Life, Death, Taxes and Your RRSP

Life, Death, Taxes and RRSP

In the past few years, there have been deaths of my friends, co-workers, fellow bloggers and their mates. All were under the age of 50. All left their families ill prepared for their untimely deaths. Most did not have wills. Most had not planned their estates; many left behind young children without a parent or a financial plan in case something happened. In this month, where we celebrate love, one of the most loving things you can do is plan for your death. Having an estate plan is one of the most loving acts you can do for your family. Yes, it is a difficult conversation to have. It is an essential one if you do not want to leave a mess for those you love.

Last week, I had a great conversation with Christine Van Cauwenberghe, Vice-President, Tax and Estate Planning at Investors Group. We had a great conversation about life, death and estate planning.

Estate Needs Analysis

Many Canadians do not want to think about death. I know it is a conversation I dread. The first step to being prepared for it though is to have an estate needs analysis done. If you have small children, it’s essential. Meet with a financial advisor who can help you develop a plan.

Your estate plan is simply a part of your financial plan. Do you want your estate to have enough money to cover day-to-day expenses if you are not there? Do you want to pass on a legacy to your children? These are just a couple of things to think about as you plan your life and death.

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Naming the Beneficiary

In my conversation with Christine, one of the things she emphasized was to never have minor children named on any insurance plans or RRSPs as the beneficiary. It is better to name the estate and to have an executor in place to take care of the financial needs of the children.

Her suggestion was never to name a young person under the age of 30 as a direct beneficiary. There are several reasons for this. If you die without a will in place and have left your kids as beneficiary, the money they inherit is held by the government for the children until they reach the age of eighteen. If you need to feed them, clothe them etc., you have to apply to the court for access. Really, if you do not have a plan in place, you are leaving a mess for your spouse and are not able to provide care for your children in ways that you may want too.

Minimizing the Tax Hit

Death, taxes and probate fees go hand in hand. Have your will written in such a way that unregistered investments, such as real estate, will pass outright to your spouse or you can use the principal residence exemption to eliminate the capital gains tax.

Have your estate administrator consider, whether it is in your family’s best interest, if an additional spousal RRSP contribution in the year of your death might help lower taxes. While speaking with Christine Van Cauwenberghe, Vice-President, Tax and Estate Planning at Investors Group she said, “Ensure that all possible tax deductions, such as medical expenses and donations are also included in the final tax return.”

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Gifts and Family Disputes

Some people try to avoid taxes or simply because they want to see their loved ones enjoying a certain item, will choose to gift an item before death. This is generally not recommended, but if you do decide to give one child part of their inheritance before you die, you will want to somehow equalize your estate through your will to ensure all are being treated equally to ensure there are no disputes.

There are so many things to think about when creating an estate and a financial plan which is why it is best to include an expert in the conversation. Investors Group has experts in tax and estate planning and I know I am now better prepared after my conversation with Christine.

A comprehensive plan really does look at all aspects of your life. It is best to be prepared for life, retirement and even death. Have you designed a plan for your life yet? Check out the Investors Group site to learn how you can be better prepared with a comprehensive plan. It really is more than just thinking about RRSPs.

The RRSP Facts You Need to Know

rrsp season facts

With the RRSP deadline looming next week, So many of us are trying to figure out what we should be doing in regard to our RRSP contributions. The deadline is just a week away.

Are you wondering should I contribute? Does an RRSP need to be part of my plan? Should you be scrambling to get a contribution in?

Who should be contributing?

For low income earners (those under $35,000 per year) you should think of a TSFA first. Did you know most Canadians still don’t have one and few cap it out? It is really the first step when it comes to long term savings.

As well, if you are a low income earner having an RRSP can work to your detriment in retirement. If your income has been low enough in your life that you qualify for the Guaranteed Income Supplement then you do not need to worry about RRSP contributions and your best saving tool is the TFSA.

Are you in consumer debt? If you are before you put money into retirement accounts and the like get rid of any credit card debt. Once the credit card debt is gone then add to your savings, TFSA and RRSPs. My only cavet to this is you will want to have an emergency fund in place.

When should I start contributing to an RRSP?

If you are earning over $35,000 a year then you want to start with a retirement plan as early as you can. Remember the laws of compound interest and make them work for you. Often when we are younger we have less responsibilities making it possible to save more. Even if you can’t contribute later those early funds over time can make a huge difference to your retirement nest egg.

Do you know why timing matters?

Everyone every year is given a maximum contribution you are allowed to contribute. Just because you are given a figure doesn’t mean you need to contribute that amount. For you, it might not make sense. Take a look at your numbers and decide if doing so benefits you, it might not. If it doesn’t wait to contribute as you can carry amounts over.

Why is it important to shop around?

Everyone has their favorite bank or lending institution, the fact is they may not have what you need or want. Your local bank only has a set number of financial products and a limited number of GICs and mutual funds. Once your RRSP balance is growing you may want to seek the advice of a financial planner and decide to go with a self directed RRSP. The self directed RRSP gives you more options. You decide which mutual funds, stocks and bonds are in your best interest.

Should you Automate?

One of the best things you can do is think about your RRSP contribution long before the deadline looms. Why would you want the worry of coming up with funds in time for the deadline? By automating savings you don’t even really miss it.

Should you borrow to invest in an RRSP?

If you are thinking about borrowing to invest in an RRSP so you can get a tax break that year, be careful. If you are already carrying consumer debt or your tax bracket is not high enough in may make no sense for you to borrow. You will also want to consider how fast any loan can be paid back, the interest rate and your taxable income. My personal thinking on this, if you don’t have the funds ready to contribute set up an automatic payment for the future. Contribute the amount of what would of been a loan payment. You are now beginning to contribute and paying no interest rate.

There are many things to think about as the deadline looms that is why tomorrow night for the #CDNmoney chat we are talking about RRSPs. Please join me at Tuesday February 23rd, 7pm EST on Twitter for a great conversation.