2011 February | Nelmes Financial | Conversations about Money

Archive for February, 2011

Are RRSP’s Creditor Protected? Date posted February 19th, 2011

It wasn’t too long ago that pensions, some locked in retirement accounts and insurance products were the only protected option for Canadian investors in the event of bankruptcy. For the individual investor only the insurance options were available, as the rest would need to be set up by their employer (if they have one). However as of July 2008, Bill C-12, an amendment to the Bankruptcy and Insolvency Act changed this. This change provides the same protection for RRSP’s, Spousal RRSP’s, RRIF’s and some other registered accounts.

Hopefully no one invests with the intention of going bankrupt, but managing risk is about handling what we did not intend. What this protection provides is a planning opportunity for those who want to protect themselves from this risk. This could be a business person who wants to protect his retirement savings from business risk or a family hit by the financial devastation that can follow illness or injury.

The money does need to be place into a protected account a year before, and before you know of the pending issue. The main purpose of this change as I understand it was to extend the same benefits of retirement savings offered to employees with a pension to those who do not have access to a pension. As always before counting on this protection I would recommend discussing your unique financial situation with a professional as the smallest detail can make a big difference.

A last point would be to consult with a professional before accessing your money if you find yourself struggling financially. Too often I see people cash out there RRSP’s and other protected investments trying to turn things around, when they could have saved those assets and used them to jump start a new financial life.

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RRSP’s White Rock, South Surrey Date posted February 18th, 2011

With life as busy as it has become, if you need to make a RRSP contribution or need a RRSP loan before this year’s deadline, we are happy to help. We offer a mobile service, we are happy to come to your office, home or local coffee shop. No need to fight traffic and wait in line to see your advisor or planner. We broker for many investment and loan providers in the convenience of your preferred location.

If you prefer we can meet you in our office as well.

We have many clients in the South Surrey, White Rock area and are happy to provide reference.

How much can I contribute to my RRSP? Date posted February 18th, 2011

Instead of calculating how much RRSP (Registered Retirement Savings Plan) room you have and risk getting it wrong, I recommend looking on your “Notice of Assessment” which is sent out each year after you file your tax return. On this form you will find both your TFSA (Tax Free Savings Account) contribution limit as well as your RRSP contribution limit.

If you contribute to an RRSP plan or Pension Plan at work will also need to be considered when determining how much you can contribute. You are also allowed to over contribute up to $2000. This is allowed without penalty, however you do not get to deduct the over contribution from your income. I would use this as a safety net and do not usually recommed intentionally using this room.

Your RRSP contribution room is made up of 18% of your taxable income from the previous year to a maximum in 2010 of $22,000, added to the unused room from previous years as far back as 1991.

The RRSP contribution limit has worked as a great annual savings target for many. It is very rare to see someone contribute the maximum to their RRSP each year and not have a sizable retirement savings.

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Repaying RRSP Home Buyers Plan Date posted February 17th, 2011

After borrowing from an RRSP (Registered Retirement Savings Plan) with either the HBP (Home Buyers Plan) or LLLP (Life Long Learning Plan), there comes a time when you need to either put the money back into the plan or pay tax on the money. I do believe saving for the future is good, however putting the money back is not always the best option, here is a common example of when back these plans do not make sense.

Example. A young couple wants to buy a house; they decided to use the Home Buyers plan for part of their down payment. A few years later it is time to start putting the money back into their RRSP. Often they have had kids by this time and one of them may be staying at home with the kids. If staying at home they likely have no income, in this case I recommend not contributing to the RRSP for this person, but instead make a contribution in the spouses name who is working.

What ends up happening is the spouse not earning any money will have to pay tax on the RRSP payment that was owed; often this is nothing or small. The RRSP room is lost. However the spouse who has an income makes a RRSP contribution and since they are in a higher tax bracket they receive a bigger tax break. As a result the same money put into an RRSP gets a bigger tax benefit.

I do believe in saving, however just because there is tax owed if the funds are not returned does not mean it is the best place for you to put your money. A little planning here can make a big difference. As always I recommend talking to a professional. If you have any questions and are in BC I am happy to help.

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Should I take money out of my RRSP? Date posted February 16th, 2011

Taking money out of your RRSP (Registered Retirement Savings Account) can cause create a tax bill and loss of that RRSP room. So it is important to consider carefully before taking this step, however if done right it can be beneficial. RRSP is a tax deferral tool, eventually you will have to pay tax on the money, so if it makes sense to pay the tax now it can be a big win. Some of the reasons you may want to take money out or your RRSP and pay the tax now are;

Home buyer plan, if it for a down payment on a home you may qualify to take the money from your RRSP, you will need to pay it back, however this is a way to get the funds without the tax issues.
Life long learning Plan, if the funds are for your schooling this may offer an option to borrow the money without the negative tax implications. You will need to repay the funds once you are finished school.
Low income year. If you have a low income year you may wish to take the funds out of the RRSP. This should be carefully consider as you give up that RRSP room, tax deferred growth of the funds and could owe taxes on the money. With all the drawbacks it can often make sense and leave you with more money long term.
Just need the money. RRSP’s are not ideal for short term saving. If you choose to take money from your RRSP you may face fees, loss of retirement savings, and a tax bill. With all this if you need the money and the RRSP is the best place to get it then it may be necessary. To prevent this we should all have savings to draw from when unexpected expenses strike.
Preparing for Retirement. Once you hit retirement you not only have income tax, but pension claw backs. For many moving from the RRSP.

When looking at making a withdrawal for your RRSP it is important to consider the negatives before making your decision, and discussing with a professional that understands your situation and the implications of the withdrawal is the best way to ensure you make the right choice.

money out of the RRSP before retirement can make sense. This is usually the case when your income will be higher in retirement, or you have an offsetting deduction in the years you make withdrawals.

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RRSP Beneficiary Designation Date posted February 15th, 2011

RRSP’s (Registered Retirement savings Plan’s) and all registered accounts (RIF, LRSP and other registered accounts) offer the ability to designate a beneficiary, seems simple enough, however there is a list of common and sometimes very expensive mistakes. Below I have listed a few of the common errors. It is simple to fix the beneficiary now, however your estate may or may not be able to correct it later.

No beneficiary designated – This means the RRSP goes to the estate, not to a beneficiary. This eliminates the tax benefits of leaving the accounts to your spouse, and also the creditor protection these accounts often have. It also means it can be contested with the will and in some cases be dealt with by the guardian trustee or a list of other negative issues.

Wrong beneficiary – A common example of this is in a divorce, where the beneficiary is not updated to the current spouse. This not only leaves the account to the wrong person, it also can leave the tax bill.

Out dated beneficiary – Often after marriage updating the beneficiary on an RRSP is not top of mind, but updating this is simple, if something happens correcting it later it can be a real hassle. I have heard of stories of the RRSP account accidently going to the ex wife and the tax bill paid by the current. Have yet to see this, and with good planning hopefully I never will.

Not naming a spouse – With RRSP’s a disabled dependant and the spouse can receive tax preferred treatment. The RRSP can roll over into the spouses RRSP with no tax issues on passing if they are named as the beneficiary. If anyone else is named the beneficiary the RRSP is taxed. It is normal for many people to want to put their children as the beneficiary. It is important to consider the tax benefits of leaving it to the spouse before choosing anyone else to be the beneficiary.

Beneficiaries can be on your RRSP, your work RRSP, pensions and many other accounts. I recommend that you review all your finances at least once a year, and that point check to ensure these details are all correct. It can make a big difference and save lots of money and stress later.

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RRSP’s and Education Date posted February 11th, 2011

The Life Long Learning plan can be a great option, although I rarely see a fit for it. The Life Long Learning Plan allows you to borrow money from your RRSP (Registered Retirement Savings Plan) without the tax consequences that you incur when withdrawing the funds. Below I have listed the common benefits and negatives to make it assist anyone who is considering the LLP.

The benefits

– You can borrow from your RRSP to fund your schooling (College, university, trade school).

– No need to pay back the funds until after you finish school.

The down side

– You do need to pay back the money of face tax issues

– If you are not working your income may be low enough paying the tax makes more sense to get the money.

– The money does not earn interest while you are using it.

– There may be fees involved in accessing the money.

If you are not working while going to school, often it is a low enough income year that taking the money out of your RRSP can make more sense, and if you are working it is usually possible to pay for school out of your existing income. When it does make sense it works great and then I would recommend talking to a professional planner and visiting the Canadian Government website for the current details as they can change over time.

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RRSPs and Buying a Home Date posted February 10th, 2011

Using your RRSP’s for a down payment on your first home is common, and with the home buyers plan you can borrow money from your RRSP (Registered Retirement Savings Plan) account without the tax penalty usually associated with accessing the funds in your RRSP. So does borrowing from your RRSP make sense?

Like so many financial choices it depends on what you want to accomplish and your unique situation. Considering both the benefits and negatives of using this program is likely the best way to see if it makes sense for you.

The benefit is simple.

- if you have money in your RRSP’s it allows you to use this towards your down payment, without having to pay tax on the money withdrawn.

- If you are in a high enough tax brackets, you can contribute to an RRSP and use the contribution as well as the tax return towards your new home, creating an even bigger down payment.

- Larger down payment can save you CHMC insurance fees.

- Larger down payment can reduce the monthly mortgage payment.

- Larger down payment allows you to qualify for a more expensive place

So why would you not want to borrow from your RRSP?

- When you borrow you do not get the growth in your investments you otherwise would.

- You risk putting off the tax issue until a later time if you do not make the repayments, and the repayments will be due once you have a mortgage, making repayment harder.

- You lose the diversification of investing in both your RRSP and I a home.

- RRSP’s are creditor protected, your home is not.

- Possible fees involved in taking the money out of the RRSP account. These vary depending on how you invest and with whom.

- RRSP’s are more liquid. If something unexpected happens you can use the RRSP’s if need be, to get money out of the home you may need to remortgage or sell, both expensive options.

I often recommend clients use the Home buyers plan. Many people pay CMHC fees as they don’t have a large enough down payment to get past these fees. In many cases we use a contribution into an RRSP and or Spousal RRSP. By including the tax refund and using money already saved for the down payment, this creates a much larger down payment. Other times an existing RRSP is the down payment, allowing the purchase of a home to happen sooner. This can save money that would have been wasted on rent or just make for a better lifestyle.

Home buyers plan is a great option, with many benefits, draw backs and restrictions. When planning I believe that discussing your situation with a professional advisor or planner who you trust will help you make a quality and informed decision. The details of the home buyers plan do change from time to time, so I would also recommend looking on the government of Canada website for current information before using this program.

With housing cost in Greater Vancouver as high as they are, often any detail that can help first time home buyers getting into the market can make a big difference.

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Easy RRSP Solution in Surrey Date posted February 9th, 2011

Nelmes Financial was founded in Surrey and we have kept our main office in Surrey. We are always happy to meet with clients at the office; however we also offer a much more popular mobile solution. We have the majority of our appointments at locations more convenient for our clients, often their office, home or a local coffee shop. So for your RRSP (Registered Retirement savings Plans) needs this year consider having us come to you. No lining up, no driving long drive to an office, just a simple and convenient solution. We can also offer RRSP loans, often with instant approval. We work hard to ensure our solutions and business fit your life.

Simple RRSP Solution in Langley Date posted February 9th, 2011

We offer a convenient and local solution for your RRSP (Registered Retirement Savings Plan). We have an office like most; however we also offer a much more popular mobile solution. We are happy to meet you at your home, your office or a local coffee shop that is convenient for you. So for your RRSP and RRSP loan needs this RRSP season please give us a call as we are always happy to help. No need to take time off work, away from the business or wait in line.