We welcome 2021 in so many ways, especially because it is not 2020. Today we review some basics we’ve known and maybe forgotten, including tax-effective ways to build and enjoy wealth, also to tame your tax bills. Our letter today is partly a check-list to review and be sure you’re not missing any goodies. We can expand on each of these, tailoring and personalizing for your needs as we meet and speak together. If you like a game, find an idea here that’s new to you, and another you may have forgotten. That’s two points. Three points (full score) if you reply to ask me further on any of these, or mention something new in your financial needs or ongoing circumstances. In a closing paragraph below I’ll outline our investment results in 2020 and how 2021 appears from what we know today.
ENJOY YOUR WEALTH AND TAX PLANNING.
Housing: Buy or Rent.
Owning your home provides a great asset whose value grows tax-free. (Scrolling down we’ll come back to this, how to get money from a home when you are retired.) I knew a couple who moved to Canada in 1973 and decided to wait and buy when property values got cheaper. Twenty-five years later values had increased 4-fold … and another 8-fold since then. They never managed to buy – paying rent, spending their income, owning nothing. That’s not the dream. Today prices seem so high, some decide it’s best to save a bigger downpayment, hoping property values may ease off when interest rates start rising. The decision is personal and gives excellent reason for us to discuss how this fits your life goals and financial planning.
Tax Free Savings Accounts.
Canada started allowing TFSAs in 2009 for anyone age 18 and up. Half of eligible Canadians have no TFSA – missing one of the greatest tax-free gems of all time. As contribution room rises each year, anyone who was 18 or older in 2009 has up to $69,500 space for deposits. Whether you invest for dividends, capital gains, or interest, none of these will be taxed on growth or even when you take out money. If you withdraw money today you temporarily lose that amount of contribution room, but gain it back again next January 1st. Use your TFSA for an emergency fund, to budget for an exotic trip, save for a house, new roof, or car. People with low income and paying little/no tax may use a TFSA instead of RRSP (moving funds from TFSA to RRSP in a later year if income and taxes will be higher). Seniors who missed owning insurance for death and burial may find their TFSA can cover those costs. Bonus: at death a survivor can inherit their spouse’s TFSA, keeping their own plan plus the inherited one. Vast are the ways TFSAs help build wealth and avoid the taxes.
RRSP & LIRA.
RRSPs since 1957 have been vital to retirement planning, especially as group pension plans become less available. Tax laws let us invest up to 18% of “earned income” as specified in each year’s Notice of Assessment from the Canada Revenue Agency. Consider some options here. If your income is being taxed at 25% you get a nice tax refund. If your income rises to be taxed at 50% the tax refund is that much higher too. Earlier in the age spectrum: at 18 years of age earning $20,000 a year we prefer the TFSA, then at 30 years of age earning $65,000 they can move money into the RRSP for a bigger tax refund (depending on when you may use the RRSP Home Buyer’s Loan.) As we age the question arises of when to stop investing in RRSP: if you’re still earning a strong income at age 60 and paying 46% tax, the refund is vital to your tax planning. But if you eased your hours and income into a hobby career or part-time retirement, very possibly your tax rate from pensions and all will be higher at 70 than it is today. In that case don’t put more into RRSP for a small refund just to turn around later and pay higher taxes in your 70s! Now if your career or business passes your 71st birthday, your remaining RRSP option is to invest in your spouse’s plan if he/she is younger. (LIRA – locked-in retirement account – is like an RRSP with some restrictions on how/when to withdraw. See LIF below. Did you know, you can borrow from RRSP for Life-Long Learning?)
RRIF & LIF.
RRIF turns the table so you draw money out instead of paying in. This must happen by the year you turn 71 – you must start drawing income in the year you turn 72. Your investment should continue to combine dividend income, capital gains, interest income, aligned to your personal goals and comfort. If you under-invested in TFSA and have surplus RRIF income, this gives opportunity to invest more to bring your TFSA to full stature. Now to reduce not just one-year’s income tax but actually a full life of tax bills, we must consider the entire planning process. For instance if one spouse dies, the total remaining RRIF may be taxed much worse than when both spouses were living, so a vital part of our time and planning together is to anticipate future events in order to diminish your “lifelong tax burden”. (LIF – Life Income Fund – is like a RRIF but with legal restrictions on min/max withdrawals, aiming to ensure people preserve some financial resources to their later years.)
Registered Education Savings Plans (don’t confuse with scholarship arrangements): keeping it simple, parents and grandparents often enjoy investing for children’s future education. We ensure government grants boost this saving by another 20%. Investment choices are much the same as TFSAs and RRSPs. With more than one child in a family we can use a “family plan” for ultimate flexibility. When the child is enrolled in college or university, we prioritize income payments from the government grants, drawing later as needed from investment growth and your own deposits. Any portion that is unused after 35 years can be directed into the account owner’s RRSP.
Registered Disability Savings Plans can offer the most astonishing growth of any investment plan – available from age 0-60 for anyone qualifying for a Disability Tax Credit. I wrote on this in April 2019: RDSP: Disability Savings Plans | Guaranteed Income For Life (guaranteedincome4life.ca). That article touches some of our vital strategies to provide for future needs and expenses of persons with a disability. Near 22% of our Canadian population qualify as disabled but few have opened an RDSP.
Income from Home Equity.
When people had mortgage renewals coming due, they often upsized a mortgage to cover debts, expenses, and upcoming projects. Later in life we may again enhance retirement with home equity. Three distinct ways of drawing tax-free income from your home include a home equity line of credit, a reverse mortgage, or Sell N Stay. These vary in ease and in costs, also in the impact on estate planning and family inheritance. When you or family members need more information on this we can review the pros/cons of each option.
Income from Life and Health Insurance.
We again touch only the surface here, but who thought life insurance would pay you an income while living? If your TFSA is one of the greatest tax-free gems of all time, life insurance was there first and is still right up there. I’ve delivered more cheques than I can count for disabilities or critical illness – paid to our clients while they are living. We also arrange “advance payments” from life insurance when clients are terminally ill. A colleague in the U.S. told how he mortgaged the family home during his wife’s cancer treatments, and repaid it all afterwards from her life insurance … money they spent while she was living! We also design tax-sheltered life insurance to supplement income in retirement. Then too and not least, is the positive return of gifting insurance to your preferred charity.
Summary on Wealth and Taxes.
It’s astonishing how many questions these sections could raise that we have no space to answer here. The letter would be a book! (On the Books Tab we have a few available.) Freely suggest a few questions, and we can talk or meet to review your personal situation. Even with covid we have continued in-depth meetings, by phone or zoom, some in person. If aspects of your present and future planning need our attention let’s immediately set a date and speak together.
RESULTS 2020 – AHEAD IN 2021.
March 2020 gave the fastest investment meltdown of all history. Then we had the fastest-ever rebound. Investments have grown dramatically from April onward, erasing losses and paying some hefty gains. While covid numbers are high and vast regions are in lock-down, we believe vaccinations will easily double economic growth in Canada and the world, in the second half of 2021. Most industry has remained active. Prime office buildings continue to receive 96% of their contractual rents. Consumers have money in their pockets (lost $30B in wages, received $90B in support programs.) Mid-summer and second-half 2021 we will be feeling wonderfully new again in so many ways.
Life and Wealth is our consistent focus because money only exists to serve your living wishes and longterm goals. If you delayed traveling due to covid you will naturally decide when it’s time to catch up on what you’ve been missing. If you used your travel and entertainment budgets on home renovations or supporting other family members, we can review and reassure how you plan to enjoy the years ahead. And if you’ve been thinking how covid interrupted your life or career and it means you want to actually retire sooner or create more flex-time in your lifestyle, let’s you and I look at this together and how it fits your financial plan.
Most important: we always want to know what’s happening for you. Are there changes in your needs or circumstances? How can we help? What questions keep you up at night, or spark your desire to create and enjoy a new future? Discussing these together, we can update your planning to safeguard your wealth and the lifestyle you choose.
Yours in Financial Security for LIFE!
Brian Weatherdon, MA, CFP, CLU, CPCA. 905-637-3500
627 Guelph Line, Burlington, Ont. L7R 3M7. 1-877-937-3500
Certified Financial Planner, Certified Retirement Coach
Author: A Lifetime Of Wealth — And How Not To Lose It (2013). Protecting Life, Loved Ones, and Future Dreams (2013). Your Business, Your Retirement: Halton Retirement Study (2015).
** This monthly letter touches on key strategies in Canadian and global investing and financial planning. This letter is not an offer to sell any kind of security, insurance, or program. Historical returns and risk measures are not a valid guide to future performance. Returns are from publicly available sources and research from a variety of firms including but not limited to Canada Life, CIBC, Dynamic, Mackenzie Financial, RBC / PH&N… Opinions in this letter belong solely to the author and no other body is responsible for the content expressed here. We value opportunity to coordinate with your legal and accounting advisers to further your financial goals in home and business. We are grateful always to receive your comments and questions.