October 2014 Questions & Answers


D Wrote:  I'm in Massachusetts, USA. Not sure if you are familiar with the 401(k) retirement plans we have here but I have the option of contributing with pre-tax dollars (Traditional 401(k)) or post-tax dollars (Roth 401(k)). My employer match is given to me pre-tax regardless of my personal choice. I am 42, single and started saving to just the post-tax Roth option a couple of years ago instead of continuing with the pre-tax Traditional contributions I've been making for my working life up until then. That pre-tax Traditional money will remain as it is and I'll continue to rebalance it as needed. My thinking is that taxes aren't going to go down. My gross income is higher for income tax purposes now so I pay more income taxes now but I'll be able to withdraw my money without taxes being assessed when I retire. Do you have similar options in CA? Either way, do you have any insight that you can share? Thanks for your input. I have almost all of your shows stored on my DVR and I watch one or two a week. Still love them. Also, I'm able to listen to your radio show a couple of days later on TuneIn. Love your show and I have a list of books and now poems to read. 

Gail Says:  While you may not think your tax rates will go down, in all likelihood you will be taking less income in retirement than you needed while you were working. Most pension system base their payouts on 50-70% of your working income. So if you were making (gross) $50,000 a year, most pension system would pay out $25,000 - 35,000 in pension income. If you're going to assume the same payouts, then you will most certainly pay less in tax and the tradition 401(k) would make sense. If, however, you think that you will need more income -- I hope you're saving like a beast -- then the Roth will work in your favour. Of course, you could do a combination of the two, so that later you could take a small "taxable" income from your 401(k) on which you'd pay tax, but not much if you kept the income to the most basic level, and then supplement with the Roth for additional income you might need. If you are paying a whack of taxes now, it might well be worth your while to participate in the 401(k) if that reduces your current taxes. You can then use the "tax savings" to boost your Roth contribution.


C Wrote:  My husband and I have been very good with our money and have investments set aside in RSP’s, TFSA’s, and RESP’s, etc. We intend to use our RSP’s for retirement only and each year we max out on our contribution limits. An investor told us that at some point we should be careful not to have too much in RSP’s as this might cause us problems later in life. When is too much a problem, and what will be the problem, especially when I love the tax savings that I am seeing today?

Gail Says:  Having "too much" in your RRSP would be a great problem, wouldn't it? Remember, it is the amount you tax out each year that affects the taxes you have to pay (unless you die and then the whole thing becomes taxable if it isn't left to a spouse). The question then becomes, how much do you need to pull out a reasonable income? And how much in tax savings are you deriving today (and putting to work elsewhere) that will offset the taxes you have to pay later.

Let's say, for example, you pay taxes at the 33% rate. If you put $10,000 in an RRSP, not only will that $10,000 grow on a tax deferred basis, but you'll reduce your taxes owed by $3,333. You could then take that money and fund your TFSA, where it will grow tax-free. One $10,000 deposit gets you $13,333 in savings and tax deferred growth. Later when it comes time to take the money out of the RRSP, you could put just enough out of the RRSP (or RRIF if you've matured your RRSP) to keep you in the bottom tax bracket and supplement your retirement income with money from your TFSA which you can take out tax free.

People often underestimate the growth of RRSP assets. Put $1,000 a year into an RRSP at an average rate of return of 5% (not interest, rate of return) for 25 years, and that $25,000 in deposits will grow to $50,113. Since we do not have a tax rate of 50% in Canada, you are ahead of the game. If you do it for 35 years, your $35,000 deposit grows to almost $95,000. Worth it, right?


It's become very popular to crap all over RRSP’s and I think it's a shame. They are a good savings vehicle. And having money beats not having money for the future, regardless of the taxes, don't you think?


M Wrote:  Could please address the idea of a reverse mortgage? It seems to me that for most people it would be better to sell a home and downsize, move to where others can help etc. Then use the income from the sell of the house to help with living expenses. A reverse mortgage ties people to their home even if that is not practical anymore, messes up inheritances if you want to leave one...what is your opinion of reverse mortgages?

Gail Says:  I am not a fan of reverse mortgages for all the reasons you just described.


J Wrote:  A few months ago you talked about why it is not a good idea to have mortgage insurance and I tried to Google it, but it will not open. Could you send me the article?

Gail Says:  Mortgage life insurance: If you have a mortgage you’ve no doubt been offered mortgage life insurance by your lender. Don’t buy it. It’s expensive. It’s single-purpose. And it can be denied down the road, since it isn’t “approved” until you try to make a claim, which is not when you want to find out you aren’t covered.

Instead, make sure you take your mortgage balance into account when you’re buying your regular life insurance. If you don’t have enough life insurance to take care of your new whopper of a mortgage, look into term insurance, as opposed to buying the dumb policy your lender is offering you.  Ditto creditor insurance.


E Wrote:  My question relates to OSAP student loan debt repayment. I am 29 years old. Currently employed with a good job where I make $54,196.97 gross annually. I have a pension with my work where I contribute 5% of my monthly earnings and they match my contributions 100%. My current pension total is at $16,000.

I have an OSAP student loan debt of $32,000...no credit card debt, no car payments. My partner and I want to save towards a down payment on a house, but don't know if that is silly when I have such large student loan debt. Currently, we are saving $250 a month each towards a down payment fund ($500 per month), and currently have $5000 saved. We also save $100 a month each towards a vacation fund ($2000 saved) and I also personally save $100 a month towards my own savings account. I automatically pay $400 a month towards my student loan, and I try to do another payment of $200 at some point in the month (aiming for $600 payment towards loan per month).

Should I be tackling my student loan debt and putting all my money towards it, leaving no savings? Or should we be putting our $5000 saved into an RRSP which we might use for buying a house and could provide us with tax benefits? Some people have told me that you may consolidate your OSAP debt when you get a mortgage, and we are unlikely to get a mortgage without a down payment, thus our attempt to save that.

Gail Says:  The interest rate on your student loan isn't a "deal." You don't say whether you have a fixed or floating rate, so I've done these calculations based on a floating rate. If you're paying $400 a mo towards your student loan, it'll take 10 years to get it paid off. Raise it to $600 and you'll be free of the student loan in 5 years. Raise it to $880, and you'll be out of the student loan in 36 months. Here's the thing, you can keep paying as you are and be out of the student loan in 5 years while you save for your downpayment. Or you can ramp up your student loan debt repayment, be out in 3 years and then use the $880 a month to save for your downpayment. Doing it the second way will save you about $3,000 in interest…so that's $3,000 of your hard-earned money that goes towards your new home instead of student loan debt. It's your call.


A Wrote:  I set up automatic payments with all of my bills every month and never have a problem. I sometimes also set up payments to come out automatically in addition to those mentioned above (like credit cards because there isn't a consistent balance) I have never missed a payment on anything in my life. I also transfer the "savings" I have at the end of each month from my chequing to savings accounts.

Twice in the last three months something has gone wrong with my PC account where a payment was scheduled but PC charged me an NSF fee because something went wrong (obviously a lack of funds to be NSF) but the problem was in the technology, because the money was always there, it just didn't transfer properly. Once was a contribution to my RRSP and the other was a credit card payment that was cancelled because I wanted to pay it three days later but the first payment went through somehow which resulted in an NSF. I paid that bill three days later, before it was due.

Both times PC financial refunded my NSF fee because something went wrong on their end. Because they refunded it does this now mean that the NSF code has been removed from my credit history? I am wondering what affect these two NSFs have had on my credit rating, if any affect at all, since they were both refunded.

Gail Says:  You should get a copy of your credit history to see if the NSF was reported and then fixed on your credit report. Send a written request to one of the two major credit bureaus in Canada: Equifax Canada Inc. or Trans Union of Canada Inc. More information can be found online at www.equifax.ca and www.transunion.ca. There is no charge for this service if you ask for your record by mail. If you’re into instant gratification, you’ll have to pay a fee.

BTW why are you still banking with PC financial if they keep screwing up your money management? Don't you get tired of the mix-ups? Is "free" keeping you there?


N Wrote:  I've always enjoyed your show and value your advice. I never thought I would end up in the financial position I am in. I've always been smart about my money, but last year things got really out of control. I thought purchasing high end goods would fill some hole that was missing in my life and it became a vicious circle. I am now sitting in $200,000 debt made possible with a secured line of credit. I know this is ridiculous and I am so ashamed of myself. I know I have to sell off all the things that I've bought over the year, but it will not be an easy task and I will end up losing about 50-75% of the retail value. I've also bought your budgeting files to really work on my spending habits and try to find any extra money to help pay this off. Should I be moving the line of credit into a flexible mortgage? Or any other advice would be appreciated.

Gail Says:  One of the reasons I hate those lines of credit so much is because it is so easy to access them for no particularly good reason. I'm sorry you had one. I'm sorry you dug such a deep hole. I hope you tell your story over and over and over as a caution to other people who think it's great to have easy access to credit just in case. You've got a long journey ahead and I wish you the best. Make a plan and stay focused.


J Wrote:  I am 26 years old, no kids or spouse; I make $35,000 Gross working Part-time in a hospital.  I bought a brand new Honda Civic 2013 in February 2013 (YES, I AM ALREADY TRYING TO SELL IT BACK!)  I learned my lesson with that!

Gail my main question is; I have a student loan balance of $5000+ with 85% interest daily added. I pay $100 a month which isn’t moving my balance at all. Is it wise for me to use a credit card and pay off this balance and just pay back my credit card or is that foolish?  I just really want to get rid of this debt in order to purchase a home. 

Gail Says:  If you can't handle the payments on a $5,000 student loan, what makes you think you're ready for home ownership? You seem focused on the interest you're paying on the student loan. Do you imagine the interest on your credit card will be less? Have you figured it out? I suggest very strongly that you a) do the math to determine what your payment should be to get you out of debt by your goal dates and b) slow down and make sure you're ready for the responsibility and financial commitment of home ownership.