did you receive individualized investment advice from a qualified professional?
    • Is that qualified professional a portfolio manager or a salesperson?
  • Do you or your advisor look at the whole picture when it comes to managing your money?
  • Are your investments held in a ‘cookie cutter’ investment portfolio?

To ensure your portfolio is suitable, reliable, and catered to your situation, a customized investment portfolio, built by a portfolio manager, may be what you need.

The trend towards a ‘Model Portfolio’

Computers and the use of algorithms have made it easier for banks, institutions and, more recently, Robo-advisors to automate the investment process for the masses. Model portfolios are now common place because of the economies of scale; it’s just cheaper and easier to do. For some people this approach might help save on fees, but for someone with more unique financial planning and investment needs, a cookie-cutter portfolio just doesn’t cut it. You need a portfolio that is customized to your situation.

Why Custom Portfolio Management?

Let’s look at high-income earner John. John has saved faithfully through his big bank over the years, and along with his defined contribution pension/stock plan through his work, he has maximized his RRSP and TFSA. He has no debt and there are very few places he can now allocate his savings without having to worry about the tax implications. He’s in the prime of his earning years and has 10+ years until he’d like to retire.

John is increasingly aware of the high fees his bank is having him pay. He’s seen the advertising on the importance of keeping his fees low *there seems to be a race to the bottom for investment fees1*. He’s looked at the Robo-options and even at managing his own investments, but he’s not sure and a little stuck. It’s not his expertise.

Here are five big reasons why John may want a tailor-made portfolio: Continue Reading…