The federal government has increased the annual contribution limit of Tax-Free Savings Accounts (TFSA) to $10,000. Going forward, the annual limit will no longer be indexed to inflation. Canada Revenue Agency (CRA) recognizes these changes as effective January 1, 2015 meaning financial institutions may immediately allow clients to take advantage of the new increased limit.
Canadians can grow their savings much faster because realized income or appreciation from a TFSA are completely tax free. Withdrawals from a TFSA will not affect your eligibility for federal income-tested benefits such as Old Age Security (OAS). Furthermore, amounts withdrawn will be added back to your available contribution room starting the year following the withdrawal. For example, a $6,000 withdrawal in 2015 can be replaced in 2016 without reducing that year’s $10,000 contribution room. Therefore, you can deposit $16,000 in 2016 without over-contributing (assuming no unused room).
Saving for Retirement – RRSP or TFSA?
It is usually beneficial to contribute to both plan types. Deciding one over the other will depend on your savings needs and your current and future financial situation. Generally, if you expect to be in a lower tax bracket during retirement, then RRSP contributions provide a benefit in deferring tax until those later years. Should the reverse be true, TFSA contributions may be more attractive.
RRSPs must be converted to Registered Retirement Income Funds (RRIFs), an annuity or withdrawn by the end of the year you turn age 71. TFSAs have no such end date and can continue to accept contributions and shelter income indefinitely. The minimum annual withdrawal requirements from RRIFs, LIFs and annuities are considered taxable income. TFSAs can benefit pensioners looking to minimize their taxable income, especially if they are receiving income from part-time or consulting work.
TFSA contribution limits are the same for everyone regardless of how much you earn or contribute to your pension. If you are already contributing to your RRSP, it might be a good option to save the refund generated into your TFSA. Ultimately, there may be no need to choose one over the other. A TFSA complements your RRSP strategy, as well as other sources of retirement income. Using TFSAs and RRSPs can bring you closer to your goals as part of your overall financial plan.
TFSAs are Not Just for Retirement
Short and Medium Term Goals
TFSAs can help to fund a major purchase, such as buying a home, vacation, or emergency fund. Early or unplanned RRSP withdrawals can result in significant taxes owing. RRSP withdrawals are taxed at your current highest tax rate, also known as your marginal tax rate. In most cases, for short-term needs you should access funds in your TFSA before using your RRSP.
TFSAs allow an effective way to split income among family members such as your spouse and adult children. You may provide a gift to help them make a contribution to their TFSA. They are responsible for their own account and contribution room. Income tax attribution does not apply on earnings as they are tax-free.
A Registered Education Savings Plan (RESP) is a great tool to save for a child’s education. It offers tax deferred growth and matching Canada Education Savings Grant (CESG) of up to $7,200 lifetime while contributions are made before age 18. TFSA savings can supplement your family’s education plan without worrying about additional tax burden on you or your child. When using RESPs it is important to be aware of the restrictions and possible penalties if your child does not pursue post-secondary education. However, TFSA savings are accessible at any time and for any reason.
You may want to consider transferring investments held in a non-registered (taxable) account to your TFSA, known as an ‘in-kind’ contribution. Please note this transfer could trigger a taxable capital gain, or if you incurred a loss you will not be allowed to claim the capital loss on your taxes. Consult your tax advisor for more information.
TFSAs can help minimize taxes upon your death and maximize your estate. If you name your spouse as successor holder on your account, he or she will inherit and maintain its tax-free status without affecting his or her own contribution room.
Naming children as beneficiaries allows them to inherit the account directly, avoiding probate fees. Note the tax free status is lost on death when the account passes to a beneficiary. Your children could use inherited TFSA funds to contribute to their own TFSA as a tax-free method of inter-generational wealth transfer.
TFSAs are significant savings vehicles for Canadians 18 years or older. Take the time now to consider using it as part of your overall savings and investment strategy.
This publication and all the information, opinions and conclusions contained in it are protected by copyright. This report may not be reproduced in whole or in part, or referred to in any manner whatsoever, nor may the information, opinions, and conclusions contained in it be referred to without in each case the prior express consent. Scotiabank refers to The Bank of Nova Scotia and its domestic subsidiaries.
An important consideration when the children have left is whether you are going to change your residential arrangements.
We’re all familiar with the term ‘empty nesters’ and you may be thinking that the ‘nest’ is too large for one or two of you. Various options are available such as ‘downsizing’, selling and renting, buying a vacation home or renovating. Some of the factors to be considered are:
Even though the children have left home, they may still have a strong emotional attachment to the place where they grew up. You may have decided that selling your home is the best strategy, but as a courtesy it may be a good idea to include your children in the discussion, which should prevent any misunderstandings or hard feelings. It has been an increasing trend in recent years that adult children return to the parental ‘nest’ for reasons such as difficulty in finding and becoming established in a career, debt or relationship breakdown. Most parents will be quite willing to take their children back into the home (at least for the short term) and this possibility should be factored in when considering selling your house and moving to another locale or to smaller accommodations.
Selling and Moving
If becoming an ‘empty nester’ coincides with retirement, you may be considering selling your home and moving to a different community. This has become a popular option for many people. It can be a very financially attractive option particularly for city dwellers to take advantage of generally higher real estate prices in urban areas and purchase a new home in a smaller community where home prices are often much lower. This allows you to find a nice home and still retain a fair amount of equity as savings. However, this needs to be carefully considered. Taking advantage of the country life often appears very attractive in theory, but small town living can provide a substantial culture shock, and the services and other features that a large community provides may be sorely missed in a smaller town. Consequently, you should be doing a fair amount of homework to determine if the new location will provide the sort of lifestyle that you are planning on.
As an empty nester, you may have plans to renovate your home to make it more comfortable for one or two people. Before you renovate, it is important to keep in mind the possibility of children returning to the home. You may also want to consider adequate living arrangements for family and friends who come and visit.
This publication is intended as a general source of information and should not be considered as estate, tax planning, personal investment or tax advice, nor should it be construed as being specific to an individual’s investment objectives, financial situation or particular needs. We recommend that individuals consult with their professional financial or tax advisor before taking any action based upon the information found in this publication. The information and opinions contained herein have been compiled or arrived at from sources believed reliable but no representation or warranty, express or implied, is made as to their accuracy or completeness. While we endeavour to update this information from time to time as needed, information can change without notice and Dynamic Funds® does not accept any responsibility for any loss or damage that results from any information contained herein.
© 2013 1832 Asset Management L.P. – All rights reserved. Reproduction in whole or in part of this content without the written consent of 12DWD213_SN_DF_IN_EmptyNest_YourHome_EN_V2_DOP_1013 the copyright owner is forbidden. Snapshots™ is a trademark of its owner, used under license.
Much can be said about Baby Boomers, but one irrefutable fact sums up this group—everything they embrace, changes. Whether it’s disposable diapers, mini-vans or portable music; the sheer number of people within this demographic make it foolhardy and financially reckless to ignore.
When boomers came of age they earned more money, and they demanded more access to investment markets. Their father’s stockbroker wasn’t necessarily what they had in mind so they started their investing with mutual funds: a convenient and easy way for them to own stocks and bonds, and to diversify their holdings while having their money managed by professionals; even when they didn’t have large sums to invest. As they became more comfortable with the volatility and potential in the capital markets they wanted to have a bigger hand in the decision making process. This led to the evolution of the discount broker, entities that offered investors the ability to buy and sell all the securities that were once the domain of stock brokers. You didn’t need a large account, nor did you have to pay big commissions. It was the perfect opportunity to become the master of your own domain.
This did well until the tech crash in the late nineties and early 2000s where markets fell dramatically. The losses for many were significant enough that they began to question their ability to manage their own money and started to look for alternatives. It was about this time that ETFs began to grow in popularity. These were investments that were typically tied to indexes, and gave investors the ability to once again manage their own money but at a reduced cost. It also allowed them to invest in specific sectors of the market without having to choose individual stocks. If they wanted to increase their holdings in companies that invested in energy, banking or any number of combinations, they could simply choose the sector and buy an ETF that held all of the stocks in that particular index.
Boomers were accumulating large amounts of money as they were now entering their peak earning years. Managing their funds was no longer as simple as it once was. Interest rates were fluctuating; global markets were in constant motion and the ability of investment banks to create new types of investments and hybrids of old ones seemed unlimited. Pooled investments began to rise in popularity. These were groups of several different mutual funds that enabled investors with larger portfolios to diversify their holdings amongst several different managers, mandates and asset classes while owning a single mutual fund. This ran smoothly until the great recession and market melt-down of 2008-2009. Baby boomers that were in the markets after the last major correction were devastated with most major indexes in the world down more than 40% at the trough. Investors saw their portfolios decimated and the dream of early retirement became a fast fading memory. To further complicate the carnage, central banks’ main form of CPR was to drastically lower interest rates. While this may have stabilized markets and economies, it left the risk adverse investor with nowhere to put their money.
This gave rise to the popularity of separately managed and discretionary managed accounts. These are portfolios in which investors own the actual securities: stocks, bonds and ETFs, but are independent of the decision making process. Separately managed accounts (SMAs), with management teams that are generally located in Toronto, manage clients’ portfolios on their behalf, while leaving the communication, wealth management and asset allocation decisions to the clients and their local advisors. These are managed for an annual fee, based on assets under management. It put advisors on the same side of the table as their clients and eliminated many of the conflicts that had existed.
Discretionary managed accounts are similar to SMAs but advisors are now licensed to manage their client’s assets the same way that the SMA Managers do. The investment decisions are made on behalf of clients by their advisor. The main difference being clients could now converse with and sit across the table from the person who manages their money.
Discretionary money managers aren’t simply advisors who have the ability to buy and sell client securities without the inconvenience of making phone calls. Their role requires broad industry experience, intensive education and training, licensing and stringent oversight by management and compliance departments. Advisors are required to complete Investment Policy Statements (IPSs) with their clients that clearly outline risk tolerances and investment objectives, as well as what clients can expect from their advisors in terms of communication, and fees.
Portfolio size is still the main determinant. To diversify and manage a discretionary portfolio typically requires an amount greater than $200,000 and for many advisory teams to be effective while providing the wealth management and planning that is also demanded today, minimums usually begin with household investable assets of greater than $500,000. The costs to manage these portfolios can range from .75% up to 2% depending on the assets being managed and the services provided.
This type of management may not be for all investors; but for many retirement age Boomers whose war cry has been, “live long and prosper,” it has become the logical next-step in managing their money.
It can only be attributable to human error.
-Hal, 2001: A Space Odyssey
For most of us who are within thinking distance of retirement, the term “robo” conjures up images of the B9 Robot on Lost in Space or Robby from the Forbidden Planet. That isn’t to say it’s the only thing that comes to mind but managing your investments and retirement planning isn’t necessarily at the top of the list.
As with all things human, the drive for cheaper, faster and more profitable keeps pushing things forward. Financial services aren’t an exception to this rule. Essentially, “robo-advisors” are online service centres that build custom portfolios, then monitor and rebalance them on an ongoing basis. Rather than deal directly with an in-person advisor, these services can be accessed from your iPad, laptop or cell phone. Typically they create portfolios with exchange traded funds (ETFs) but they are not limited to those securities.
Robo-advisors have a significant presence in the US, where an estimated 15-20 billion US dollars are managed this way, while in Canada we are still at the getting-going stage. Fees for ‘robo-advisors’ fall typically between the cost of a discount brokerage account and that of a full service advisor- somewhere between .50 and 1%. Although the services and fees may vary, this cost usually covers advice, rebalancing, monitoring and trading.
As a rule, planning services haven’t been offered with robo-advisors. The decision on where and how your money will be invested is typically based on a questionnaire that uses algorithms to determine a suitable portfolio for you based on your age, financial situation and risk tolerance. As this form of advice matures so will the services that are available. Some offers provide financial plans and as the industry progresses, we will likely see tools designed to help evaluate and advise the softer side of retirement planning such as health, legacy, vision, social networks and lifestyle. As this is part of the bigger picture when it comes to wealth management some of the firms are being proactive and are already offering these services in conjunction with the ability to engage with human advisors, either in person or on the phone. There are several smaller firms that offer these services in Canada right now, but until major financial institutions take a seat at the table I wouldn’t expect this to become a mainstream option.
The key to their success will be the level of trust that investors are willing to place in the process and form of these services. For those closer in age to the baby boomers and beyond, the comfort level required to commit your life savings to an online service may not be there yet or ever. However, for those who call themselves Gen X, Y or younger this may become a natural extension of their technically driven lifestyle, and may quickly become the way investing is done. As technology and innovation improves, so will the capabilities of these services and the costs. Like all decisions, it comes down to what you are looking for, what you need and what you’re comfortable with.
Read more Navigating Retirement articles
- Do or do not May 21
- Death of a sales commission May 14
- The other side of retirement May 7
- The rules are changing Apr 30
- What's your score? Apr 23
- Living with Plan B Apr 16
- Do I have to file tax return? Apr 9
- Retiring with purpose Apr 2
- CRA Notice of Assessment Mar 26
- Choosing life Mar 19
- Managing the markets Mar 12
- Creating your retirement vision Feb 26
(Click for RSS instructions.)