youngandthrifty.ca » RRSP

Weekend Ramblings and PF Blog Love: Did you RRSP yet? Edition

young — Fri, 03 Feb 2012 16:03:07 +0000

Deadlines are looming again (FYI if you didn’t know it is February 29, 2012) for your contribution to be counted towards the 2011 tax year.

I’m curious to know (you know, because I’m nosy like that), for those that contribute to an RRSP, when do you contribute?

Do you contribute in a lump sum in early 2011?
Do you contribute throughout the year in 2011?
Or do you wait until the first two months of 2012 to put in that big chunk of change in?

What I do (and there’s no rhyme or reason or method to my madness) is I contribute a set amount per month and then if I have room left over, I’ll contribute a lump sum to max out my RRSP afterwards. After I finish paying back my Home Buyer’s Plan, I’ll likely stop contributing to my RRSP’s (unless I have oodles and oodles of money after contributing to my TFSA already) since I plan to have a defined benefit pension plan. However, who knows, I might be desperate to decrease my taxes in which case I’ll probably contribute to an RRSP as well.

Speaking of RRSP’s, I had the lovely opportunity to talk to Bryan Borzykowski from Moneysense.ca (I idolize Money Sense so it was pretty awesome to be mentioned in it) and he interviewed me about my strategy for my RRSP’s.

Here are some RRSP posts that might pique your interest in case you’re not sick of seeing RRSP stuff just yet.

RRSP versus TFSA: Head to Head Comparison
RRSP’s Holdings Part 1
RRSP Holdings Part 2: What to Keep in and Out of your RRSP (I loved writing this post but no one commented on it, sadly. I wrote it when my blog was a baby in blog years)

Have a fantabulous weekend!

Pf Blog Love

This blog has been featured in the Jenny Pincher’s Blog Carnival (woohoo!)
My Own Advisor talked about the retirement goals of Gen X and Gen Y (and no one is thinking about being 67)
Free Money Wisdom got engaged and WON their honeymoon (that is so awesome!!)
Million Dollar Journey my blogging idol posts his net worth updates- he’s killing it and I know he’ll make his goal
Dividend Ninja also weighs in on the TFSA or RRSP debate
The Financial Blogger asks you where are you… where do you stand?
My University Money asks whether you feel more satisfied earning or saving (for me it’s both lol)
Boomer and Echo talks about the hot Boomer topic, of the OAS age increase from 65 to 67
It’s not too late! Crystal from Budgeting in the Fun Stuff shares her New Years Resolutions
Financial Uproar ponders the question.. why are people scared to be rich?
Financial Samurai asks those who are interested in quitting their jobs to blog full time to read this first

youngandthrifty Net Worth Update: May 2011

young — Mon, 09 May 2011 15:33:08 +0000

$132, 262 (+ 2.4%)

Some of you might have noticed that I haven’t done a net worth update in a while. At first, I decided to stop posting my updates because of all the negative comments I was receiving on my home purchase. Then I decided to compromise, because really, a personal finance blog isn’t personal if I don’t share some detail with you all As silly as it may sound to some of the readers that are bearish on real estate, I am planning to live in this home for 5-10 years (or maybe more, who knows) and did not primarily purchase it for investing reasons. We just wanted a place to call our own. The thought of this piece of land being “ours” really hit home when I decided to grab a shovel last weekend and dug up a garden in the back yard. It was quite a surreal experience.

The renovations and everything are all done to the ~~money pit~~ house and now we’re in the process this month of finalizing everything and finding a tenant for downstairs. We just have a few minor things to do before we can start taking pictures of the suite and getting it ready for Craigslist.

Okay, so here’s the breakdown for this quarter:

ASSETS:

CASH: $10956 (-13%)

The cash accounts took a hit because we finished paying off the contractors for our renovations
Boyfriend and I have a joint account which our mortgage is deducted from, and our own personal accounts
I added up my chequing and savings accounts (High Interest Savings Account). I automatically deduct money from my chequing account and have it siphoned to the HISA account (paying yourself first)
I have $1592 saved up for my goal of climbing Mt Kilimanjaro (highest peak in Africa) within 1-2 years. If you want to help contribute to my personal lifelong dream, feel free to sign up for an ING account with my orange key. You’ll get $25 if you start an account with $100, and I will get $25 too. How’s that for shameless self promotion?

STOCKS: $17216 (-13%)

Don’t worry, I haven’t been doing poorly with the market. I sold 75 shares of Encana in Canadian Funds for a profit and moved about $1500 into my RRSP to max it out this year. I bought some USD (since our dollar is so good right now) and bought shares in an American corporation.
These are stocks that capture the “moment in time”, including unrealized gains or losses in my BMO Investorline and Questrade accounts. I added up USD and CAD stocks as “Canadian” money to be simplistic (even though our dollar is high now)

RRSP: $11088 (+27.2%)

This includes the pre-authorized monthly contribution into my TD E-Series account (primarily bonds), a GIC in my ING Direct Account and my new Questrade RRSP account.
I have about $700 contribution room left to max out my RRSP for 2011.
I owe about $16,000 to myself in my RRSP because I used the Home Buyers Plan, but I won’t have to start repaying until 2012.

OTHER INVESTMENTS: $3311 (-1%)

If you’re wondering what I hold in my Other investments- check out my post long story
I have some investments that were poor choices (I signed up for them before I became self “edumacated”) that are losing money big time. In order to receive a tax credit, I got persuaded into buying some flow through shares, Venture investments that gave out a tax credit, and some more mutual funds about four or five years ago.
This lonely mutual fund hasn’t been moving much, unlike the rest of the market. Once I hit January 1, 2012 I’m going to take my money back and run

TFSA: $7793 (+39%)

I bought Exchange Income Corporation, Just Energy, Keg Income Trust, and Sunlife last month. So far, my TFSA portfolio is up only about 2.5% not including the dividends.
I JUST got my tax refund in the mail the other day of $1033 and put it straight into my TFSA (talk about will power, eh? Didn’t even stash any of it in the travel fund!)
I signed up for a Tax Free Trading Account with Questrade and my TFSA consists 100% of stocks
I have about $8,000 I can put back in this year to avoid the penalty from our good friends at the Canada Revenue Agency. We are allowed $5000 a year and this is year 3 of the TFSA, so one can have $15000 in their TFSA.

CAR:

My car is 11 years old and still running well. Boyfriend has been pressuring me to get a new car (is it a guy thing?) but I like my 11 year old car. Next month I have to pay insurance (boo-urns!), which costs $1500 though I get a 10 year driving discount which apparently saves me $1300, according to what my government insurance corporation says.

PRINCIPLE RESIDENCE: $387,500

I know this it does not make any sense to divide the principle residence and mortgage debt by 50%, but since I cannot disclose my boyfriend’s financial information, I will do it this way to simplify things. Some of you may not agree to that, and I understand.
Vancouver is an expensive city to live in, and many people predict that there will be a housing collapse, especially in a place where their is such a disparity between income and housing price. The Vancouver market was actually quite unscathed compared to the depressed housing markets elsewhere, and many people believe it is sorely due for a correction.
We plan to live in this house for 5-10 years or even more, and we are prepared to “suck it up” if it corrects by more than 25%. Our house is in a favourable location in the city, and our neighbours have sold recently for about 30% more than what we paid for our house.

LIABILITIES:

Mortgage Debt: $305075 (-1%)

It’s an accelerated bi-weekly payment (-4 years from amortization) and we plan to add on what we get from our rental downstairs to pay the mortgage off faster. Target pay off= 15-17 years.

Credit Card: $527

I pay off my full amount every month (and folks, it’s VERY important you do so otherwise you’re losing out on a 19% return!) but include it in my net worth update so I have an accurate picture of my actual net worth. I sort of think “If I were to sell everything right now, what would my net worth be?”
I basically charge everything to my card to reap the benefits (free flights and hotel stays here I come!)
I got the SPG AMEX card for a few months already and have been using it as often as I can (compared to the MBNA travel elite card) but American Express isn’t accepted everywhere here in Canada…which is a hassle.
BF and I got the Royal Bank Avion Infinite Card as our joint credit card (free for one year since we have a mortgage with RBC! So will be using it and letting you how I like it- I would of course never pay $170 a year for this, but since it’s free for one year, why not?)

Why I won’t be filling out a T1213 for my Tax Return

young — Wed, 20 Apr 2011 15:15:12 +0000

In case you didn’t know, the T1213 (entitled “Request to Reduce Tax Deductions at Source for Tax Year”) is a form from the Canada Revenue Agency that lets you take back the interest free loan to the government you give them every time you get a huge honkin’ tax return.

If you regularly contribute to your RRSP’s and you also regularly donate in the form of a pre-authorized contribution plan (like I have for my TD e-series funds), you regularly donate to charities or pay for child care costs, you can choose to forgo the big tax return at the end of the year and just get a bigger pay cheque bi-weekly or monthly or whenever you get paid.

Most people would want to get a bigger pay cheque because otherwise you are giving an interest free loan to the government (the government already takes so much, why would we want to give them even more?). If they give you a loan (e.g. if you over-contributed to your TFSA) they ding you like heck, but when they do it to us, they just turn their back. Sigh… C’est la vie

If you are interested in getting less taxes dinged each pay cheque, here are the steps you need to take in order to do so:

Make sure you have a pre-authorized payment plan for your RRSP

Make sure you have all the slips and receipts etc. for your child care costs or your charitable donations that you regularly make, employment expenses you would normally fill out on your T777, interest expenses on investment loans, and even rental losses.

Find out who your human resources/ payroll deductible person at your place of work is, because you will have to give the CRA their contact information and and they can set it up through payroll to deduct less taxes of your paycheque

Fill out that T1213 form and send it in along with the documentation and send it in to CRA

Et voila, you will get less taxes taken off your paycheque in about a few week to months

The reasons why I’m not filling out the T1213:

I think this is a great way to get taxed less throughout the year, but to be honest (and feel free to judge me haha), I really enjoy my big tax refund at the end of the year. I’m not sure why, perhaps it’s some sort of psychological defect of mine. I like to plan how I spend the big tax refund and I like how I can use it to fill up my TFSA contribution room or to fill up my RRSP room for next year. I know that if I got a bigger pay cheque throughout the year, despite my automatic ‘pay myself first’ deductions, I know I would be tempted to adjust things and adjust my budget, and I probably would contribute less to my TFSA and RRSPs (heck, it’s human nature, I suppose).

Another reason is because I’m afraid of commitment. Although I have been contributing regularly to my pre-authorized payment plan for my RRSP for years, I like the idea of just stopping it if need be (or if life gets in the way of my regular contributions)… without having to fill out more paper work or talking to the human resources person again, or being on hold on the phone with the Canada Revenue Agency for eons.

Finally, because I get a lot of investment income slips, it can be unpredictable as to what my interest income is for the year, or my capital gains etc. I don’t want to have to pay the Canada Revenue Agency for this and with the RRSP deduction, it would be a good buffer for all of this non-employment income I get, so I can avoid (God forbid) having to OWE the Canada Revenue Agency come tax time.

So my dear government, enjoy your interest free loan courtesy of me…for now. I know I’m not being financial smart or prudent with this decision, but that’s what personal finance is about, right? It’s personal What works for me may not work for others.

Readers, do you use the T1213 form? I wonder what the percentage of Canadians is that reduce their income taxes is, by this method? Can you list any other pros or cons for the T1213 form completion? Do you enjoy the big tax refund at the end of the year like me, or are you more pragmatic?

How to Get More Money Back from your Tax Return

youngandthrifty Net Worth Update: February 2011

young — Mon, 21 Feb 2011 15:42:22 +0000

$129172 (+ 1.03%)

Another month has gone by, we’re almost into 1/4 of 2011 already! I hope everyone is keeping up with their personal finance resolutions. I usually do my net worth calculation at the same time every month (yes, I actually look FORWARD to this, am I a personal finance geek or what?), but this month it was a little skewed as I was out of town (more on that later this week). I think I might be a few days off from when I usually do my calculation. I still haven’t got to including my pension back into the net worth calculations, though.

I also delayed posting this because I was hesitant to include so much information for the world to see. I hope it benefits you in some way, you can try and learn from my mistakes (and victories, hopefully)…

Okay, so here’s the breakdown for February:

ASSETS:

CASH: $13246(+1.05%)

I added up my chequing and savings accounts (High Interest Savings Account). I automatically deduct money from my chequing account and have it siphoned to the HISA account (paying yourself first)

STOCKS: $19809(-19%)

Now please hold your horses, I haven’t lost 19% of my investment portfolio (not repeating another 2008 here, lol). What I did this month is move some of my money into the TFSA (since I almost depleted it late last year). I plan to take my tax refund (hopefully it’s juicy) and put it into the TFSA too.
These are stocks that capture the “moment in time”, including unrealized gains or losses in my BMO Investorline and Questrade accounts. I added up USD and CAD stocks as “Canadian” money to be simplistic (which is about a 0% difference right now)

RRSP: $8700 (+1.04%)

This includes the monthly contribution into my TD E-Series account (primarily bonds), a GIC in my ING Direct Account and my new Questrade RRSP account.
I have maxed out my contribution for the 2010 tax year, and am planning to take my refund at sock it in a TFSA (two birds with one stone, anyone?)

OTHER INVESTMENTS: $3347 (-3.3%)

If you’re wondering what I hold in my Other investments- check out my post long story
I have some investments that were poor choices (I signed up for them before I became self “edumacated”) that are losing money big time. In order to receive a tax credit, I got persuaded into buying some flow through shares, Venture investments that gave out a tax credit, and some more mutual funds about four or five years ago.
This lonely mutual fund hasn’t been moving much, unlike the rest of the market. Once I hit January 1, 2012 I’m going to take my money back and run

TFSA: $5607 (+947%)

I sold about $5000 worth of equities in my nonregistered account and put it into my TFSA. I haven’t bought anything with my new TFSA money yet, though I plan to this month.
When I get my tax refund, I plan to put it into either the TFSA or back into the RRSP (for the 2011 tax year): I’m all for double dipping!
For my 2010 TFSA, I signed up for a Tax Free Trading Account with Questrade
Last month, I sold most of my TFSA income trusts (all but two- which are being converted) and kept about $500 in the TFSA account as Questrade requires you to have a minimum of $200 in the account.
I plan to put $15000 $10,000 back in (slowly throughout the year, of course…) to avoid the penalty from our good friends at the Canada Revenue Agency.

CAR:

My car is 11 years old and still running well. Boyfriend has been pressuring me to get a new car (is it a guy thing?) but I like my 11 year old car.

PRINCIPLE RESIDENCE: $387,500

LIABILITIES:

Mortgage Debt: $307954 (-0.3%)

Before anyone goes ballistic on me for taking on such a large mortgage debt (which I know you might anyway! ) we are planning to rent the out the basement out after the renovations to help with the mortgage. This will be on top of the full amount that we pay accelerated biweekly.
I’m excited to tackle this mortgage beast and pay down my debt- might be a new focus on youngandthrifty.ca!

Credit Card: $1383

I pay off my full amount every month (and folks, it’s VERY important you do so otherwise you’re losing out on a 19% return!) but include it in my net worth update so I have an accurate picture of my actual net worth. I sort of think “If I were to sell everything right now, what would my net worth be?”
I basically charge everything to my card to reap the benefits (free flights and hotel stays here I come!)
I got the SPG AMEX card for a few months already and have been using it as often as I can (compared to the MBNA travel elite card) but American Express isn’t accepted everywhere here in Canada…which is a hassle.
BF and I got the Royal Bank Avion Infinite Card as our joint credit card (free for one year since we have a mortgage with RBC! So will be using it and letting you how I like it- I would of course not pay $170 a year for this, but since it’s free for one year, why not?)

RRSP versus TFSA: Head to Head Comparison

young — Mon, 07 Feb 2011 15:45:27 +0000

There has been a lot of talk about which one is better, the RRSP or the TFSA in both the PF blogosphere and the media. Both are great tools for saving for us Canadians. Given that it’s a fresh year (and almost time the RRSP contribution deadline for 2011- March 1, in case you forgot), more people are thinking about the TFSA and the RRSP.

In an ideal world, one could max out both the RRSP and the TFSA. That would be ideal. Though in the real world, life happens, and it is oftentimes very difficult to be able to scrounge up the money (without having to sell a kidney on the black market-kidding!) to be able to max out both the RRSP and the TFSA.

In my opinion, the RRSP and the TFSA are like siblings. Very different siblings. Almost mirror opposites and the inverse of each other. They both compete for your money and attention. They are both good, but as we all know, one can be better for you than the other, just like parents really do have a preference of one sibling over the other, but they just don’t say it aloud (uh oh, is my middle child syndrome coming out in my post?! Sorry about that).

So let’s talk about the RRSP first (the older sibling):

The Basic Lowdown on the RRSP:

The RRSP was introduced in 1957 (yeah, it’s the really old sibling)
As detailed in my RRSP post, the RRSP can hold a number of things (including GIC’s, stocks, mutual funds, bonds); it’s like a basket of investments sheltered from tax
Contributing to the RRSP is with PRE-TAX income (the tax refund you get is your pre-tax money, but given to back to you at a later date)
You will have to pay tax eventually when you take money out of it- it’s a tax deferral program (the hope is that when you take money OUT of the RRSP, you’ll be low income aka retired, so there won’t be as much income)
You are supposed to contribute to it to reap the tax deductions when you’re at a higher tax bracket, and take it out when you are at a lower tax bracket.
There are two options where you are allowed to borrow money from your own RRSP: 1) Home Buyers Plan and 2) Lifelong Learning Plan (with both you are expected to pay back 1/15 and 1/10 respectively, of the amount you borrowed per year until its fully paid)

The Lowdown on the TFSA:

People could first contribute to a TFSA in 2009 (this is the new baby sibling, becoming ever popular)
Each year after the age of 18, you can contribute to $5000 per year to a TFSA
Currently in 2011, if you haven’t opened a TFSA before, you can contribute up to $15,000
Like an RRSP, you can hold a number of things. The TFSA is like a basket of investments (GIC’s, High Interest Savings Accounts, stocks, bonds etc.)
Money contributed to it is AFTER TAX income, but you can take out money that has been compounding in the TFSA TAX FREE.
You can take out the money any time- tax free
You have to wait until the next year to contribute back to it, otherwise you will be dinged A LOT.
Many people have been using the TFSA as an emergency fund, but with the increasing amount allowed ($15,000) I think people should be looking at other options for their TFSA- like my personal favourite, the Tax Free Trading Account

Do you see what I mean about them being the inverse of each other? RRSP= pre-tax dollars invested, taxed when you withdraw; and TFSA= after tax dollars invested; no tax when you withdraw. Now that we’ve introduced the siblings, lets look at their good and bad traits.

PROS of the RRSP:

It feels awesome to get that tax return. Especially when you use that tax return to contribute to your RRSP again for the following year.
Like Jim Yih (a fee only advisor and best selling author and financial speaker on wealth), I agree that RRSPs are great in that you are forced not to want to withdraw from it (other than for school or for a first time home purchase)… because we all know that we all have sticky fingers and it’s hard not to take from the cookie jar!
Hence, it’s a great way to develop disciplined investing into your RRSP
It’s a good tool for those with high incomes who are taxed to the nines. It can feel good to get some of your tax dollars back.
You can hold USD stocks in it- great for big dividend payers stocks like Coca Cola, Johnson and Johnson etc. Because if these stocks are held OUTSIDE of an RRSP, you would have to pay hefty taxes on it because foreign income is treated like interest income- taxed at your marginal rate (e.g. if you paid 40% income tax, you would pay 40% tax on your dividend income from Coca Cola)

CONS of the RRSP:

It’s a tax deferral… if you have a great pension, you will be taxed to the nines when you are in retirement, especially when you are forced to take your RRSP out, little by little each year.
You can’t take money out except for buying a home (first time or very long time since you’ve bought a home) or for education for you or your spouse (up to the age of 71)
If you aren’t making much money that year (e.g. if you are a student) there isn’t too much point in taking a deduction for the RRSP. You already aren’t taxed that much, so you wont’ get much of your taxes paid back.
The Home Buyer’s Plan and Lifelong Learning Plan are great, but the money you pay back to your RRSP isn’t tax deductible.

Now let’s look at the hotter younger sibling, the TFSA

PROS of the TFSA:

Everyone gets the same amount- so it could be more equitable that way. Everyone can contribute $5000 starting from the age of 18.
So, theoretically if I contributed $5000 to a TFSA until I was 65 and had zero returns (which is highly unlikely) on my investments, I would still have a little over $200,000 in the bank. Tax Free.
It is easy to get your money out
You are rewarded for investing smart.
If you invested really well and made $4000 on top of your $5000 contribution, and you withdraw $9000, you can contribute $9000 back the following year instead of $5000 (Balance Junkie proves this is true by calling up CRA to double check)

CONS of the TFSA:

The problem is that it is being heavily marketed as a Tax Free High Interest Savings Account by all the big banks. You get 2% interest if you’re lucky, and as we all know this barely keeps up with inflation (this is understandable because with such little amount able to invest, the banks don’t want to waste their money or time if you have so little to invest with them- that’s my two cents anyways)
With little contribution room available ($15,000 so far), it might not be feasible to invest in equities or trade very often, because this eats away at your contribution room ($29 a trade can really add up).
It’s very easy to take money out (it’s both a pro and a con) so being able to save for something long term (like retirement) will be difficult, what with our natural tendency towards instant gratification

Youngandthrifty’s Take:

Personally, I am trying to contribute to both. I don’t have very much money that I am allowed to contribute towards an RRSP anyway because of the Pension Adjustment, so a little tax refund is always nice to offset some things like capital gains, interest income etc., otherwise I might be paying more taxes when I’ve already paid so much in taxes from my primary source of income.

I do like that the RRSP allows you to contribute USD. I do like that with the TFSA, it can be used as a short term mode of investing and saving. I like them both, for different reasons.

I would recommend that for those who are not taxed to the nines yet (like students, new grads, young adults etc.), it is better to contribute to a TFSA. The TFSA would be better for short term goals (within 1-10 years), like saving for a down payment, saving for a car, saving for that future baby, or saving for that big trip. The TFSA (younger sibling) is great for those short term goals. If you are able to invest well with the TFSA, those goals can become reality that much sooner. However, just as we can’t ignore the wiser, older sibling, we must not forget about the RRSP. We need to make sure we have enough to retire on too. Because compound interest and TIME is on your side (because we’re young!), once you start making some money, I would sock some money away at an RRSP for now. It’s hard to play catch up when you’re saving for retirement.

However, for the 32% of us that have a big pension to retire on, I would mainly recommend the TFSA. With $200,000 available to be withdrawn tax free and a pension, there should be enough money available for a comfortable retirement. That is unless can’t resist dipping into the cookie jar before then!

Of course, everyone is different and would have a different reason for having one or the other as a better option for their situation. It’s best to sit down and really think about the merits of each option to figure out which one you want to allocate the majority of your hard earned money to.

Readers, what do you think? Do you prefer the RRSP or the TFSA? Are you planning to contribute to both? If you had to pick one, which would you choose?

How to Use the Home Buyers Plan

young — Mon, 20 Dec 2010 15:43:36 +0000

Way back when, I had talked about how one can use the RRSP for the Home Buyers Plan. Having bought my first home recently, I found the home buyers plan information on the Canada Revenue Agency website a bit difficult to understand (must be all that government lingo), so I thought I would simplify it in easy to understand terms and spell it out step by step on how take advantage of the HBP.

First off, in case you haven’t heard of the Home Buyers Plan, I’ll try to explain it.

It’s where a first time home buyer (you and whoever you buy the home with) can each withdraw up to $25,000 from your RRSP tax-free. The caveat is that you have to repay it within 15 years, following the second year after the home is bought.

e.g. if you buy the home in 2010, you will have to start repaying the Home Buyers Plan withdrawal in 2012.

Conditions in order to be eligible for the HBP plan:

You have to be a first time home buyer (or you are buying it for someone who is disabled)
You must enter into a written agreement to buy a home or build a home (offer of purchase). Getting a preapproval from the bank doesn’t cut it.
You have to be a Canadian citizen (Gooo Canada!)
You plan to use the home as a principal residence (not for rental income)
This is the big one: you cannot own the home for more than 30 days before the withdrawal (so as you can see, it’s a bit time sensitive!)
You have to build or buy the home before October 1 on the year or after the year of withdrawal
You have to have money in your RRSP (duh!)

You don’t have to use the HBP as a down payment, you can use it for whatever you want (they don’t check), you could use it for renovations, for a trip around the world (though that might not be a good idea.. just sayin’!) etc.

For each withdrawal from each RRSP account (if you have more than one like me), you will need to complete a T1036 form and answer their questions. You then bring that to the RRSP issuer (e.g. your bank, investment advisor etc.) and they will help you take the money out so that it’s not subject to the RRSP withholding tax.

Starting the year following your withdrawal, the minimum you will have to repay back to the government is 1/15 of the amount that you took out from your RRSP in the first place. Here’s an example:

Let’s say you took out $10,000 for a down payment for your condo in 2009. You get a break in 2010 (woohoo!) and in 2011, you will have to let the government know that you have redeposited money back into your RRSP account, otherwise, it will be included as income for your 2011 taxes. The amount included as income (if you don’t repay it to your RRSP) would be $667, which is 1/15 of $10000.

In order for you to let the CRA know that you have been good and made repayments back into your RRSP, you will have to fill out another form for the CRA (Schedule 7). Unfortunately, these repayments are NOT tax deductible so you are basically putting the money back into your RRSP interest free.

IMPORTANT REMINDER:

Remember that you cannot withdraw from your RRSP any contributions that you have made within 90 days of the withdrawal or else you will get DINGED. This happened to a friend of mine, and she was not a happy camper.

Also, some RRSPs are “locked in” and don’t allow you to take money out for e.g. five years from investment. So make sure you know your investment goals when you invest in your RRSP.

Some pros and cons of using the Home Buyers Plan I have thought about:

PROS:

It’s money that has been tax sheltered and you can take advantage of the growth in your RRSP (if any )
You can use it for anything, doesn’t have to be a down payment
You don’t have to start paying it back until about a year and a half after you buy your home
If you plan on going back to school, or if your net income somehow gets lower in any calender year (e.g. you started up a business and have tons of deductions), you don’t have to pay the 1/15 owed back and instead, can just leave it as income for that year. You will have low(er) income that year anyway, so you don’t have to worry about paying too much tax (if any) on that income.
There is no maximum pay back. You could pay back the full $10,000 that you took out if you wanted to, later on.
It’s an interest free loan over a 15 year span, to yourself, basically

CONS:

It’s more debt… debt to your own RRSP (interest free)
Lost opportunity costs of compounding over 15 years (unless you pay it back right away)
If you have lost more than your marginal rate in your RRSP portfolio (e.g. you got $3200 back from the government for your RRSP contribution, but your portfolio is down $5000 from the market), then you are essentially selling for a loss of $1800 and not really gaining any benefit from tapping into your RRSP
There’s a small window of opportunity to take advantage of it (namely within 30 days after possession date)

Hope that helps you decide whether the Home Buyers Plan is right for you. You can find very detailed information about the HBP on the CRA website.

Readers, did you use/do you plan to use the Home Buyers Plan for your first home purchase? Do you have any Pros and Cons you would like to add?

Weekend Ramblings & Link Love: good bye $100 yearly fee edition

young — Sat, 12 Jun 2010 20:29:27 +0000

Hope everyone’s having a great weekend so far. It’s beautifully sunny here in Vancouver and I can’t wait to get outside to enjoy some of that rare sunshine.

I finally got my act together and signed up for a self-directed RRSP Questrade account. I’m transferring over the BMO investorline RRSP account to Questrade. I found that I was hesitant to rebalance my portfolio in the BMO Investorline account because of the $29 trading commissions. Also, I was getting sick of paying the $100 yearly administration fee (that the guy neglected to tell me about when I signed up a few years back) that they charge if your portfolio is less than $25,000. I’m not even allowed to contribute more than $25,000 in RRSPs because of the pension adjustment I get. I should have done this a long time ago, oh well- hindsight is always 20-20, right?

LOL I might as well change my middle name to Questrade. I now have a non-registered margin account, a TFSA account, and an RRSP account with them. You really can’t beat the $4.95 trades.

And the winner is…

youngandthrifty.ca had a giveaway of the book “Enjoy Your Money; How do Make It, Save It, Invest It, and Give It” by Steve J. Miller. I used random.org and drew the winner of the book giveaway.

And the winner is….Kevin! From Financiallypoor.com. Congrats, Kevin!

Some weekend Links:

CanadianFinanceBlog examines how frugality can lead to happiness
DeliverAwayDebt talks about how hiring someone to cut your grass isn’t really worth it (as I hear my neighbours getting their grass mowed)
FinancialSamurai tries to give some reasons why East Coast living isn’t that bad (sorry, can’t give examples here because I’m a west coast girl!)
Million Dollar Journey gives some tips on how to attract the best tenants
The Financial Blogger calculates how you shouldn’t be scared into a fixed mortgage because of media hype
Couple Money considers whether now is the time to by BP (let’s just say I feel bad for people who were holding BP before this disaster struck! Can you say.. OUCH?)
MoneySmartsBlog (previously Four Pillars) tells you to Under Promise, Over Deliver
Money Reasons reveals his Movie Secret Frugal Weapon
Well Heeled Blog talks about how sushi can be an expensive culinary habit (mmmm me hungry now)

TFSA (Tax Free Savings Accounts) Basics

young — Wed, 03 Feb 2010 04:48:58 +0000

Since everyone is likely busy finding money to fill their RRSP’s (the deadline is March 1, 2010 to claim for the 2009 tax year by the way), people probably aren’t focusing on the TFSA’s right now. If you are a 20something and are in school and aren’t making that much money (aka you’re not getting taxed to the nines), you should think about contributing to a TFSA instead.

The TFSA’s were introduced in the since January 1, 2009 and is basically the greatest thing since sliced bread (or RRSP’s which were introduced almost half a century ago- before we were even born, shucks!)

Like RRSP’s, TFSA’s are not an investment per se, think of it like a glass jar. It’s a container where you put your investments. Anything that you EARN from putting stuff in this container is withdrawn tax free.

The TFSA is basically the inverse of the RRSP (DANG, Jim Flaherty- you’re not just a pretty face after all!)

In the TFSA you invest with your after-tax hard-earned bloodsweat money, and money that is withdrawn from it is NOT taxed.
In the RRSP, you invest with pre-tax dollars (yes, the tax refund is supposed to reflect this) and money that is withdrawn is taxed– the caveat is that most people who retire are at a lower tax bracket so they will pay less tax on the money withdrawn.

You can hold many things in the TFSA (except USD holdings- only Questrade TFTA’s allow this) and it’s the same for an RRSP.

TFSA Rules:

You have to be over 18
Everyone gets $5000 a year max to contribute
Any unused space in your $5000 can be carried forward to next years (e.g. you only contributed $2000 in 2009, you can contribute $7000 in 2010)
TFSA’s don’t expire (so you can be 98 and still have a TFSA- whereas you HAVE to start withdrawing RRSPs at 71)
TFSA’s can hold anything that RRSP’s can hold (For some reason, I have the song “I Can Do Anything You Can Do Better” in my head)

What should you put in your TFSA?

90% of people who start up a TFSA end up stashing their cash in a fixed income high interest savings account that earns 3% (max…) ING Direct is offering this right now, but doesn’t guarantee how long the 3% will last. Let me give you a hint…Not long. But at least with the orange key, you get the 3% for an undefined amount of time, AND $25. One other bonus is that ING Direct won’t charge you fees.

That’s good if you want to use it as an emergency cash savings “jar”. But it’s not recommended. After one year at 3% you’ll only get $150 (x your marginal rate of 40%….which is… wait for it……. $60 saved in taxes). So you should definitely let your friend, compound interest take over.

If you’re looking for more growth, then the self directed TFSA is probably the way to go.

You can hold mutual funds, ETF’s, bonds, stocks.. you name it in your TFSA investment account.

Some TFSA Investment Account brokerages/ banks:

Questrade No fees; check out my post on Tax Free Trading Accounts here
Scotia itrade No fees.
HSBC
CIBC
BMO
TD Canada Trust
RBC

Just a word of caution- some of the bigger banks have fees associated with the registered TFSA account (just like how I have to pay BMO Investorline $105 a year for having an RRSP account open with them- which they neglected to tell me about when I signed on, but that’s another story).

OR you could open up a TD E-Series mutual fund account (low MER’s yeeehaw AND no fees) and put in a small amount each month (e.g. $400) for dollar cost averaging.
I have TD E-trade RRSP account and love it- but it was quite arduous to get it in the first place!
I would recommend going to a TD Branch first and getting a basic mutual fund account (don’t buy any mutual funds on it though!), then convert it to the E-trade account by calling in and then buy your mutual funds there.

Hope that clears up some of the confusion surrounding TFSA’s!
What have you filled with your TFSA?
Any suggestions?

youngandthrifty book review: The Wealthy Barber by David Chilton

young — Thu, 14 Jan 2010 22:44:46 +0000

The Wealthy Barber

By David Chilton

The Wealthy Barber was lent to me by a friend who wasn’t very keen on financial planning (her boyfriend gave it to her)- she hadn’t finished yet. So I borrowed it.

It’s an easy read. It’s an older book (published 1995) but it’s very relevant… timeless! It’s kind of a page turner in a way- you want to find out what Roy says next, or what happens next to the characters in the book… I guess it’s like the Harry Potter or Twilight of financial planning. Somehow the author manages to pack in everything you need to know about finances (wills, RRSPs, insurance etc) into this neat storyline.

You follow the events of people who are in their mid to late 20′s in search of answers to their financial questions from the small town barber. His name’s Roy and even though he doesn’t look it, he’s wealthy.

He shares some common sense tips on personal finance and financial planning with the visitors from the city.

Pay yourself 10% of each paycheck first

I think I read this book before The Automatic Millionaire but I guess great minds think alike. Paying yourself first before you pay everyone else (before you even think about spending it away), and whatever is left over is yours to play around with. It’s a tried and true way of making sure you save money and grow it. I started doing preauthorized withdrawals from my BMO account to the Manulife Bank high interest savings account every pay check. It’s much easier this way

Get insurance

Basically the book says that if you have dependents (hmm in the future? When someday we will be financially ready for children?) you should get life insurance.

Write up a will

This is important especially if you have dependents or children. Otherwise, the government will take your money or it will be held up. I guess you don’t want to leave that kind of a legacy!

RRSPs!

Darn, The Wealthy Barber says that 10% that you’re saving each paycheck isn’t for your RRSP? Oh well, I guess you get some money back from the government. I know it’s hard to think about retirement, but just think about “home buyer’s plan.. home buyer’s plan..” instead!

Get a mortgage for a place. And pay it off quick.

He says that renting is for losers. But what? Buy a place and get a 15 year amortization period??? Pay it off weekly? I guess there WILL be less interest paid. There goes my “fun fund”. Maybe this only works in places where the price of a closet(450 sq) isn’t $400,000. Maybe it doesn’t work in Vancouver. I think I need to work on the “downpayment” part first, let alone paying something off weekly and within 15 years!

Be cheap

He emphasizes the fact that if you save a looney it’s really a tooney! (because it’s after tax dollars that we are saving). So it really does pay to save that extra $10 if you price match your new Mp3 player at Best Buy. The Wealthy Barber does say that it’s okay to not be that cheap, because if you save the 10% and max your RRSP’s, you should still come out ahead of the game.

Minimizes the taxes you pay

David says that it’s better to pay off your mortgage before you start the 10% savings (if you don’t have enough for both, that is) because you are using your AFTER tax dollars to pay off your mortgage. I’m not sure if I agree with this 100%. Then again, I don’t have a mortgage yet!

RESP’s

The book says that you should also put some money away for your kids (if you have any) because the RESP is a good tool from the government to encourage us to save.

youngandthrifty’s take:

In summary, I rate this book 10/10. Easy and entertaining read. Good common sense. Practical. One of the first financial books I have read and it gives a good simple yet comprehensive summary of what you need to do to have a good financial plan to be financially secure in the future.

Have you read The Wealthy Barber? What do you think? They probably need to do a new edition with the new TFSA option out.

Tiger Woods: Here are 16 Last Minute Tax Tips for Year End (hey! same number as your mistress count!)

young — Mon, 21 Dec 2009 22:22:59 +0000

I’m not actually sure what the current mistress count for Tiger Woods is, but last I checked, it was 16. I thought I would write up a post about the last minute tax tips before the end of the year to help decrease your tax burden for 2009.

This post isn’t really about Tiger Woods. Tiger Woods doesn’t live in Canada, anyway. He’s probably getting a lump of coal for Christmas because he hasn’t been a good boy this year. Anyway, here you go:

16 Last Minute Tax Tips:

Moving to a different Province?: If you’re moving to Alberta or something, you should be cognizant of what date you actually move. December 31 is the day that the Canadian Revenue Agency will decide what you pay for your taxes. So if you are moving to a province that has LOWER taxes soon, you might get your butt over there sooner rather than later. If you’re moving to a province that has HIGHER taxes, maybe you can wait until the new year.
Getting Married?: For all you winter wedding people, December 31 is the day the Canada Revenue Agency will take if you get married. So you can reduce your taxes that you pay for 2009 by getting your vows done before December 31.
Car Maintenance Expenses: If you use your car for work or your business, you can deduct the expenses related to using that car (gas, oil changes, maintenance, winter tires etc.) So hurry over to your mechanic for that oil change before the end of the year to be able to include those expenses in your 2009 tax return. I’m planning to get my oil changed on Monday.
Donate to Charity: It wasn’t a coincidence that I have been getting more letters from charitable organizations asking for my donations. Many people donate to charity at this time of the year to reduce the taxes that they owe. In B.C., if you donate any amount up to $200, you get 16% back. For any amounts OVER $200, you get 29% back. The government encourages us to donate, therefore they let us give our money tax free. So, if I were to donate a total of $250 in 2009, then the first $200 I get 16% back ($32) and then for the next $50 I get 29% back ($14.50). So if you don’t plan to donate more than $200 this year, it’s probably a better idea to lump them up all together and claim them next year. A great Canadian website that has all the CRA approved charities online is: Canada Helps It’s easy, fast, and convenient.
5. Realize Capital Losses: You can offset your capital gains by selling off your loser stocks. Remember that only 50% of the capital loss can apply. So to calculate the taxes you have to pay: Capital gains – capital losses= net amount x 0.50 x marginal rate. You have to do this before December 24 (a few more days! Hurry it up!) because it takes 3 days to settle a trade and December 28 is in lieu of Boxing Day in Canada.
6. Don’t Realize your Capital Gains until after December24: Then you can defer the capital gains tax you pay for a whole year.
7. Collect all of your Medical and Dental Expenses: Medical and dental expenses can be claimed for any 12 month period. So you don’t really have to rush for this one, I guess.
Stock up on Equipment if you’re Self Employed: You can stock up on computers, stationary, business cards, etc. etc. if you’re self employed. Maybe even the iPhone if you use your phone for work. As long as the receipt is dated before December 31, you’re good to go.
Computers yield a 100% deduction: To stimulate the sagging technology sector, the recent 2009 budget said you can deduct 100% of the cost of a computer you purchased between January 27, 2009, and before February 2011 if you are are a business owner. You don’t have to deduct the depreciation cost. I don’t think many people know about this, there’s not much buzz around it for some reason. So all you bloggers out there, submit your receipts for your computer! Better yet, buy a computer on Boxing Day and claim it! (Talk about hitting two birds with one stone!)

Fill up that RRSP: Fill or max out your RSP room if you can to minimize the taxes that you have to fork out next year AND get a nice tax refund.
Fill up that TFSA: Fill or max out the $5000 that was introduced this year to minimize the taxes that you have to pay.
Home Buyers Plan: If you’re planning to buy a home before the interest rates go back up sky high, you should delay the HBP withdrawl until next year in January to delay repayment until 2012. Otherwise, you’d have to repay your HBP withdrawls in 2011.
Home Renovation Tax Credit: The Canadian Government (bless their hearts) introduced the Home Renovation Tax Credit to stimulate the economy as well. If you spend between $1000 and $10,000 before February 1, 2010 you can get a 15% nonrefundable tax credit. The government keeps adding more things that are eligible for this tax credit. Including: Permanent installed air conditioing, driveway installation, landscaping, permanent installation of a home security system, and tree removal. I know it’s kind of last minute, but I’m sure you can get some of these things done before December 31 to reap the tax advantages for this year. Again, you have to OWN your home to be eligible for this tax credit. *sigh* there goes my home envy again.
Claim Investment Expenses: A real easy one to get before December 31 is to sign up for a safety deposit box.
Lastly, if possible Delay or Defer Income: If your workplace is pretty flexible with regards to your paycheck, you can ask them to delay your paycheck until the new year (you better not be living paycheck to paycheck or this won’t work!) so you don’t have to pay tax on your paycheck until next year.

There you have it. Sixteen last minute tips to save taxes on your 2009 Tax Return. Good luck!

Hopefully there aren’t more than sixteen mistresses, otherwise I’d have to edit this post to include more tax tips!
Any other tried and true last minute tax tips out there?