Author Archives: JamieList

Tax Free Savings Accounts

The government of Canada gave us Canadians another tax savings option in the 2008 federal budget that will go far in helping Canadians accumulate wealth in a tax-effective manner.  The Tax Free Savings Account is quite simple, and the features of the plan are as follows:

  • It is open to all Canadians over the age of 18, and continues for life.
  • The maximum contribution into this plan will be $5,000 per year. That amount will be increase with inflation in increments of $500 in future years.
  • There is NO tax deduction available for deposits.
  • All income and growth is exempt from taxation, even on withdrawal.
  • Unused contribution room can be carried forward.  If you make a withdrawal, the amount withdrawn can be replenished to the account in subsequent years without any penalty.
  • As with an RRSP, the plan contemplates spousal contributions without affecting the contribution room of the spouse receiving the spousal contribution.
  • TFSA can then be used for whatever purpose at whatever time. (buying a house, paying for a wedding, starting a business, etc.).

We think that every Canadian over the age of 18 should have this account. For the time being, your TFSA balance will be small, and that will limit your investment options, but it is a great place to hold any extra cash – since the account has no penalties to your “room” when you withdraw, you can move funds in and out without penalty.  And, with interest rates at record low levels, we need all the help we can get on interest savings after tax and inflation are taken into account.

Here are two strategies that you can implement in the future:

  • Lower income taxpayers: for taxpayers who are saving their money while earning a lower income, the TFSA is a better deal than the RRSP (i.e. for the spouse during maternity leave). This is because the positive effect of the RRSP deduction is less if the taxpayer has a lower income tax rate (lower tax rate = lower amount of tax back from your RRSP deduction). If an individual is in a situation where they expect to be earning more in the future, then the TFSA would be a far better choice, and the taxpayer could carry forward RRSP room for future deductions, hopefully at higher tax rates.
  • Funding Education for Adult Children: parents might consider funding more of a child’s education on the agreement that the adult child save the equivalent amount in their TFSA. This would allow the parents to take all relevant deductions and credits for funding their children’s education, and it would allow the children to begin to accumulate savings in their own TFSA. They are likely earning a very low income as a student, their contribution to the TFSA will come at a very low after‐tax cost.
  • All in all, I think that the TFSA is a good move for Canadians. If for no other reason, it simply provides you with another planning tool. If the tax benefits are not enough to persuade you, then the added planning options and flexibility should.

Do I really Need Life Insurance?

Yes, you do.

As a parent, life insurance is a necessary part of planning, because it takes care of your family if something happens to you.  It is not an enjoyable topic, but it is something you should look into.  You will likely be surprised at how inexpensive a program can be.  The big questions is “how much should I get?”  That is different for everyone, but basically, there are three main reasons we buy life insurance:

  • To pay off debt (usually the mortgage and/or student loans)
  • To replace the lost income of the person who is gone
  • To pay for expenses what may arise when one or both parents are gone.

In the first example above, the amount is easy to understand.  If you have a mortgage of $200,000, you should have a corresponding amount of insurance to pay off the debt should something happen.

Replacing lost income is a bit more complicated.  What industry experts recommend is that you should have approximately 60-70% of your family’s annual income available should something happen to either spouse.  So, if both parents are earning $50,000, the family income is $100,000.  If something should happen to one of them, then there should be funds available to create an additional $10,000 to $20,000 per year, likely until the kids are finished at least high school.  If the children are young, this could mean that the surviving spouse needs this income for 15-20 years.  The insurance amount for this situation would be to create a benefit of $150,000 to $250,000 in the event that one of the two income earners is gone (this would be in addition to the insurance that is earmarked for debt repayment).  Here are two calculators to explore – Sun Life, LSM Insurance or there is a good one available at the Bearing Capital Partners website.

Finally, families should consider the added costs to the family if one of the parents is gone.  Will there be an increased need for daycare or housekeeping as the surviving spouse continues to work?  This could cost an additional $15,000 to $20,000 per year, depending on the number of children, etc.  For two children, a working single parent would need to have some kind of back-up, and we estimate that cost at an additional $15,000, until the kids are 16.  This would be funded in much the same way as the lost income, and would require approximately $100,000 to $200,000 (in our example) of insurance benefit.

Last, you might want to consider adding some small extras, such as an education fund and some final expenses, in order to deal with added burdens to the surviving spouse. The big question is “where do I get this stuff?”  There are two sources.  First, your company employee benefits plan likely has some kind of benefit, and there might be the opportunity to apply for more.  These company plans tend to be less expensive, but you run the risk of losing coverage if you leave your employer.

Your other option is to find a licensed insurance broker who can take you through the options.  Most young families should consider term insurance, which is an inexpensive method of providing a benefit.  There are other plans that have more permanent options, and that build up an investment value over time, but these can be looked at later, when you have some excess savings.  The important thing is to get some insurance in place and make sure that everyone is taken care of.

Heads Up Dad – Money

Hi all, and welcome to Heads Up Dad, Money.

The intent of this section is to generate some discussion about the financial strains of parenting.  Believe it or not, parenting and finances generally don’t mix.  Kids are expensive, and there are not a great deal of programs that help parents run the finances and their families at the same time.  Canada is a great country to live in, and we are lucky to be able to raise kids here (one year parental leave, etc), but financial literacy has only recently come into the foreground in our education system (too late for us!).

Some ground rules about this section:

  • questions are always appreciated, and gives lots of ideas about future posts
  • feel free to post comments publicly to generate discussion and debate
  • feel free to contact me directly if you feel the question is more discreet
  • let’s keep this away from an investment forum (you can try my company blog for that – see RSS feeds to the right)

So, Dads, what we have to do is find time to negotiate the various pleasures and pitfalls of parenting, and also understand that money is an integral part of keeping a household running smoothly.  Money does not buy happiness, to be sure, but lack of money can create stress and strain in even the strongest of family relationships.

The main focus of this section will be to try and shed some light on some common strategies and opportunities to help you make the money problem a little easier and more enjoyable to deal with.  Most people agree that they will remain healthy if they eat wisely, stay hydrated, and get lots of sleep—and if they do all of that, they will have a better than average chance at a long and healthy life.  The good news is that, with similar simplicity, your wealth and financial success is going really to come down to how you approach three broad elements:

  • planning
  • discipline
  • tax

Avoiding, reducing, or simply dealing with taxes can be the single most important way to help you bolster your wealth as you move forward.  Planning and discipline you can supply on your own, perhaps with some coaching. Keep your eyes away from the financial junkfood that you see day-to-day on TV about “the markets” and how people who claim they have a one-size-fits-all solution that can help you achieve your retirement goals – picking the “hot stock” or latest investment product will not make your financial situation any better.  Instead, trust your gut and instinct, stick to some simple, straight forward basics, and you should be well on your way to making money—an situation that enhances your experience as a Dad, not one that frustrates the journey.