It
is important to choose a plan that’s most appropriate for you, depending
on your age, needs and level of involvement in financial decisions.
Retirement income is often generated through a combination of plans that
collectively help to ensure your financial safety and security.
- Defined Benefit Plan:
This plan pays a specific amount of pension income based on a formula
that factors in your years of employment and salary. Defined Benefit
Plan structures vary from company to company.
- Defined Contribution Plan:
This plan allows both you and your employer to make specific annual
contributions to an account based on your earnings. At retirement age,
the accumulated value of your plan must be used to purchase either a
life annuity or a Life Income Fund. Unlike a Defined Benefit Plan, a
Defined Contribution Plan depends on the success of your investments and
does not guarantee a specific level of pension at retirement.
- Group RRSP:
Employees can choose to contribute to an employer-sponsored RRSP fund.
Group RRSPs are flexible because employees are typically offered a
choice of how the funds are invested and how much to contribute.
- Deferred Profit Sharing Plan (DPSP):
An arrangement where an employer may share with employees the profits
from the employer’s business. Employees do not make contributions to the
plan. DPSPs can be used as a supplement to a company’s Group RRSP or as
a company pension plan.
- Canadian Pension Plan (CPP):
CPP and the Quebec Pension Plan (QPP) are Canada’s major pension plans,
providing regular payments to people in retirement who have contributed
to either of these plans over the years.
- Old Age Security (OAS):
Funded by the federal government with general tax revenues, this
provides a monthly income security benefit based on your age and the
amount of time you’ve lived in Canada. Benefits include the basic OAS
pension and the Guaranteed Income Supplement (GIS).
- Registered Retirement Savings Plans (RRSP):
An RRSP is a government registered account that holds investments,
allowing them to accumulate in value tax-free until withdrawal at
retirement. You may own as many RRSPs as you wish, although it\'s
advisable to have fewer for ease of management and to minimize fees.
RRSPs provide a tax-sheltered environment where investments can grow
faster. Outside an RRSP, investments are subject to being taxed on
gains.
- Tax Free Savings Account (TFSA):
TFSA is a registered savings account that allows you to earn investment
income tax-free inside the account. Contributions to the account are not
deductible for tax purposes, and withdrawals of contributions and
earnings from the account are not taxable. Each year you are allowed to
contribute at least $5,000. Withdrawals made in the previous year are
added to your contribution room for the current year. Unused
contribution room from the previous year is also added to the
contribution room for the current year.
- Non-Registered Investments:
These are savings and investments you have that are non-tax-sheltered,
which can include money held in savings accounts, GICs, mutual funds,
stocks and bonds.
At age 71 you need to convert your RRSP savings into a source of income
to sustain yourself financially throughout retirement. There are a
number of retirement income options available. You may prefer to choose
an RRIF, annuity, or to withdraw your savings depending on your goals,
income needs and the value of your RRSP.
- Registered Retirement Income Fund (RRIF): An RRIF is a plan in which your RRSP investments are converted into an income stream to last throughout your retirement years.
- Annuity:
An annuity is a purchased contract that provides a constant and
guaranteed stream of payments at regular intervals for a fixed period of
time. There are three main types of annuities:
- Straight-life annuity: This annuity provides fixed regular payments for as long as you live.
- Joint-and-last-survivor annuity: Geared towards married couples, this annuity will pay a set amount throughout both spouses’ lifetimes.
- Term-certain:
This annuity specifies that payments must be paid out until age 90. If
you die before you reach 90, payments to your spouse will continue until
the year you would have reached 90 years.
- Cash in your RRSP: Cashing in your RRSP allows you to withdraw the savings. But be aware: you pay tax on the full amount.
In addition to saving and investing your money for retirement, planning
your estate is also as important. Proper estate planning includes
preparing a will, tax planning, signing a power of attorney and
purchasing life insurance.
- Will: Your
will is a precise legal document that defines the distribution of your
estate. Without a will, upon your death the provincial government
decides how your estate is distributed and divided.
- Tax Planning:
Proper tax planning can result in reduced estate taxes. Financial
advisors, lawyers or accountants can recommend tax planning strategies.
- Power of Attorney:
This is a legal document that authorizes a person, or persons, to make
financial or health care decisions on your behalf should you ever become
incapable of making them yourself.
- Life Insurance:
This can help provide your family with replacement income after your
death, as well as cover your final expenses and any debts. There are
different types of life insurance, including term, permanent and
universal.
There is a lot to think about before you
retire. Research your options carefully to ensure your financial health
throughout your retirement years.
Posted in Mortgages by Banks-Banqes
March 08, 2012
Buying a home is more than just a financial commitment. It involves choosing a neighbourhood and community that is right for you. Home ownership may be the biggest investment you’ll ever make, so approach the housing market with a firm understanding of the buying process, your objectives and current market trends.
What can you afford?
Before looking for a home, determine what you can afford. Closely examine your finances. It is important that you consider how much you can afford as a down payment, the total cost of owning and maintaining a home, and whether you will be able to manage your other living expenses as well.
GDS and TDS Ratio
Two simple calculations can help you estimate how much of your income can be allocated to monthly housing costs: the Gross Debt Service Ratio (GDS) and the Total Debt Service Ratio (TDS).
GDS Ratio: Most lenders recommend that you spend no more than 32 per cent of your gross monthly income (before tax) on combined housing costs – monthly mortgage principal and interest, taxes, utility costs and if applicable, 50 per cent of condominium fees.
TDS Ratio: According to most lenders, you should spend no more than 40 per cent of your gross monthly income to service your mortgage and cover other debts and obligations, such as vehicle payments. Keep in mind that these numbers are maximums. Try to keep your housing costs as low as possible for a more affordable lifestyle.
The federal Home Buyers Plan (HBP)
This plan allows first-time home buyers to withdraw up to $25,000 per person from their Registered Retirement Savings Plans (RRSP), without tax liability, to buy a home in Canada. You don’t have to start paying back your RRSP until two years after the purchase of the home. Before cashing in your RRSP to buy a home, weigh the pros and cons carefully. Consider the details of the Home Buyers Plan.
To be eligible for the Home Buyers Plan:
You need a written agreement to buy or build a home
You intend to occupy the home as your principal residence
You are a first time homebuyer
Your HBP balance on January 1 of the year you withdraw has to be zero
Talk to a financial advisor. To find out more about this program contact the Canada Revenue Agency.
Extra costs
There is more to buying a home than the down payment and mortgage. You need to budget another 1.5 per cent to 4 per cent of the price of your home for extras associated with the original purchase. Some of these costs include the survey fee, home inspection cost, mortgage default insurance (if applicable), title insurance, property insurance, land registration fees, land transfer tax, legal fees, goods and services tax, moving expenses and closing costs.
Credit report
Before making an offer on a house, you may want to review your credit profile to verify that the information your lender sees is accurate and up-to-date. A credit report gives a snapshot of your financial history, such as your previous and current debts and whether or not you’ve had any problems paying off those debts. Many real estate agents recommend that buyers check their credit report before shopping around for a house. You can order your credit reports from Equifax and TransUnion.
Pre-approval
Know how much you can afford to pay. Ask for a “pre-approval” from a financial institution. To do this you need to submit your financial information to a potential lender, who then approves you for a predetermined mortgage amount. The pre-approval may guarantee the interest rate for a mortgage taken out during a set period.
Down payment
A down payment is the initial amount of money put towards buying a home. Depending on the type of mortgage, down payments generally range from 5 per cent to 20 per cent of the purchase price for first-time buyers. Keep in mind that the higher your down payment, the lower the interest costs over the life of the mortgage.
Mortgage loan insurance
Mortgages with less than a 20 per cent down payment, known as a high-ratio mortgage, are required by law to be insured against default. If you default on your mortgage, mortgage loan insurance pays back the mortgage lender. Mortgage loan insurance requires the payment of a premium, which is usually added to the amount of your mortgage – another good reason to make a larger down payment.
Interest on mortgage
Interest is the amount added to the amount borrowed to compensate the lender for the use of their money. It is represented as an annual percentage rate applicable to the mortgage. Interest is usually paid to the lender in regular payments along with the repayment of the principal (loan amount).
A Tax Free Savings Account (TSFA) is a registered savings vehicle that allows you to earn investment income tax-free inside the account. Canadians aged 18 and older, with a valid SIN (Social Insurance Number), can contribute up to $5,000 every year in a TFSA. Your TFSA can hold any combination of eligible investment vehicles, such as cash, stocks, bonds, GICs and mutual funds. You do not have to pay taxes on earnings within the account (including interest, dividends or capital gains) or on money you withdraw from the TFSA. Contributions to the account are not tax-deductible, however, unlike contributions to your RRSP.
Where can I open a TFSA?
You can open an account at most financial institutions, including banks. Talk to your bank or look online at your bank’s website.
What can I use my TFSA savings for?
You can withdraw funds from the TFSA at any time for any purpose. TFSA accounts are very popular since they can be used for so many different kinds of savings goals. In fact, as of the end of 2009, approximately 4.7 million Canadians have opened a TFSA. Here are a few examples:
Short-term savings for a vacation or home renovation in the near future.
A place to hold your non-registered investments so that they continue to grow tax-free.
Long-term savings for a car or a home.
A place to hold extra pension income after you retire.
What are the contribution limits?
The TFSA contribution room is made up of:
your $5000 per year limit;
any unused TFSA contribution room in the previous year; and
any withdrawals made from the TFSA in the previous year, excluding qualifying transfers.
Your contribution room began building the first year TFSAs were offered in 2009 and any unused contribution room can be carried forward to future years. For example, if you opened your TFSA in 2010, your contribution room is $10,000 ($5000 for 2009 plus the $5000 limit for 2010 provided you were 18 or older in 2009).
How do withdrawals from my TFSA affect my contribution room?
If you withdraw money from your TFSA, your annual contribution limit increases by the amount withdrawn – but not until the following calendar year. For example, if you withdraw $1000 from your TFSA in 2010, in 2011, $1000 will be added to your contribution room.
It’s important to remember not to exceed the maximum contribution room that you have for the year as you will be taxed one per cent a month on the highest excess amount for that month until you remove it from the TFSA.
It is also important to understand that any withdrawals from the account during the year do not increase your contribution room for that year. For example, if your maximum allowable contribution for 2010 is $5000 and you contribute that $5000 in January 2010 and then withdraw $2000 in April 2010, you cannot re-contribute that $2000 during 2010 without incurring the one per cent per month tax since you have already made the maximum contribution. This $2000 will be added to your contribution room for 2011. The Canada Revenue Agency (CRA) has two more examples of this important point on their website here.
If you wish to move your TFSA to a different financial institution be sure to directly transfer your funds to your other TFSA. Qualifying transfers will not affect your contribution room. If you withdraw your funds and then recontribute them to another TFSA, however, both of your contributions will be counted towards your annual contribution limit which may result in an over-contribution which will be subject to the one per cent per month tax on the excess amount. You can find out more about qualifying transfers here. In June 2010, the Government of Canada released a statement to address the confusion expressed by some Canadians regarding the TFSA contribution rules. You can find that statement on the CRA website here.
The CRA will provide details of your contribution room annually on your Notice of Assessment that you receive once you have filed a tax return.
Will a TFSA affect my government benefits?
No. Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits such as Old Age Security (OAS) benefits, guaranteed income supplement (GIS) or Employment Insurance (EI) benefits or credits such as the goods and services tax credit/harmonized sales tax credit, or the age credit.
Questions?
The rules governing registered products such as TFSAs can be complicated. Banks and other financial institutions explain the rules governing registered products to you when you open an account. If you have any questions, visit the Canada Revenue website or talk to your financial institution.
While financial institutions provide advice to their clients, a financial institution can never be certain of the total amount of your TFSA contributions because you may have TFSAs at more than one financial institution. That’s why it’s important to carefully track your contributions and withdrawals from your TFSA to ensure that you stay within your annual contribution limit.
For more information about the Tax Free Savings Account, visit the Government of Canada TFSA website or The Canada Revenue Agency.
Parents dream of giving their children the best possible post-secondary education. Whether this dream includes university, college, vocational school or technical school; education costs money. If you have children, are planning to start a family, have a grandchild, niece, nephew, relative or friends you would like to save for, this information can help get you started.
How much do you need to save?
To create an education savings program you will need to estimate the amount of money that you will need to save, including books, tuition and living expenses. The education savings calculator at http://www.canlearn.ca/ can help you determine the future cost of post-secondary education, and how much money you will need to save to meet your goal. A financial advisor can also help you set up a plan that meets your needs.
Personal savings plan: You can include saving for your child’s education as part of your personal savings plan. Just as you set aside money for your retirement and vacations, you can reserve money for your child’s education.
Special Savings/ Investment Programs: These options allow for you to save money in your child’s name. This can be done through a guaranteed investment certificate, savings bond, mutual fund, stock or other investment choices.
Informal Trusts: This is a regular (non-registered) investment account set up for the purpose of investing funds for a child. The money is held in trust for the child until they reach the age of majority. There are no restrictions on the amount you can contribute to this account. Income earned on the contributions is not tax-sheltered.
Registered Education Savings Plans (RESPs): RESPs allow your money to appreciate tax-free in a plan until the beneficiary is ready to attend an eligible post-secondary school. The limit on lifetime contributions for any one beneficiary is $50,000. The Government of Canada will help with savings incentives that are only available if you have an RESP. These incentives include the Canada Education Savings Grant and the Canada Learning Bond:
The Canada Education Savings Grant is a government incentive. For an eligible beneficiary under the age of 18, the government will add 20 per cent annually to the first $2,500 contributed to an RESP. The grant proceeds are invested along with your contributions.
Canada Learning Bond is another government incentive to help children in modest-income families. Under the program, the Government of Canada will make a one-time payment of $500 into an RESP plus provide $100 a year until the child turns 15 years old, to a maximum of $2000. You can open an RESP without making a contribution or deposit. The Canada Learning Bond is available to families receiving the National Child Benefit Supplement under the Canada Child Tax Benefit for children born after December 31, 2003.
The amount of money you put into an RESP depends on the type of RESP that you choose. Regardless of the type of RESP that you use, the Government of Canada will still add to your savings. Research and learn about the various types of RESPs that are available.
You can find more information about government education savings programs at http://www.hrsdc.gc.ca/.
Types of RESPs
Individual Plans: An individual plan names one beneficiary. The beneficiary does not have to be related to the subscriber. The beneficiary can be over 21 when named. An individual plan allows you to invest the money on your own, or with the help of a financial advisor.
Family Plans: A family plan allows one or more beneficiaries to be named in the RESP. The beneficiaries must be under 21 when named and related to the subscriber by blood or by adoption. If one beneficiary decides not to pursue schooling, other beneficiaries can still use the money. The family plan does not require any regular monthly payments, and allows you to invest the money on your own or with the help of a financial advisor.
Pooled (group) Plans or Scholarship Trusts: In a group plan funds are gathered from many families. The RESP administrator pools the contributions and places them in investments that earn a fixed rate of return. The earnings are shared equally among beneficiaries of the plan. Monies from the fund are paid out in the form of scholarships to eligible students while they attend post-secondary education.
When your beneficiary does not pursue post-secondary education
If your child does not pursue post-secondary education you may be able to:
Use the RESP for another child who does continue education.
Wait for a period of time; they may decide to continue their education at a later date.
Transfer the money from the RESP into a Registered Retirement Savings Plan (RRSP) to help you save for retirement.
Withdraw your personal savings, tax-free.
Ask your RESP provider about the choices you have if your child does not continue onto post-secondary education.
Qualifying institutions
Educational programs include apprenticeships, programs offered by a trade school, College of General and Vocational Education (CEGEP), colleges and universities. Funds can be used towards full or part-time study in a qualifying program. For a list of qualified educational institutions across Canada please refer to http://www.canlearn.ca/.
Steps to opening an RESP
Get a social insurance number (SIN) for yourself and the RESP beneficiaries. There is no fee to get a social insurance number, however, you do need certain documents to be eligible. For more information on SIN refer to servicecanada.gc.ca.
If your family net income is $75,769 or less, apply to the Canada Revenue Agency for the Canada Child Tax Benefit. The form can also be accessed through the hospital where your child was born.
Find an RESP provider that can provide you with opportunities that will meet your needs and objectives. RESP providers include financial institutions and group plan dealers.
Research the various types of RESPs that are available and decide on the type that you want to open. Decide on a type of investment that will benefit your funds.
Invest in your RESP. Start early to make the most of compounding interest.
Questions for your RESP provider
What does it cost to open an RESP?
What type of fees will I have to pay on an opened RESP?
Do I have to make regular payments?
A Guaranteed Investment Certificate (GIC) is a type of investment in which the investor agrees to lend money to a financial institution for a set amount of time. Time periods (dates of maturity) for GICs vary from increments as little as one month or up to ten years.
Also available are index or market-linked GICs, whose interest earnings depend on stock market conditions, while offering protection of your principal investment.
What are the costs of owning a GIC?
GICs usually have no administrative fees associated with them. However, a penalty may be charged if money is taken out of the investment before reaching the date of maturity. Redeemable GICs carry no penalty for early redemption, but the interest rate may be lower. There may be a minimum deposit required to purchase a GIC.
What level of risk is associated with GICs?
GICs are a low-risk investment, providing stable earnings through a fixed rate of interest. But the low-risk nature of the investment means that returns may be comparatively lower over the long-term than that of equities, mutual funds and others.
The value of market or index-linked GICs varies according to stock market conditions, so the rate of return is not guaranteed. These products do, however, protect your initial principal. It should also be noted that interest earned on GICs held outside of tax-sheltered accounts linke RRSPs or RESPs may be taxed as a source of income.
The Canada Deposit Insurance Corporation (CDIC) insures deposits in GICs with an original date of maturity of five years or less.
Why should I invest in a GIC?
GICs may be an appropriate choice for short-term savings, with interest rates comparable to that of a high-interest savings account. The different dates of maturity provide the flexibility of generating earnings without having to make longer-term investing commitments. GICs can also be used to balance an investment portfolio, complementing higher-risk stocks and mutual funds.
GICs can be held inside registered plans such as Registered Retirement Savings Plans (RRSPs), Registered Education Savings Plans (RESPs) and Registered Disability Savings Plans (RDSPs).
As with any financial product, it pays to shop around to find the GIC that best suits your needs. GICs can be purchased at banks, credit unions and other financial institutions across Canada.
