A primer on RRSPs

Retirement seems like a long way off. Nothing but a destination far off in the distance that has little consequence for us in the here and now.

That’s future us’ problem, right?

Unfortunately, not. We’ve talked before about the many advantages of starting to save young.

Planning for retirement is the same thing. It’s a wave best caught early, otherwise you spend the rest of your life paddling frantically to catch up.

Today we’re talking about a little government program developed in the 50s called retirement savings plans or RRSPs.

We’re going to cover everything from what they are and who can contribute to them, to some common myths about RRSPs, and some legitimate concerns about them.

This article has two goals: One is to provide you with enough information that you can feel confident talking about RRSPs. The second goal is to help you make an informed decision as to whether or not an RRSP makes sense for your particular financial situation.

What is an RRSP?

An RRSP is a legally recognized trust with the federal government. It is not an investment itself. It is a special type of investment account where you can hold savings and other investment assets.

There are many types of investments that can be held in an RRSP. These include, but are not limited to:

  • Cash
  • GICs
  • Savings bonds
  • Treasury bills (T-bills)
  • Bonds (including government bonds, corporate bonds and strip bonds)
  • Mutual funds (only RRSP-eligible ones)
  • ETFs
  • Equities (both Canadian and foreign stocks)
  • Canadian mortgages
  • Mortgage-backed securities
  • Income trusts
  • Corporate shares
  • Foreign currency
  • Labour sponsored funds

What you can’t hold in an RRSP: precious metals, personal property (art, antiques, and gems), or commodity futures contracts. Those are the rules.

Who can get an RRSP?

Just about anyone. If you’ve filed a tax return and have an earned income, you are eligible to join the party.

You can open an RRSP with banks and trust companies, credit unions, mutual fund companies, investment firms, and life insurance companies.

Who can contribute?

You, your spouse, or your common law partner can contribute to it; however, it must be closed when you turn 71. At that time, you can withdraw your RRSP savings in cash, convert them to a registered retirement income fund (RRIF), or buy an annuity.

Why get an RRSP?

RRSPs were introduced in 1957 to supplement registered pension plans and encourage Canadians to save for retirement.

While the intention of the program is to set you up better for retirement, I would say the majority of people get them for the tax benefits they are going to experience in the here and now.

With RRSPs:

  • Your contributions are tax deductible

Your taxable income is reduced by the amount you contribute to your RRSP for that year. In a given tax year, you can contribute as much as 18% of your earned income (to a max of $26,010 dollars).

** If you are a member of a pension plan, this will reduce the amount you can contribute to your RRSP. **

  • Earnings are tax-sheltered

Investments within an RRSP can compound without you having to pay taxes on the gains. For the time being anyway.

You do have to pay taxes eventually, but this tends to be in retirement when your income tends to be lower than in you peak earning years.

The one caveat to this is that the funds must stay in the RRSP. In contrast to something like a tax free savings account (TFSA), you will take a tax penalty if you choose to withdraw your RRSP contributions early.

Some unfounded concerns about RRSPs

  • You have to pay taxes on your contributions eventually, so what’s the point?

A popular knock against RRSPs, although it shouldn’t be enough to prevent you from contributing to RRSPs altogether.

Since you get a tax reduction upon your contribution, an RRSP provides a completely tax-free rate of return on your net contribution. This holds true if the tax rate is the same in the year of your contribution and the year you make the withdrawal.

If the tax rate is lower in the year of withdrawal, you get an even better after-tax rate of return.

Even if the tax rate is higher in the year of withdrawal, the benefits of compounding tax free wash out the taxes you’ll eventually have to pay.

  • Having too much in an RRSP means there will be a huge tax bill when you die.

The rules say that your RRSP is included in income on your terminal tax return with tax payable at your marginal tax rate for the year of death.

If you have a surviving spouse or partner, or you have a financially dependent child or grandchild, a tax-deferred rollover will be granted.

You can also take annual withdrawals from your plan during your lifetime to maximize the income that will be taxed at low rates.

Some genuine concerns about RRSPs

Some financial gurus suggest RRSPs are an outdated program that does not reflect the current job market.

Their primary critique is that the program was developed way back in 1957: a time when long term job security was more prominent and people were much more likely to retire in a lower tax bracket than in their peak working years.

We now live in a gig economy. Job precarity is more common and many Canadians spend much of their careers in various entry-level jobs or spend some of their working years dealing with unemployment.

If there is a risk that you will have to withdraw funds from your RRSP early, it doesn’t make sense to put investments or savings into them. And this seems to be the case for a lot of Canadians: 40% of Canadians withdrew from their RRSPs early in 2017.

If this is the situation you find yourself in, you’re better off saving your money in something like a TFSA, which won’t hit you with the tax penalty an RRSP does for withdrawing.

Sources and further reading

Registered Retirement Savings Plan (RRSP)

The five biggest RRSP myths that Canadians can’t stop repeating

How RRSPs work

RRSPs: The Benefits

IT’S TIME FOR CANADA TO GET RID OF THE RRSP: It is a savings scheme that benefits everyone except the people it was designed to protect

These are the situations when contributing to an RRSP isn’t worth it

 

 

 

 

A quick starter guide to life insurance

Life insurance can be an uncomfortable topic to think about – no one likes thinking about not being around anymore. Like many things in life, however, it’s the things that can make us feel the most uncomfortable that are the best for us.

The fact of the matter is, life insurance is one of the best decisions you can make for you and the people you care about the most.

And the vast majority of people realize its importance: 90% of people surveyed in a recent study said they believe the person earning the primary income should have it. Herein lies the disconnect. While most say they should have it, comparatively less actually pull the trigger. Only 60% of people in the same study said they have a life insurance policy.

This article is made for people who know the value of life insurance, but don’t know if they should have it or not, and/or don’t know where to start.

I’ll tell you who needs it and cover some basic facts about life insurance that will start you on the path of making an informed decision about life insurance policies.

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Who needs life insurance

Life insurance is for anyone that will have debts to cover after they’ve passed on. These liabilities can come in the form of outstanding loans, mortgages, debts, funeral costs, and living expenses for your next of kin.

It’s supremely important for people who have others that depend on their income, but it also has its place for individuals with no dependents.

The basics

Where to begin? You’re in a good place by starting with learning the basics of life insurance policies.

Before you spend any money on anything, though, make an appointment and talk with an independent insurance broker or a fee-only financial planner.

These two entities will help you make the best decision based on your current life situation, and, because they won’t be the one selling you anything, serve as an objective voice.

Because they’re impartial, you don’t have to worry that you’re getting duped into anything for their benefit and not yours.

Before you go into that meeting, arm yourself with some basic knowledge so you can be an active participant in the discussion and get the most out of your time with them.

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The major types of life insurance policies

There are two major types of life insurance policies, both with their own pros and cons

  1. Term life insurance

Term life insurance is the type that most people think about when talking about life insurance in general.

Basically, you sign on for a certain number of years – ten, twenty, or thirty, most commonly – and you pay a premium every year for that period.

If, god forbid, you pass away during the time you’re paying your premium, your beneficiary (i.e. the person you say you want to give the money to) gets money.

The premium you pay every month and the money going to your beneficiary are agreed upon when you sign up for the policy.

Pros:

The benefits of term life insurance are that the premium is fixed, so you always know what you’re going to be paying; it comes at the lowest possible price; it protects you during the years when you and your family are most vulnerable; and you can pay into it during your prime working years.

For most, your mid-twenties to your fifties are vulnerable years for your family – the kids are growing and are dependent on your income and you’re still trying to establish your place in the world.

Covering your family in case something terrible happens during this time is very comforting.

Cons:

The major drawback to term life insurance is that you get no reward for taking your policy to its full term.

If you’re fortunate enough to live past your policy – and everyone hopes you are – all the money you paid into your policy is kept by the insurance company who issued it.

2. Permanent life insurance

Permanent life insurance is the other major type available.

In contrast to term life insurance, permanent stays in effect as long as you keep paying your premium – it’s essentially an open-ended policy.

Pros:

The first benefit of permanent life insurance is that it will potentially pay out no matter how old you are. If you keep paying the premium into old age, you could die at 95-years-old and still expect your beneficiary to get a payout.

Permanent life insurance policies also accumulate cash value (the amount of money offered to you if you cancel the policy) on a tax-deferred basis and serve as investment vehicles. Basically, they are a way to make your money grow AND protect you in the instance of a tragedy.

Cons:

Permanent policies sound enticing because of the additional benefits, but they come with one major drawback: they’re way more expensive than your standard fixed term.

The premiums on permanent policies can run you as much as 10 to 20 times more than the premiums on a term policy.

Which one do you go with?

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It really depends on your financial and life situation, but the most common is a term policy. It gives you basic coverage at a price that won’t break you financially.

Permanent policies have a lot of beneficial features that can make sense for you under certain conditions.

For example, financial advisors will generally recommend them to people who have already maxed out their contributions to RRSPs, TFSAs, and RESPs and still have more savings than they could spend in their lifetime.

It really depends on where you’re at financially and what your needs are.

Conclusion

Navigating the world of life insurance can be overwhelming and tricky – especially when you don’t know who you can trust. Everyone will tell you their product is the best.

It can also be a tough sell when you have so many other financial burdens you’re trying to cope with. You may be paying down debt, saving for retirement, or just trying to make ends meet in general. But, the investment is worth it. Just knowing the people you care about are going to be okay if you’re gone is comfort enough.

I hope you found the information useful and please feel free to comment below with any questions. Also, follow Healthy Wheys on Instagram, Facebook, and Twitter and follow the blog!

Top credit cards to have if you want to pay down your debt

There are a lot of things that separate the financially well off from the people who struggle to get by. And a lot of it can be blamed on circumstances outside your control – medical bills, family emergencies, etc.

But, what factors are within your control? If you placed two young people in their late-twenties, early-thirties who both had good jobs and aren’t plagued by financial hardship side-by-side, how do you tell who’s going to be better off financially in ten years?

It’s the one who’s better at thinking long term. Moreover, it’s the one who can make sacrifices now for the benefit of their long-term viability and security.

Let’s talk about credit card debt. And, more importantly, the credit card you should have in your wallet if you want to best manage – or pay down – your existing credit card balance.

If you want to create wealth, it’s an important discussion to have. 89% of Canadians have a credit card. On average we have two. And we tend to carry a balance (between $2,627 and $3954, depending on the source), which means we’re consistently paying a substantial amount of interest.

Taking on debt means borrowing money from our future selves. To put your future self in the best financial spot possible, start taking care of your credit card debt now.

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The benefits of little to no credit card debt

Having little credit card debt benefits you in two ways: you avoid paying interest and it’s good for your credit score.

Credit card interest

The average credit card comes with an interest rate around 19-20%. Typically, you don’t start paying that interest on your purchases for thirty days. But, 40% of Canadian credit card holders carry a balance on their credit card from month to month.

What many people don’t know is that your interest accumulates daily once it starts.

If we take the typical 20% Annual Percentage Rate (your credit card interest rate) and divide it by 365, we have a daily rate of 0.0548%.

If you have a balance of $3000 when the interest kicks in, you have a new balance of $3001.64. One day later, when the interest is calculated again, you’re up to $3003.29 – plus any additional purchases or minus a payment. This cycle repeats until the end of your monthly statement cycle.

Your $3000 balance has become $3048.04 without you even buying anything.

It’s not hard to think of ways in which you could better spend that money. You could be putting $50 dollars a month away for a vacation, an emergency fund, investments, or towards your retirement.

Credit score

The two credit bureaus in Canada – TransUnion and Equifax – use five factors to calculate your credit score.

  • Credit utilization ratio

The amount of credit you have used divided by the amount you haven’t used.

  • Length of history

How long you’ve been using credit.

  • New credit

Credit you have applied in the last six months.

  • History of payment

How well you’ve been able to pay off your credit.

  • Type of credit being used

What type of credit you’re using. Credit card versus mortgage versus line of credit, etc.

Credit card debt can affect all five factors. If you constantly keep your credit card towards its maximum, you can get dinged – it accounts for 30% of your credit rating.

If you’ve racked up a lot on your credit card on the last six months without consistently paying it down, you can get dinged – it accounts for 10% of your score.

If you have missed payments, you can really get dinged – it accounts for 35% of your credit score.

And, a lot of credit card debt can hurt you in comparison to other, better, types of debt. This factor accounts for 10% of your credit score.

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What do you do?

If you’re one of the many Canadians who carries a balance on your credit card and you want to make stop borrowing from your future, you want to alleviate yourself from credit card debt.

A good credit card with low interest can make it easier to do that.

I found this list of the best low interest credit cards in Canada in 2018 from greedyrates.ca. Here are the cards at the top of the list.

  • American Express Essential Card

This card has a fixed interest rate of 8.99%. It’s the lowest fixed rate in the country. It also has a 1.99% balance transfer fee for the first 6 months – making it easy to consolidate your credit card debt – and a 0% balance transfer fee.

  • Scotiabank Value Visa

The Scotiabank Value Visa does have an annual fee of $29 and the interest rate is a little higher than the American Express Essential Card at 11.99%.

The Scotiabank Value Visa does make up for it with some other promotions, however. There’s a promotional interest rate of 0.99% for the first six months, the 0.99% applies to balance transfers and cash advances in the first six months, and you receive up to 20% of AVIS car rentals.

  • BMO Preferred MasterCard

This MasterCard has an interest rate of 11.90% with an introductory rate of 3.99% for the first nine months.

The annual fee is a little higher than the first two at $99.

  • RBC Cash Back MasterCard

The RBC Cash Back MasterCard has no annual fee and offers a 1.9% interest rate for the first 10 months. It also comes with some cash back perks: 2% on groceries and 1% on everything else.

Conclusion

Wealth is about thinking long term. Managing credit card debt is one of those decisions that can have a huge impact on savings and your future financial situation. Make the good choice and get on top of it now.

Remember to follow Healthy Wheys for weekly articles about living your best life. And follow us on social media too (Instagram, Facebook, and Twitter).

Have a great week!