September 2014 Questions & Answers

 


A Wrote:  I'm 31 years old, single and recently my consumer proposal has been accepted. Finding your books, TV show and blog has helped me look at my finances in a different view. As I can't afford a financial advisor at this time and a newbie in investment, I was hoping you can guide me on next steps. I'm so overwhelmed by all the financial info out there and I know you said don't invest in something you can't explain to a child so I'm probably not looking at mutual funds or EFTs etc. I managed to save $5000, guess it's my emergency fund/savings...since, I filed my proposal but it is sitting in a very low interest savings account. Feels like I should park it elsewhere. I have no TFSA at this time (did years ago but withdrew to pay down debt). I have about $7000 in RRSP’s and no other assets. What do you recommended for me to build up my retirement and emergency funds? I make about $36,000/year. I feel behind in my finances and saving for the future. I’m more of a low to moderate risk taker based on your book.

Gail Says:  If you are a low to moderate risk taker, you need to limit your investments to those that will let you sleep at night. Keeping a healthy cash balance in an emergency fund is one step. Yes, the interest rates are low, but if you shop around you can get a slightly better rate than if you just default to what your bank may be offering.

A TFSA is a great place to put money you want to set aside for an emergency fund and for your future. You can hold any investment in a TFSA that you can hold in an RRSP so feel free to build your cash for an emergency and take some of your money (lets say about 25% for now) and invest in a balanced mutual fund. You'll get a little growth and a little fixed income, and build your risk tolerance as you build your asset base.

Don't worry about being "behind." It is most important that you start. As you become more comfortable building up your assets, you can learn about other options. If, down the road, you decide to take advantage of an RRSP to minimize your taxes, you can always use some of the money you've socked away in your TFSA to fund a contribution.

 

M Wrote:  Due to declining health I am no longer able to work at all! I have bill collectors constantly contacting me about repayment of what I owe and yes! I do owe it but my wife and I survive on $876.00 monthly. I would love to be cleared of the debts I owe but I am truly unable to do so! Would you be able to give my wife and me a solution to our problem?

Gail Says:  I'm sorry you've not been well and I hope that you get stronger with care. The reason I tell people that debt is a trap is perfectly demonstrated in your situation. For while debt may be "manageable" if anything changes it quickly becomes a huge problem. You don't say how much you owe or own so I'm not sure if bankruptcy is even an option for you. If you have no assets, bankruptcy would wipe out the debt and with your low income that would be pretty much that. But it'll cost $1,000 + to go through the process.

 

C Wrote:  I just came off maternity leave with some debt and then found out I owe the CRA a big amount of money. Is it ok to take money out of my TFSA to help pay off the debt?

Gail Says:  Sorry to hear about the big tax bill to the tax man. It sounds like it was a shocker. Is it from past years, or did you simply not calculate the tax you would owe during your mat leave accurately?

You can take the money out of your TFSA at any time without tax consequences, so if you think this is the best way to deal with the tax bill by all means go ahead. Keep in mind that if you choose to, you can put previously withdrawn contributions back into your TFSA in a subsequent calendar year.

 

D Wrote:  I am approximately 1/2 way through your book, "Never Too Late." Thank you for a wonderful book.  I had one question from chapter 6. Specially the section in chapter 6, where you assist the 50 plus crowd (I turned 50 in October). You wrote that in this stage some expenses (college loans, mortgage, kid expenses, etc.) should be in the past and those monies can be either saved toward retirement savings or future health care costs. That makes a great deal of sense. However, I am a renter and will probably always be a renter. Besides the logical need to prepare to continue to pay rent (vs. those whose mortgages are a thing of the past) by saving more, can you say more about your thoughts on those of us who are renters? Are there any additional thoughts you know that renters must consider and make plans for?  I will add that I live in the U.S. and while rents have increased over the last few years, the location I am working does not have a strong housing market. I do not plan to remain in this state in retirement, and my fear is that if I bought a home, I would be "stuck" with it for the rest of my life.  Again, thank you for writing your books and for your television program on CNBC. You make a significant difference in people's lives.

Gail Says:  Renters and home-owners alike make the mistake of thinking that once you've paid off a home your shelter costs are gone. Nothing could be further from the truth. Between property taxes, insurance, maintenance and utilities on my paid-off home, my shelter costs run to about $1,200 a month…kinda like rent right?

It's important to ensure that as you move into retirement and your income falls off that your shelter costs aren't eating up so much of your monthly cash flow that you can't have a life. People get "married" to the idea of living where they currently are, sacrificing money they could be using for other things to keep the same roof over their heads. If you must downsize your living space or move locations to reduce your shelter costs at retirement so that you have more money for other things, it's worth making that part of your plan.

 

J Wrote:  I have just retired and I want to know if I can still buy an RRSP?  Is pension considered earned income?

Gail Says:  Sorry babe, pension income is NOT considered earned income when it comes to calculating contribution room for an RRSP. If you have other sources of earned income, you can continue to buy RRSPs until the year you turn 71. RRSPs have to be rolled over to something else -- usually a RRIF -- by the end of the year in which you turn 71. If you have a younger spouse you can contribute to a spousal RRSP until your spouse turns 71.

 

B Wrote:  My husband is part owner of a small business and receives dividend payments throughout the year as well as a regular salary. He has been keeping the dividend payments in his holding company name. We understand that if he were to withdraw any of the money, he would have to pay tax on it, but at a reduced tax rate because it is dividend income. My question is: Is there any advantage to taking the money out of the holding company account to use as a contribution to his personal RRSP?

Gail Says:  Do you know that dividends from a business do not qualify as earned income, and so cannot be used in the calculation of RRSP contribution room?  If you have calculated your RRSP contribution on other forms of earned income and just want to know if you should take the dividends to have the cash to make the actual contribution, sure. But the contribution must be based on "earned income," which includes:

  • Salaries and wages (less employment-related expenses like union or professional dues)
  • CPP or QPP Disability pensions; regular CPP and QPP retirement pensions don't qualify
  • Net self-employed income from a business
  • Net rental income from real estate
  • Alimony or maintenance payments received and taxed in your hands
  • Royalties and net research grants

 

B Wrote:  Are Achieva and Outlook Financial Credit Unions safe to invest a large sum of money with?

Gail Says:  Both credit unions have good reputations. Achieva, which is owned by Cambrian Credit Union, actually offers more deposit protection than the major banks. All credit unions in Manitoba offer 100% protection of deposits, as opposed to the $100,000 limits for bank deposits through Canada Deposit Insurance Corp. And Achieva's deposit insurance applies to customers in any province. Outlook Financial like Achieva in is owned by a Manitoba credit union, in this case Assiniboine Credit Union.

 

L Wrote:  I own my own house & rent out the upper level. I’m a successful landlord with great tenants. I'm 33 weeks pregnant & thinking about my maternity pay. When I apply for EI, will my rental income affect my maternity pay? All the websites don't talk about this "other income".

I’ve always paid into my EI & hope ill get full maternity pay. I want to make wise financial choices & ensure I’m prepared for 2015 tax time too. I don't want to find myself owing taxes.

Gail Says:  You should check with the EI system to see how much you will receive each week. Your maternity leave payments depend on how much you've made and your province of residence (since Quebec has a different system).

People are often surprised at how little EI maternity/parental benefits actually work out to be. The most you’ll receive is 55% of your average weekly earnings to a maximum of $501 a week (for 2013). This dollar amount is reset every year so check with Service Canada for the current maximum.

If your income was $62,000 for the 52 weeks leading up to your maternity leave in 2013 your mat leave benefits worked out to $501 a week:  $62,000 x 55% ÷ 52 =  $655.77 or $501, whichever is less.

If your income was $32,500 for the 52 weeks leading up to her maternity leave in 2013, your maternity benefits worked out to  $343.75 a week: $32,500 x 55% ÷ 52 =  $343.75 or $501, whichever is less.

Your rental income will not affect your benefits. According to HRDC, these are the things that will reduce benefits:

  • other income from employment (including self-employment), such as commissions;
  • payments received as compensation for a work accident or an occupational illness, such as compensation for lost wages;
  • payments received under a group health insurance plan or a group wage loss replacement plan;
  • certain payments received under an accident insurance plan to replace lost wages;
  • retirement income from a retirement plan, a military or police pension, the Canada Pension Plan, the Quebec Pension Plan, or provincial employment-based plans; and
  • allowances, amounts, or other benefits paid under provincial legislation, such as benefits under the Quebec Parental Insurance Program