Determining whether to contribute to an RRSP or pay down a mortgage has always been a great debate, for each have their advantages. To begin with, an RRSP contribution is tax-deductible, and it can generate a tax refund for you or it can reduce your income tax liability. In addition, an RRSP will continue to grow and accumulate without taxation, meaning you will accumulate more over similar taxable investments. On the other hand, while paying against the principle of a mortgage is not tax deductible, it does reduce the cost of the mortgage over the long term; however, interest on a mortgage is not tax deductible either.
When determining what works best for you, either contributing to an RRSP or paying down a mortgage, we do a series of calculations comparing RRSP contributions and accumulations versus mortgage payments and accumulations. To do this, total RRSP investments accumulated at retirement age are compared using two approaches: making the RRSP contribution, or making the mortgage repayment and using the subsequent savings from the mortgage towards RRSP contributions once the mortgage is paid off. This intricate analysis is best done by a financial planner to ensure the figures used are accurate and specific to your individual case.
When doing an analysis like this, we would look at the following:
- Current outstanding balance on your mortgage
- Current mortgage interest rate
- Assumed long term mortgage interest rate
- Rights under your mortgage to make payments against the principal
- RRSP carryforward room
- Annual RRSP room created
- Assumed long term rate of return in the RRSP
- Your marginal tax bracket
Arianna (age 35) would like to figure out if she should contribute to $5,000 to her RRSP or put the same after-tax equivalent $3,000 (40% tax rate) against her mortgage.
If Arianna applies $5,000 to her RRSP contribution, the investment would accumulate to $22,338.72 by age 65 assuming 5% rate of return compounded monthly.
Alternatively, she can apply $3,000 against her current mortgage of $500,000 with an amortization of 20 years and interest rate of 4%. Her current mortgage payment is $3,029.90 (Pre-tax equivalent: $5,049.83).
By doing this, she reduces her amortization period by 2 months, making her new amortization period to 19.8 years. She then redirects her mortgage payment of $5,049.83 to her RRSP for the next 2 months at 5% rate of return, she would accumulate $18,009.40 by age 65.
In this example, she would be better off contributing to her RRSP.
It is likely that these assumptions will vary in the future and could change the outcome of the analysis. Please consult us before making a decision.
In reality, you can also do a combination of the 2 approaches, for instance by contributing to your RRSP, you can use the tax refund to pay down your mortgage, this way you can get the benefits of both strategies.
Before buying insurance from your bank to cover your mortgage, please consider your options. What does the insurance cover?
- From the bank: only the balance of your mortgage
- From us: whatever you need it to cover such as debts, line of credit
What happens as my mortgage balance decreases?
- From the bank: the coverage amount decreases as your balance decreases.
- From us: the coverage stays the same for as long as you own your policy
What if I switch banks?
- From the bank: You might lose your coverage and need to reapply
- From us: Your coverage stays the same, since it’s not tied to your mortgage
Who gets the benefit if I die?
- From the bank: The Bank
- From us: You decide who gets the insurance and how to use it, such as to pay your mortgage, medical expenses or child’s education- whatever is best for your family
Talk to us, we can help.
You most likely do, but the more important question is, ‘What kind?’ Whether you’re a young professional starting out, a devoted parent or a successful CEO, securing a life insurance policy is probably one of the most important decisions you will have to make in your adult life. Most people would agree that having financial safety nets in place is a good way to make sure that your loved ones will be taken care of when you pass away. Insurance can also help support your financial obligations and even take care of your estate liabilities. The tricky part, however, is figuring out what kind of life insurance best suits your goals and needs. This quick guide will help you decide what life insurance policy is best for you, depending on who needs to benefit from it and how long you’ll need it.
Permanent or Term?
Life insurance can be classified into two principal types: permanent or term. Both have different strengths and weaknesses, depending on what you aim to achieve with your life insurance policy.
Term life insurance provides death benefits for a limited amount of time, usually for a fixed number of years. Let’s say you get a 30-year term. This means you’ll only pay for each year of those 30 years. If you die before the 30-year period, then your beneficiaries shall receive the death benefits they are entitled to. After the period, the insurance shall expire. You will no longer need to pay premiums, and your beneficiaries will no longer be entitled to any benefits.
Term life insurance is right for you if you are:
- The family breadwinner. Death benefits will replace your income for the years that you will have been working, in order to support your family’s needs.
- A stay-at-home parent. You can set your insurance policy term to cover the years that your child will need financial support, especially for things that you would normally provide as a stay-at-home parent, such as childcare services.
- A divorced parent. Insurance can cover the cost of child support, and the term can be set depending on how long you need to make support payments.
- A mortgagor. If you are a homeowner with a mortgage, you can set up your term insurance to cover the years that you have to make payments. This way, your family won’t have to worry about losing their home.
- A debtor with a co-signed debt. If you have credit card debt or student loans, a term life insurance policy can cover your debt payments. The term can be set to run for the duration of the payments.
- A business owner. If you’re a business owner, you may need either a term or permanent life insurance, depending on your needs. If you’re primarily concerned with paying off business debts, then a term life insurance may be your best option.
Unlike term life insurance, a permanent life insurance does not expire. This means that your beneficiaries can receive death benefits no matter when you die. Aside from death benefits, a permanent life insurance policy can also double as a savings plan. A certain portion of your premiums can build cash value, which you may “withdraw” or borrow for future needs. You can do well with a permanent life insurance policy if you:
- …Have a special needs child. As a special needs child will most likely need support for health care and other expenses even as they enter adulthood. Your permanent life insurance can provide them with death benefits any time within their lifetime.
- …Want to leave something for your loved ones. Regardless of your net worth, permanent life insurance will make sure that your beneficiaries receive what they are entitled to. If you have a high net worth, permanent life insurance can take care of estate taxes. Otherwise, they will still get even a small inheritance through death benefits.
- …Want to make sure that your funeral expenses are covered. Final expense insurance can provide coverage for funeral expenses for smaller premiums.
- …Have maximized your retirement plans. As permanent life insurance may also come with a savings component, this can also be used to help you out during retirement.
- …Own a business. As mentioned earlier, business owners may need either permanent or term, depending on their needs.
A permanent insurance policy can help pay off estate taxes, so that the successors can inherit the business worry-free. Different people have different financial needs, so there is no one-sized-fits-all approach to choosing the right insurance policy for you. Talk to us now, and find out how a permanent or term life insurance can best give you security and peace of mind.
Working with a professional to help you to make sense of your finances can be a wise move, but for this relationship to work effectively it is important that you understand what to expect from your financial advisor.
What can your financial advisor help you with?
- Defining your financial goals and creating a step by step plan or strategy to achieve them.
- Planning for the future, including for retirement, future education or housing needs.
- Choosing the mix of investments and assets that suit your goals, lifestyle, time horizon and appetite for risk.
- Building a solid estate for your family to inherit in the future.
- Choosing the most tax-efficient methods of saving and investing.
What should your financial advisor inform you of?
- The range of services that they offer and how much and by which method you will compensate them.
- Your mutual responsibilities and obligations towards each other.
- What the planning process will look like and the documents that they will provide you with.
What will your financial advisor need from you or need to ask you about?
- What your financial goals are.
- What your personal circumstances – such as your marital status, any dependents, your job, earnings and tax situation.
- Any investments or assets that you currently have – such as registered accounts, workplace pensions, property etc.
- Your appetite for risk and investment preferences.
- Information on your income and also your outgoings, including debts such as mortgages, loans or credit cards.
- Whether or not you have a will, and its contents.
- Your estate and inheritance planning situation.
If you’re looking to achieve your financial goals, talk to us. We can help.
Several key changes relating to personal financial arrangements are covered in the Canadian government’s 2018 federal budget, which could affect the finances of you and your family. Below are some of the most significant changes to be aware of:
The government is creating a new five-week “use-it-or-lose-it” incentive for new fathers to take parental leave. This would increase the EI parental leave to 40 weeks (maximum) when the second parent agrees to take at least 5 weeks off. Effective June 2019, couples who opt for extended parental leave of 18 months, the second parent can take up to 8 additional weeks, at 33% of their income.
The government aims to reduce the gender wage gap by 2.7% for public servants and 2.6% in the federal private sector. The aim is to ensure that men and women receive the same pay for equal work. They have also announced increased funding for female entrepreneurs.
Effective for 2021 tax filings, the government will require reporting for certain trusts to provide information to provide information on identities of all trustees, beneficiaries, settlors of the trust and each person that has the ability to exert control over the trust.
Registered Disability Savings Plan holders
The budget proposes to extend to 2023 the current temporary measure whereby a family member such as a spouse or parent can hold an RDSP plan on behalf of an adult with reduced capacity.
If you would like more information, please don’t hesitate to contact us.
BC Finance Minister Carole James delivered the province’s 2018 budget update on February 20, 2018. The budget anticipates a surplus of $219 million for the current year, $281 million for 2019 and $284 million in 2020.
Corporate and personal tax rates remain unchanged.
The biggest changes are:
- Elimination of Medical Services Plan (MSP Premiums) effective January 1, 2020
- Addition of the Employer Health Tax (EHT)
- Provincial Property Taxes
The Employer Health Tax and Medical Services Plan premiums:
Effective January 1, 2020, the Medical Services Premium (MSP) will be eliminated. In last year’s budget update, MSP was reduced by 50% effective January 1, 2018. Starting in 2019, the budget introduces the Employer Health Tax (EHT). The EHT is to help fund the elimination of the MSP premiums.
The Employer Health Tax will be calculated as a percentage of payroll:
Provincial Property Transfer Taxes
Effective February 21, 2018, the following will occur:
- The provincial property transfer taxes (PTT) will increase to 5% (from 3%) on residential property values above $3 million.
- The PPT applies to foreign purchasers of residential properties in BC will increase to 20% (from 15%) and the tax will extend to include the Fraser Valley, Capital, Nanaimo and Central Okanagan Regional Districts.
- There is a new speculation tax on residential property in BC. This tax is targeted at foreign and domestic homeowners who don’t pay income tax in BC. Starting in 2018, it’s a rate of $5/$1,000 of assessed value, in 2019, this will increase to $20/$1,000.
There will be a new affordable child care benefit that will reduce child care costs by up to $1,250 per month per child by 2020. The new benefit will apply in September 2018. Families with pre-tax incomes of $45,000 or less will receive the full benefit, (up to the cost of care) while those who make up to $111,000 will receive a reduced amount, scaling based on income. The government will be releasing an online benefit calculator to help parents budget.
The budget will provide up to $350/month directly to licensed child care providers to reduce fees. They will be the following:
- Up to $350/month for group infant/toddler care
- Up to $200/month for family infant/toddler care
- Up to $100/month for group care for children aged 3-5
- Up to $60/month for family care for children aged 3-5
To learn how these changes will affect you, please don’t hesitate to contact us.
CorePlan Financial Inc. Burnaby Office
CorePlan Financial Inc. Fort St. John Office
2 – 11116 100th Ave.
Fort St. John, BC
Phone: (250) 785-9603
Toll Free: 1 (877) 461-5140
Fax: 1 (888) 453-3277
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