November 2015 Questions & Answers

 


R Wrote:  My husband and I are both mid 30's have 2 kids and both work full time. We have next to nothing in consumer debt.  The debts we have are the usual, mortgage and vehicle. We have money set aside every month for the kid’s education funds. We do get to the end of the month in the green, but we always hear friends and co-workers buying this and that and going on trips here and there and we can not afford these things, we are always asking ourselves what are we doing wrong, as we know they do not make as much as we do combined. When you get to the end of the month and all bills etc are paid and there is say $300 left at the end of the month do you just keep it in the account and keep rolling it over to the next month it hopes you don't spend it or should I be moving any extra cash at the end of the month whether it be $5 or $500 to my money master?? And starting fresh again at the beginning of the month.

Gail Says:  Those people who seem to have and do everything also have a lot of debt you can't see. It's a shame really, that we don't walk around with a flashing sign on our foreheads showing our level of indebtedness since that would make those of us who choose to live sensible, balanced financial lives deal with the "WTF" that pops into our minds. If you can't afford those trips and purchases, and you make the same as they do, then clearly they can't afford them either which means they're putting it on credit.

As for what to do with the cash left over at the end of the month, I'd do as you suggest and move it, accumulating it for a special purpose. Assuming you've established your emergency fund and are doing what you should for retirement, then why not open up a "vacation" savings account and move the money there so you can watch it accumulate and anticipate your family trip… or whatever it is you want to do as a family.

Keep on keeping on the straight and narrow. I'm going to work hard this year to spread the word about financial literacy and celebrate the people doing the right things. I'm glad to hear you're one of them.

 

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.

 

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?

 

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.

 

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

 

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.

 

K Wrote:  Is there a real penalty to cancelling a credit card? I was looking at an on-line credit card statement. To my horror, my card had been compromised and a charge of $4000.00 had been posted.  Note this - the card was nearly maxed out. I had about $350.00 left on it. I had a family emergency and used it, and was preparing to pay it in full. Despite the small amount of credit remaining, Visa approved this fraudulent purchase. When I called the company, I got no answer as to why.  I want nothing more to do with this credit card. Will my credit rating suffer?

Gail Says:  Sadly, despite the credit "limit" credit card companies continue to over-extend credit, often charging an "over-limit" fee to customers who exceed their credit limits. As far as the fraudulent charge goes, you must prove it is not your charge and it will be reversed.

When it comes to cancelling the credit card there are two things to consider:

1. If this card is your primary credit card then most of your credit history is linked to it. Cancelling it will erase that history. Not good. Instead, report the card lost, and you'll be sent a new one. Do not activate it. Cut it up but keep the account open while you establish a new credit history on a different card.

2. Cancelling credit cards does cause a short negative downturn in your credit score, which is why you should get a different card before you cancel the one you're mad at. The score will re-right itself within a few months of using the new card.

 

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