My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, February 25, 2019

Bridging the Financial Literacy Gap with your Spouse

We have all heard the expression about affairs of the heart: opposites attract. However, how do these opposites operate when managing a family’s financial affairs? Spouses and common-law partners sometimes come to the relationship with differing levels of financial literacy.

When meeting with couples to discuss their financial affairs, it has always amazed me how one spouse often takes control of that aspect of their lives and the other spouse, in many cases, abdicates that responsibility. Of course, in some families, the financial duties are shared and both spouses have an understanding of the family’s finances, but I would suggest this is the exception rather than the rule.

How do you as the “financial spouse” involve the other spouse in spite of their indifference or reticence? How can you help them overcome their comparative lack of financial literacy? Why would you even want to?

Why your spouse should raise their financial literacy


I will start with the why. Here are three reasons:

  • For the sake of your marriage — it is best to have consensus on financial decisions.
  • You may die first — your spouse needs to be aware of and understand family finances, or it could lead to severe financial consequences. At minimum it could create significant stress for them after you die.
  • Get a new view — it may be useful to have a different perspective on financial issues.

How to improve your spouse’s financial literacy


Here’s how you can involve your spouse in the family’s financial affairs:

  •  Plan, document and communicate
  •  Introduce your spouse to your advisors
  •  Review the budget together
  •  Ask your spouse to pay some bills
  • Share yearly investment reports
  •  Discuss daily financial events

Plan, document, and communicate


An estate organizer is a great tool to plan, document, and communicate with your spouse on key financial issues. It doesn’t help just your spouse — it assists your entire family and your executor on your death.

While this estate organizer is really a future document, you can use it to educate your spouse now. If you have not prepared this document, do so; if you have already prepared it, you should review it with your spouse. Walk through each section. It will provide clarity on your affairs to your spouse and they will at least have some familiarity with this document if your death precedes theirs.

Introduce your spouse to your advisors


Introducing your spouse to your advisors means involving them in meetings. Introductions to your advisors will help your spouse develop a comfort level with the advisors. This will go a long way if you pass away and are not around to continue the relationships. On a current basis, if your spouse attends these meetings, they will begin to gain at least a minimum understanding of your affairs.

Review the budget together


If you create a family budget, you should review it with your spouse. A non-financial spouse will often consider this a form of financial torture, so keep the review brief and hit on points that your spouse is responsible for or will affect them. Seeing that you spent x dollars on restaurants may crystallize your concern about eating out too much to your spouse. Along similar lines, reviewing your interest expense will highlight the need to reduce debt. Any number of issues can be discussed.

Your spouse may surprise you. Sometimes showing the raw numbers in black and white can trigger an interest in financial affairs that – after all – affect them just as much as they affect you.

Ask your spouse to pay some bills


It may help to have your spouse be responsible for paying certain bills. This teaches them how to pay bills, especially online. I am often shocked by how many spouses have no clue about banking and paying bills. By taking an active role in this crucial activity, they can see first-hand the budget issues your family may have. In addition, should you pass away, it is vital your spouse have basic banking and bill paying skills.

Share yearly investment reports


I have always stressed the importance of looking at your investments annually to review your returns, fees and asset allocation. While your spouse may not care about the minutia, they may be interested in your yearly returns.

Discuss daily financial events


When there is a significant financial event – Brexit, an interest rate hike, trade agreement negotiations, or even relevant tweets from U.S. President Donald Trump – you may wish to have discussions with your spouse, so they are aware and understand the potential impact on your day-to-day lives.

Finding the right financial conversation


There are many practical ways to get your spouse involved in the family’s financial affairs. Feel free to discuss them in the comments below.

While there are some people who do not really want their spouse to have too much knowledge of their financial affairs, let’s hope these spouses are few and far between. For everyone else, the benefits of improving your spouse’s financial literacy are significant. I would suggest that you consider implementing some or all of the steps I discuss above to improve your spouse’s financial literacy and your family’s financial and estate planning. Your marriage and finances with be all the better for it. 

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms. 

Monday, February 11, 2019

Exploding 19 Common RRSP Myths

It’s that time of year again. We have just a few weeks left until the Registered Retirement Savings Plan (RRSP) deadline, and despite its almost 60 years in existence, there are still plenty of myths and misconceptions surrounding this popular retirement savings plan.

Today, Sarah Rahme, CFP, a wealth advisor with BDO Canada LLP, gets us ready for the 2019 RRSP deadline by demystifying 19 common RRSP myths.
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Myth #1: RRSPs are for everyone


The reality is that every Canadian needs to evaluate their own fit for an RRSP. We generally say that Canadians earning a lower income (under $50,000 yearly) should use a Tax Free Savings Account (TFSA) instead. Moderate earners have to weigh the pros and cons before deciding which option will work better for them in the long run. This typically entails weighing the tax savings you would gain today versus the tax cost when you withdraw your RRSP or Registered Retirement Income Fund (RRIF) in the future and how quickly you may need to access the funds in your TFSA.

Myth #2: RRSPs aren’t worth it, since you need to pay tax on withdrawals


Some of you may wonder: what is the point of sheltering tax now since you will be paying it back at some point? Needless to say, should your tax bracket be lower in retirement, you will benefit from significant tax savings and tax-free compounded returns.

But what if your tax rate ends up being higher during retirement? We believe depending upon your specific situation, you may still be ahead based on the long-term tax-free compounding effect.

Myth #3: RRSPs have one use — retirement


An RRSP can also be used for two other key purposes:
  • purchase your first property through the Home Buyer's Plan (HBP) (up to $25,000 to purchase your first home)
  • finance your or your spouse’s training or education with the Lifelong Learning Plan (LLP) ($10,000 per year up to $20,000 in total to finance your education at a qualifying institution).

Myth #4: I should pay off my mortgage and other debt first


Let’s distinguish between two types of debt: high-interest and low-interest. For high-interest debt – the best example is credit cards, which can carry rates of up to 29.99% – absolutely, paying off debt should take precedence. But when it comes to low-interest debt, such as a mortgage, be careful not to scrimp on retirement savings. As long as you can generate a return on your investments that is higher than your cost of borrowing, it may make more sense to invest rather than pay down that low-interest debt.

Myth #5: I cannot make a withdrawal from my RRSP until I retire


Technically, funds in an RRSP are available to the plan holder at any time, even if there is a withholding tax on the funds withdrawn. (The exception, of course, is withdrawals under the Home Buyer's Plan or Lifelong Learning Plan, which are tax-free.) That being said, unless you really need the money, try to withdraw RRSP money at a time when your tax bracket is the same or lower than it was at the time of the contribution. Be aware that the statutory tax withholding may be significantly less than the actual income tax you owe in April, so plan for this shortfall.

Myth #6: It doesn’t matter when I make my spousal RRSP contribution


This may be the case if you don’t intend to make a withdrawal from the plan in the next three years, but if you do, the contribution timing matters.

As a reminder, spousal RRSPs allow one spouse to contribute to the other’s RRSP. This can often be a sound tax strategy when one spouse earns significantly more money than the other. However, spousal RRSPs come with conditions. One big one is that funds withdrawn within three years are attributed as income to the contributor and taxed accordingly.

Withdrawal rules are based on calendar years, which means that if you make a contribution for 2019 by December 2019, you’ll be able to withdraw money attributed to the plan holder as soon as January 2022. If you make that same contribution sometime in the first 60 days of 2020, you’ll have to wait until January 2023 before withdrawals are taxed in the plan holder’s hands.

Myth #7: I’ll have more money to contribute when I’m older


This is not always the case. It’s true that your student loans will be paid off, and you’ll most likely generate more income. But you may also have new obligations, such as a mortgage or the financial responsibilities of child-rearing.

Myth #8: If I die, the proceeds of my RRSP are subject to taxation


Not always – there are two scenarios:
  • If the beneficiary of the deceased is a surviving spouse or common-law partner, the funds will roll over tax-free into their RRSP or RRIF.
  • If you have a child or grandchild who was dependent on you due to physical or mental infirmity, the funds will roll over tax-free into their RRSP or RRIF.

Myth #9: I don’t have enough money to start investing


Like with all investing, the secret formula is compounding. If you begin your investment journey, even with small sums, a long-term strategy will build those initial amounts into greater wealth.

Myth #10: I have to take my deduction in the year I contribute


Well, you can definitely claim your RRSP deduction every year – and benefit from the tax deduction immediately. But remember: If you think your tax bracket will be higher in subsequent years, you may want keep the deduction in your back pocket and maximize your tax savings.

Myth #11: I can only convert my RRSP to a RRIF when I turn 71


It is true that you must convert your holdings by the end of the year in which you turn 71. You can, however, convert a portion, or the entire amount, at any earlier age. In fact, it may make sense to withdraw $2,000 per year from your RRSP to utilize your pension tax credit to offset the taxes on the RRIF income once you turn 65.

Myth #12: Converting my RRSP to a RRIF is my only option when I turn 71


You also have two other options:
  • take out the account value as a lump sum cash payment. In this case, you’d need to pay tax on the whole payment.
  • buy a life annuity that would pay income at regular intervals for the rest of your life.

Myth #13: A Spousal RRSP doubles my contributing room


Your personal RRSP contribution limit doesn’t change just because you have two accounts at your disposal. You have a choice to use your own RRSP, your spousal RRSP or a combination of both, but only up to your personal RRSP limit.

Myth #14: I have to use cash to make my RRSP contribution


RRSP contribution rules offer you more ways to contribute than just cash. You can also use stocks and bonds and make what is known as a contribution-in-kind. However, if you transfer stocks or bonds with an unrealized gain, you will trigger a capital gain, and if the stocks or bonds are in a loss position, your capital loss will be denied.

Myth #15: I should borrow money to contribute


Sure, that’s an option. But it’s probably better to make contributions to your RRSP throughout the year. Many people do this via a regular payroll deduction. This both helps your long-term savings and decreases your debt obligations.

Myth #16: I should contribute a lump sum just before the Feb. 28 deadline


Many Canadians do follow that strategy, but it’s suboptimal. First of all, you lose out on a year of tax-free growth for your funds. Besides that, are you convinced you’ll have access to the necessary funds in the waning days of February?

Myth #17: I have to wait until I turn 18 to open an RRSP


This is a common source of confusion. In reality, an RRSP can be opened at any age. A TFSA, on the other hand, can only be opened by someone 18 years or older. That being said, typically it will not make income tax sense to contribute before you are earning substantial income.

Myth #18: I can hold any types of investments in my RRSP


The RRSP rules do restrict some investment vehicles, such as precious metals and land. Some other vehicles are permitted but can be problematic and complex. These include mortgages and shares of a private corporation. Speak with your financial advisor to learn more about holding these vehicles in your RRSP.

Myth #19: My employer sponsored pension plan does not affect my RRSP contributions


Registered pension plans and deferred profit-sharing plans affect your RRSP contribution limit in the same way. Your annual T4 information slip from your employer includes a pension adjustment amount which reduces your RRSP contribution room.

The general formula is as follows: Your RRSP deduction limit for a tax year starts with contribution room carried forward plus your current year’s contribution room, minus any Pension Adjustment or Past Service Pension Adjustment and plus any Pension Adjustment Reversal.

Sarah Rahme, CFP, is a wealth advisor with BDO Canada LLP and covers Eastern Canada. If you would like help structuring a customized comprehensive financial plan for you and your family, contact Sarah at SRahme@bdo.ca or 613 739-8221, ext. 4520. For other parts of Canada, contact Sarah and she will direct you to the BDO contact person in your region.

The content on this blog has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The blog cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information on this blog or for any decision based on it.

Please note the blog posts are time sensitive and subject to changes in legislation.

BDO Canada LLP, a Canadian limited liability partnership, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. BDO is the brand name for the BDO network and for each of the BDO Member Firms.