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RRSP – When an RRSP is not enough

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February 24, 2014 , , , , ,

ted_financial_postRRSPs are simply one big tax game. The aim is to get at least the same (if not better) tax refund when you put money in, than you will be forced to pay when you ultimately withdraw from your RRSP or RRIF.

For those who make a high income – let’s say $300,000 in taxable income – RRSP contributions are great. Depending on the province, every dollar they contribute to RRSP’s effectively lowers their income by $1. This provides a lower tax bill of 39 to 50 cents.  As long as tax rates don’t change, you are guaranteed not to lose the RRSP game because at worst, you will have to pay the same rate when you withdraw funds from your RRSP or RRIF, as you rece22185731_sived when you made the contribution.

Therefore someone with a high taxable income should definitely contribute to their RRSP if at all possible.  The challenge is that they often have more money that they would like to shelter but the RRSP contribution limit doesn’t allow for it.

For most people, they can contribute 18% of their earned income. In the case of the $300,000 income earner, that would translate into $54,000, however the limit comes in to play for them at just $23,820 for 2013.

In order for this person to improve their retirement planning, they have several options:

1)   Maximize TFSA contributions.  For a couple, you can add $11,000 to your TFSAs this year.  In my estate planning work, especially when looking out 30+ years, we try and structure things so that TFSAs are the last pool of assets that are left in an estate – as they face no taxes (other than probate).  TFSAs will become almost as important as RRSPs for retirement planning.

2)   Make a portion of your taxable (non-registered) investments growth oriented, low income investments.  These funds will create low taxes along the way, but should grow nicely over a long period of time, and can fund retirement without having to worry about being taxed on withdrawals.  Examples of high growth, no dividend income companies might include: Adobe Systems, Priceline, Google, Constellation Software.

3)   Use insurance as a tax sheltered alternative.  If this person wanted to put $40,000 a year into their RRSP but is limited to under $24,000, one alternative option would be to put the other $16,000 into a life insurance policy on a parent or in-law. The ideal age for this type of insurance is 65 to 75. Assuming a parent is 30 years older than you, and passes away at age 90, then you will receive a non-taxable payment at age 60, just in time for your retirement. In many cases, the rate of return on this investment will be very good – 7%+ after tax equivalent – and the investment will help diversify your returns as the insurance is not correlated or tied to stock markets, real estate or bond markets . While some people feel that this is an inappropriate ‘investment,’ we have found that many parents are happy to help their children and ultimately their grandchildren in a way that costs them nothing other than a short health checkup.

4) Tax strategies such as flow through shares – which can come in two forms. Flow through shares are aimed at helping to lower the tax bill for those who have incomes in a top tax bracket. The first form is better known.  In this case you invest say $50,000 into a flow through, you can get significant tax savings through a variety of investment credits. The risk is that you must invest these funds in highly volatile companies that are usually doing mining exploration. The second form is less well known, and is more conservative. It essentially takes away the investment risk, leaves you with a tax savings that is potentially smaller, but is guaranteed from Day 1.

5)   Other strategies for high income business owners, incorporated professionals, and occasionally for key executives of a corporation, would include strategies called Individual Pension Plans (IPP) and/or Retirement Compensation Arrangements (RCA).  These strategies are too complicated to address in detail here, but serve as tools to provide additional pension income to those who are restricted by the RSP contribution limits currently in place.

While RRSP contribution limits do impose some retirement planning challenges for those with a high income, a variety of good tax planning exists to provide some alternatives that might be even better than simply having more money going into your RRSP.

Ted can be reached at tedr@tridelta.ca or by phone at 416-733-3292 x221 or 1-888-816-8927 x221

Reproduced from the National Post newspaper article 13th January 2014.

Leaving money to charity in your will? There is a better way

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March 23, 2013 , , ,

ted_financial_postI recently met with someone who wants to leave all of their money to two charities. They put this in place because they didn’t have close family members (or didn’t feel the family members needed the money), and they wanted to leave a real legacy to a couple of causes that were close to them.

Their situation was as follows: Age 85. $550,000 in savings (75% non-registered and TFSA). Pensions and RRIF withdrawals totaling $70,000 a year. Living in an upscale retirement residence. Drawing roughly $20,000 a year from savings.

While it seemed like his estate plan made sense, there are better ways to leave that legacy than through a will — ways that could grow the amount of giving by over $100,000.

Here are 3 problems with leaving money to charities in the will:

1. By leaving money to a registered charity you will receive a charitable tax credit of between 40% and 50%. The only issue is that you will only receive the tax credit on charitable giving of up to 75% of your current years’ income. For example, if you make $100,000, you could give up to $75,000 and receive the full tax credit. In your ‘final’ tax return, you will get a credit for up to 100% of your income.

The problem is if you have income of $80,000 in your final return, and leave $800,000 to charity, you will have foregone almost $360,000 of tax credits! If you die with a very large RIF, this may work because your RIF would be considered as income on your final tax return (if you don’t have a surviving spouse). Otherwise, it is a real missed opportunity.

2. Wills with very large charitable giving occasionally are contested by family members who feel that they should have received more. This can cause lots of delays, legal costs and heartache. All can be avoided by giving to the charities outside of the Will.

3. You are paying too much tax. In many cases, this money is getting taxed every year sitting in a non-registered investment account, never being spent. Finally it will go to the estate, and in some cases be hit with a probate fee as much as 1.5%, and then go to the charity.

The best way to avoid these problems is by some blend of giving annually and taking out a life insurance policy with the charity as beneficiary. By giving annually you will almost always be in a position to receive the full charitable tax credit (unless you give a very large amount).

You will also have significant flexibility in terms of how much to give, who to give to, and be able to change your mind any year you wish. The charity will also benefit today instead of having to wait for many years.

T2820027_saking out a life insurance policy is not as common, but is actually one of the best ways to leave a charitable legacy. Using an insurance policy with the charity as a beneficiary can be a quadruple benefit if you qualify. The first benefit is that if it is structured properly, the annual insurance premiums can be considered annual charitable giving, so that you get the tax benefit each year.

The second benefit is that the insurance policy bypasses the estate, and is paid directly to the charity. This avoids estate battles over the funds.

The third benefit is that the proceeds avoid probate because they don’t form part of the estate. In Ontario, this 1.5% fee can add up on a major charitable gift.

The fourth benefit is if you are in reasonable health for your age (even if you are 75 or 80 years old), the ‘rate of return’ on the insurance can be much higher than other options. This is because the money is tax sheltered and as a permanent life insurance policy, the actual rate of return (money put in vs. money that comes out) is often well over 7% per year.

There are several other good ways to leave funds to charities including community foundations, setting up a private foundation and donor advised funds. Every one of these options requires some personal planning to determine what makes the most sense for your situation.

In the case of the 85-year-old, by giving $30,000 a year to charity they are receiving the full tax credit every year. If he lives to age 97, he should still have an estate of about $200,000. If he is still alive at 97, he can stop giving to charity in order to ensure he has funds to cover another ten years. In his case, if we assume he lives to age 97, he will have given an extra $100,000 to the charities than if he simply left the money in his will, and he will have been able to see the impact of his giving in his lifetime.

Leaving significant money to charity can be of great value to you, the charity and society at large. However, if the plan is to simply leave it through your will, there are likely many other smarter ways to make a bigger impact with the same funds.

Written by Ted Rechtshaffen, President & CEO of TriDelta Financial.
Reproduced from the National Post newspaper article  23rd March 2013.

 

Four ways single seniors lose out

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October 30, 2012 , , , , , , , ,

Becoming single in old age could cost you tens of thousands of dollars through no fault of your own. The current tax and pension system in Canada is significantly tilted to benefit couples over singles once you are age 65 or more.

I don’t think it is an intentionally evil plan of the Canada Revenue Agency and other government agencies, but something has to change. Given the fact that so many more single seniors are female, this unfairness is almost an added tax on women.

StatsCan recently came out with census data that said that among the population aged 65 and over, 56% lived as part of a couple. This 56% of couples was split out as 72% of men, and just 44% of women. Among those aged 85 and over, 46% of men and just 10% of women lived as part of a couple. This gap is made up of two factors. Women live longer than men, and men tend to marry younger women.

Here are four ways that single seniors lose out:

  • There is no one to split income with. Since the rules changed to allow for income splitting of almost all income for those aged 65 or older, it has meaningfully lowered tax rates for some. For example, in Ontario, if one spouse has an income of $90,000 and the other has an income of $10,000, their tax bill would be $22,571. If instead, their income was $50,000 each their tax bill would only be $17,774, a pure tax savings of $4,797 per year. If you are single, you are stuck with the higher tax bill.
  • Let’s say the 65-year-old couple both make $50,000, and qualify for full Canada Pension Plan. In 2012, that would be a total of $986.67 per month at age 65 for both of them or $23,680 annually for both combined. If one passes away, the government doesn’t pay out more than the maximum for CPP to the surviving spouse. They will top up someone’s CPP if it is below the maximum, but in this case, they simply lose out almost $12,000 a year. They would receive a one-time death benefit of a maximum of $2,500, but that is all.
  • RSP/RIF gets folded into one account. This becomes important as you get older and a larger amount of money is withdrawn by a single person each year — and taxed on income. Let’s say a husband and wife each have $400,000 in their RIF and they are age 75. They are forced to withdraw $31,400 each or 7.85%. If the husband passes away, the two accounts get combined, and now his wife is 76, with a RIF of maybe $775,000. At that amount, she would have a minimum withdrawal of $61,923. As in the first example, her tax bill will be much larger when she was 76, than the combined tax bill the year before, even though they have essentially the same assets, and roughly the same income is withdrawn.
  • Old Age Security. The married couple with $50,000 of income each, both qualify for full Old Age Security — which is now $540.12 a month or $12,962 a year combined. If the husband passes away, you lose his OAS, about $6,500. On top of that, in the example in #3, the wife now has a minimum RIF income of $61,923, and combined with CPP and any other income, she is now getting OAS clawed back.

The clawback starts at $69,562, and the OAS declines by 15¢ for every $1 of income beyond $69,562. If we assume that the widow now has an income of $80,000, her OAS will be cut to $414.50 a month or another $1,500 annual hit simply because she is now single. In total, almost $8,000 of Old Age Security has now disappeared. As you can see, a couple’s net after-tax income can drop as much as $25,000 after one becomes single.

On the other side, there is no question that expenses will decline being one person instead of two, but the expenses don’t drop in half. We usually see a decline of about 15% to 30%, because items like housing and utilities usually don’t change much, and many other expenses only see small declines.

In one analysis our company did comparing the ultimate estate size of a couple who both pass away at age 90, as compared to one where one of them passes away at age 70 and the other lives to 90, the estate size was over $500,000 larger when both lived to age 90 – even with higher expenses.

So the question becomes, what can you do about this?
I have three suggestions:

  • Write a letter to your MP along with this article, and demand that the tax system be made more fair for single seniors. You may also want to send a letter to Status of Women Minister Rona Ambrose, as this issue clearly affects women more than men.
  • Look at having permanent life insurance on both members of a couple to compensate for the gaps. Many people have life insurance that they drop after a certain age. The life insurance option certainly isn’t a necessity, but can be a solution that provides a better return on investment than many alternatives and covers off this gap well. If you have sufficient wealth that you will be leaving a meaningful estate anyway, this usually will grow the overall estate value as compared to not having the insurance — and not hurt your standard of living in any way.
  • Consider a common law relationship for tax purposes. I am only half joking. If two single seniors get together and write a pre-nuptial agreement to protect assets in the case of a separation or death, you can both benefit from the tax savings.

Ultimately, the status quo is simply unfair to single seniors, and that needs to change.

Ted Rechtshaffen is a regular contributor to the National Post, see http://business.financialpost.com/author/fptedrechtshaffen/

If you have questions or want to discuss your personal situation, please call Ted at 1-888-816-8927 x221 or email him at tedr@tridelta.ca.

Insurance – only two thirds of Canadians have life insurance

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October 26, 2012 , , ,

Most people have insurance for their motor vehicle and home, but many fail to cover their most valuable assets, their life and potential loss of employment income.

This statistic is disturbing, given the risk that those without insurance face. Equally important is that life insurance owners occasionally monitor what they own and whether it still fits. We must review it against our original goals and update this as our life circumstances evolve.

Despite the typical Canadians’ risk averse nature, many are leaving themselves open to unnecessary financial risk and worry, a TD conducted poll suggests.

This Risky Business Poll revealed that the majority of Canadians claim to be cautious and risk-avoiders (55%), with only 8% saying they are risk-takers. However, the same poll finds that 3-in-10 Canadians don’t have life insurance and 6-in-10 don’t have critical illness insurance.

Canadians are however in better shape on this than Americans. In the US ownership of individual life insurance has hit a 50-year low, according to a new LIMRA study. The Trends in Life Insurance Ownership study, conducted every six years by LIMRA, found that only 44 percent of U.S. households have individual life insurance.

Of the 31% of Canadians who do not have life insurance, 40% say they don’t think it’s necessary, 23% admit they probably should have it and another 23% feel they can’t afford it. Additionally, one-third of Canadians worry they aren’t adequately protected by their insurance policies.

When asked what life events have changed their appetite towards risk, the top answer from Canadians was having children (48%), followed by buying a house (23%) and getting married (18%).

Reference: Results for the TD Risky Business Poll were collected through an Environics Research Group telephone omnibus, conducted October 27 – November 11. A total of 1,500 completed surveys were collected with Canadian adults.

At TriDelta we pride ourselves on our expertise and servicing of insurance. Please contact us to discuss your needs even if it’s simply to review your existing policies and how they fit into your current lifestyle.

By Anton Tucker – Vice President.

If you have questions or want to discuss your personal situation, please call Anton at 905-901-3429 or email him at anton@tridelta.ca

The Benefits of Working with a Life Insurance Broker

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July 28, 2011 , ,

There are many ways a Life Insurance broker can add value in helping to determine your insurance needs and finding the right product for you.  One of the main benefits of working with a broker rather than an agent from one specific company is that a broker will examine the market to find the best overall solution to meet your needs.  This may include searching the market for desirable product features and including policies from different insurers, usually resulting in cost savings.

Jonathan Weinstein, one of our Insurance Advisors at TriDelta Financial, gives a good example of how one can benefit by working with a life insurance broker:

“I worked on a solution for a client recently – the client was a 35 year old female who was looking for permanent life insurance and critical illness (CI) insurance (CI is a plan that pays a tax free lump sum living benefit in the event of certain catastrophic health issues – e.g. heart attack, stroke).  She was interested in paying off her premiums during her working years with coverage in force for life, so I looked into some 20-pay plans for her (i.e. policies with a level premium cost for a 20 year period at which time no further payments are required and the policyholder remains covered).  Based on a needs analysis I determined she required $300,000 in life insurance and $100,000 in Critical Illness insurance.

 

For the life policy I found a 20-pay Universal Life plan with a cost of $160/month.  For the Critical Illness policy I looked at 20-pay plans that included a Return of Premium (ROP) on Death rider.  This is a policy that is paid up after 20 years, with CI protection for life, and with this rider if a claim is never made the insurance company will return all premiums paid to the insured’s estate (after 20 years the insurer will also return all premiums paid upon surrender of the policy; if surrender is exercised coverage is no longer in force).  The total monthly premium cost for this plan was $128, or about $30,000 over 20 years (so in essence, in addition to the CI protection, given that all premiums will be returned upon death with the ROP feature, the client was purchasing an additional $30,000 in Life Insurance).  The total monthly premiums for the two policies were $288.

I then however, looked at one company’s CI plan which included a great feature – rather than choosing the ROP rider, this insurer offers a life insurance rider – in the event of death with no CI claim having been made, they will pay the full face value of the policy (in this case $100,000) rather than just returning the premiums ($30,000 as noted above).  So I calculated the premiums by choosing this rider and reducing the Universal Life Insurance plan to $230,000 from $300,000 (as the new CI plan chosen was providing an additional $70,000 in life insurance).

The resulting total monthly premium costs were $273!  The client is saving $180/year – $3,600 over the 20 year payment period and is getting the same total coverage (with the only caveat being she needs to keep both policies in force).  The client was happy with this solution and appreciated the cost savings by structuring it this way.

As a broker I was able to mix and match products from different companies and find unique product features to provide a solution that met the client’s needs and saved her money.  If you would like an assessment of your insurance needs to see if you are properly set up or would like to find out about different alternatives please contact us here at TriDelta.”

 

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