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Here’s what you and your trustee of your will need to know will happen to your RRSP when you die.

On the date of your death, your RRSP would have be considered redeemed – cashed out.  There will be no tax withholding (NOT SAME as no tax payable)  and the funds will be given to your beneficiaries on file according to the percentages designated.  Therefore it is important that your beneficiaries are up-to-date.  If there is no beneficiary designated then the money goes to your estate and distributed according to your will or regulations as it may apply.

As noted this does not mean that you don’t have tax payable issue.  Your estate will be liable to pay what ever tax redeeming your whole RRSP all at once unless your have designated a spouse or disabled dependent as your beneficiary.   Since this is considered a lump-sum redemption of your RRSP, your income for the year of your death has now just increased by the amount of your RRSP.  If you have a small RRSP, then it may not have a great deal of impact, but if you have saved more then it may push you to higher tax brackets and your estate will have a higher tax bill.

Also note that it is your estate that will be responsible for the tax bill and not the beneficiaries.  There is no tax withholding for disbursement on death and beneficiaries will receive full proceeds, leaving your estate to cover the tax payment.   For example if you have $100,000 in your RSP and you have designated each of your child as 50% beneficiaries, they each will receive $50,000 and your estate is liable for for $25,000 in tax payable to CRA (assuming your average tax rate is at 25% and you have no other income).  That money has to come from some where else in your estate.

This difference in tax treatment is the reason why I recommend that clients always designate their spouse/disabled dependent as the beneficiary, unless there are very good reason not to.  And if you are not going to designate your spouse/disabled dependent, then designate your estate as the beneficiary so that it can pay the taxes out of the proceeds before distributing the funds to your heirs unless you have funds set aside for any tax liabilities.

If you have a spouse/disabled dependent and have designated them as the beneficiary, then they can perform a tax neutral roll over of the assets that was in your RRSP to their own RRSP/RDSP.  They will have to report it as income (line 129) but they will receive an equal off-setting amount on line 232 leading to a tax neutral situation.   You can also achieve the same result if no beneficiary is listed and the spouse and the estate representative can elect to roll over the RRSP to the surviving spouse’ s RSP.  The process is longer but result will be the same.  Of course if there are named beneficiary, this will not be an option and the funds will be paid to the beneficiary.

Nota Bene: From the time death and when RRSP are transfered into the right beneficiary’s account or redeemed,  there may be a delay of several weeks or months or years.  Income earned after the date of  death is taxable in the hand of the beneficiary.

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As the ‘baby boomers’ rapidly approach the magical age of 65, more and more questions are being asked about retirement income.  For most people their retirement income will be made up a combination of government programs and pension plans.  For those who have worked most of their lives, the income stream is made up of a combination of CPP, pension, RRSP and depending on income level from all these OAS (old age security).

For those who haven’t worked or haven’t worked much the situation is a bit different.  You may not have worked much because you have been a stay-at-home mom or situation in life has prevented you from working all of your life; regardless the reason here’s options that’s available to you.

1. CPP – As a paid into program, how much you receive will depend on how much you contributed to the program.  In most cases if you have worked a little bit you will be entitled to some CPP (Canada Pension Plan). Normally CPP sends out estimates before retirement age, so please do review their documents to ensure that they are accurate.  For those who worked but may have taken a break in working to raise your children you maybe able to have up to 7 years credited to your work time and thus increasing what your CPP payments.  See Child-Rearing Provision webpage for more details.  You will have to fill out some forms to have this added.

If you have not received any estimates as you approach 65 (actually you can do this at any time and if you are moving out of the Canada to work, I suggest you get this before you leave) you can request a copy of your contribution statement on-line, via mail.

2. OAS (Old Age Security) Pension – is a program to provide income supplement is available to anyone who has lived in Canada.  Because it is part of the general revenue, no contribution is required.  However, there’s a residency proviso.  The program is the largest pension program offered by the government and you may even be entitled to the program even if you don’t live in Canada (US residents!)  In this post will assume that you currently lives in Canada.  To qualify for the program you must be:

  • 65 and over
  • Canadian Citizen or legal resident
  • lived for more than 10 years in Canada after age of 18

You can apply after 64, but the government may auto enroll you.

How much you will receive will depend on how long you have lived in Canada.  If you have lived in Canada for 40 years after the age of 18 you will be entitled to the maximum amount as long as claw-back does not occur.  The current maximums can be found at Service Canada website.   It’ is $6618.48 per year, hardly enough to live on.

OAS Claw Back – OAS is available to everyone, but for those who have pension plans and other retirement income stream there’s a claw back clause for those who have sufficient private income stream that it is deemed that they don’t need government support.  While I have heard a lot of clients complaints about claw back from client, it is important to recognize that the claw back doesn’t happen until you have more than (in 2013) $70,954 in private retirement income.  I think what irks people is that they give it to you and then take it away.   To minimize OAS claw back, it is important to income split between spouses especially if one is receiving a good pension and one is not, but that’s another topic and post entirely.

GIS (Guaranteed Income Supplement) – Because the government recognizes  that $6618.48 isn’t enough to retire on, for those Canadians who does not have any other additional source of income, they have a separate program called GIS for those who makes less than $16, 728 (2013).  You can be entitled to this program at age 60 if your spouse is 65 and collecting OAS and GIS.  For single people the eligibility starts at age 65 when you are eligible for OAS.  You will have to apply for this program. However, once you applied, you don’t have to re-apply but will be required to file taxes every year.  This program for singles has maximum pay out of $8974.32.  The actual amount you will receive will depend on how much income from all sources you have.  Check out this webpage (scroll down half way) to get the table or download the pdf.

So the government will essentially ensure you have about $16,000 of income to live on.  While it’s better than nothing, it isn’t designed for you to live well.  If you live in a low housing cost area, this amount might be barely sufficient to offer a none destitute life.

For those of you who are in need of all of these program, I would highly recommend setting up a meeting with your local Service Canada representative who can walk you through all of the programs and help you apply for them before you turn 65 so that your entitled payments will start once you turn 65.

As always, please let me know if this post is helpful and if there’s other topics you would like to have covered.

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Finding a Money Guru

I been reading Carl Richards blog for a while now.  I don’t agree with everything he says, but “Your Misguided Search for a Money Guru” hit the nail on the head.

I agree with Mr Richards that while the need to find someone to help us make sense of the world is natural, we need to be aware that there are no such people as “money gurus.”  The foundation to good money management is a plan, some common sense and perhaps someone who can remind us of our plans and common sense when we need it.  That’s what I see my role as an advisor as.  I’m there to add a dose of common sense and maybe hold your hand to do what needs to be done, things that are hard to do like deny yourself current pleasures, or take the long view etc.

So how do you deal with it?  I always found it comforting to recite a modified serenity prayer:

I cannot control the future return of the stock market 

What I can control is how much money I save

What I have is the the wisdom to know the difference between what I can and can not control.

In the end all you can do is take a deep breath and do your best.  I know it is not as satisfying as me telling you to buy stock A and you’ll make tons of money but it’ll be a lot more truthful.

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I just read another article about returns.  I don’t understand why everyone out there is constantly summarizing  different ways to calculate returns when there is only one way that matters to you as an investor.  While it is important to understand how other returns are calculated the average investor really only cares about their own returns.

To summarize, there are basically 3 ways to calculate returns:

  1. Regular rates of return – this should be used for quick summaries usually. It is computed as (End Value – Total Contributions) / Total Contributions.  Can be annualized to calculate actual returns if no additional contribution is made after the initial contribution.
  2. Time Weighted Returns – Used by mutual fund companies to remove the effects of  individual investors moving their money in and out.  Calculates the ‘pure’ performance benefit that advisors bring.
  3. Dollar Weighted Returns (you should use this one!) – Internal rate of return (IRR)  calculates returns taking out the effect of when contributions were made.

This info sheet (pdf) has the clearest explanation I have found  of how these calculations can provide very different results. And it doesn’t require wading through overwhelming math like most explanations.

Because IRR is the only way to take out the effect of when funds arrive in the account, it is the preferred way to calculate your individual returns. This is especially true for those of us who use dollar cost average.  Since the only way to compute the IRR is to track when you put the money in, you will need a spreadsheet to help you and you will need to input numbers often.  I’m not too concerned about getting the returns down to the day so I use my quarterly statements to calculate how much I contributed for the quarter and annualize that value (note in Excel you need to calculate -IRR not IRR or you will be getting the negative of your return).

Since I’m tracking my returns quarterly, I also use it to tell me how much my portfolio should be worth if I were getting the return I want on my portfolio  (you just do compounding on the contribution and add them up) this way I can see in one shot if I’m meeting my expected return or not and if not, how far am I off.  I use this to adjust how much I need to top up my contribution to my investments.

In the end it is the final dollar figure that I really care about.  All of the talk about math is inconsequential.

Comment if anyone is really interested in how the excel spreadsheet works.

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I was just reading this article today about how to turn your rsp into your mortgage.  It’s not the first time I have heard about this, but the article made it seem it is so very easy that I thought I should check the numbers out.  My calculations show that if your investment rate is very low (2% below the standard mortgage rates) using your RSP for your mortgage would make sense but otherwise you are not better off using your RSP for your mortgage.

Now the article started off saying that you can guarantee yourself 5% return which I think is completely wrong.  While you will be making payments as if you are paying back a mortgage at 5%, your investment will still only be reinvested at the current market rate.  Therefore, if the market is offering 3% you will still only be reinvesting your mortgage payments into your RSP at 3%.  I suspected that the numbers cited in the article seemed better because no one is taking into consideration that the difference in payments between conventional mortgage at 4% and your RSP mortgage at 5% should be reinvested.  What if you did that?  As always, please check my math in case I missed something.

First assumptions

  1. Mortgage amount of $100,000 (I know who has mortgage of $100,000? Just for simplicity sake)
  2. Mortgage insurance premium of 1.76% as if you had 20% down payment.  Therefore standard mortgage amount would be only $100,000 but going w/ what I’m going to call RSP mortgage will have principle of $101,767
  3. Standard mortgage rate of 4.19% – current rate sale no other discounts, standard you should be able to get 1.5% on average off of posted rates.
  4. RSP mortgage rate of 5.19% – current posted 5 year rate no discount
  5. Reinvestment average return of 4%

This is the process of my calculation and results:

  1. I calculated what the monthly mtg payment would be for either convention mortgage or RSP mortgage amortized over 25 years  – $536/month for conventional mtg (principle = $100,000 rate = 4.19%) and $602/mon for RSP mtg (principle = $101,767 rate =5.19%). I will assume that $66/mon difference is re-invested
  2. I calculated what my normal RSP (not used for mtg) future value will be at the end of 25 years if I reinvested the $66/mon difference in mortgage payments. (PV = -100,000, PMT = -66, rate = 4%/12, N = 300 (25*12)) = $305,309
  3. I then calculated what my RSP would be is it were to get the regular payments (PV = $0, PMT = -602, rate = 4%/12, N = 300) = $309,989

At this stage it seems that using my RSP for mortgage is marginally better, but if you consider the extra legal cost and annual maintenance fee ($250/yr over 25 years if reinvested at 4% is $10,411) then a conventional mortgage now looks slightly better.

I ran the numbers assuming the reinvestment rate is 3% and in this case the RSP mortgage is $10K better. But if the reinvestment rate is 5% then conventional mortgage options at 40K better.  Therefore it would seem only if reinvestment rate is quite low then would it make finacial sense to do it.

Now if you don’t reinvest the difference between the two types of mortgage then the RSP mortgage will seem better even if the reinvestment rate is at 5%.  This makes sense since you are simply making yourself pay more mortage through a larger contribution back into your RSP account.  The key seems to be making you reinvest the difference in the mortgage payments – it’s a forced saving plan.

Let me know if I missed something logically and think before you act.

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I walked past an ATM machine the other day and noticed that someone did not take their receipt out.  Out of habit, I took it out to threw it away.  Of course, I looked at the information on it.  The person had just used this non-bank ATM to take out $20.00. His (assuming it is a he) balance at that moment was $1.10.  He got charged a non-bank ATM fee of $1.50 and of course his bank will charge him another $1.50 so now he is in overdraft, which will charge him a fee of $5.00. So for $20.00 he will pay $8.00 in fees.  That’s a negative 40% return.  If he works minimum wage, he will have to work an entire hour for the pleasure and convenience of using this ATM machine at the grocery store.  I wonder if he thinks it is worth it.

So why do people do this?  Why do people sabotage themselves like this financially?  At some point you can’t use the argument that you didn’t know since there have been more than sufficient amounts of education that’s been in the public about not using non-bank ATMs.  Yet there are more and more of them.  So why did he take the money out?  Could he not waited until he was in his neighborhood to take the money from his bank account?  Can’t he just use debit to pay for the item?

One of the keys ways of avoiding getting into debt is to not get into debt in the first place.  This means that the mind has to be engaged and not on auto pilot.

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Sometimes a new thought that’s been spinning around you mind seems to spiral outwards and you suddenly realize that there are others who have been thinking about too. While it makes you feel less lonely, it also makes you feel not so original.  Well I came across this article about living with less recently and was intrigued.  While I’ll never want to live with just 100 items I think we can all live with much less.  I especially like the discussions about experience vs things.

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