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When people hear the word wealth management, they think of ‘elite’, ‘sophisticated’ investment portfolios. In fact, it’s not about that.
Wealth management is selecting the right solution to build and protect your overall wealth. It’s about finding that balance, between life and planning for the future.
When properly designed, your wealth portfolio can provide the following:
1. A goal that is realistic in achieving;
2. A wealth plan, to allow benchmarks and measurement of success;
3. Aligned to your investment objectives and invested in your comfort and risk – not your professional’s risk;
4. A plan designed for the long term. Wealth creation is best when slow and steady.
Wealth management should not be complex. The biggest reason it becomes complex is people are inundated with charts and graphs and complex math formulas that the average person just wants to put up their hands and say forget it. They then go on and entrust someone to do it for them, and go through life not being engaged in their wealth management portfolio.
It should not be that. It should be simple, easy to understand and you should be engaged.
That’s what we want to achieve in protectyourfinances.ca . Information to help you become engaged, so when you speak with your professional everyone is on the same page.
Non-Registered Investments
Non-registered investments can include many things such as stocks, bonds, mutual funds, and GIC’s to name a few. Non-registered investments are subject to tax, but not all of the investment income is taxed the same way and at the same rates. Some examples you will pay tax on include interest-bearing investments, dividend-paying investments, capital gains and foreign investments.
Non-registered investments do not have any contributions limits.
Annuities
An annuity is a contract with an insurance company. Here, you deposit a lump sum amount of money and the insurance company agrees to pay you an income for a period of time, or life (depending on the type of annuity). People consider annuities in having a predictable, stable retirement income stream. Annuities are available through a licensed insurance agent or broker.
Many factors are used to calculate an annuity, and the main ones are interest rates and life expectancy. Once an annuity has been purchased, you can’t make changes to it. The payments are locked in.
Two types of annuities exist.
Term certain annuity
Term certain annuities give you a regular income stream for a set number of years (a term). Depending on the term you select, if you are receiving the annuity income and you die before the end of the term, your payments will continue to go to the estate.
Life Annuity
A life annuity gives you an income for life. Payments generally stop when you die, thus not having money go to your estate. Some may allow you to add your spouse, beneficiary or estate to continue receiving your payments after death. If this is important to you, make sure you ask the question to see if it is available when you are considering a life annuity.
Registered Retirement Savings Plan (RRSP)
A registered retirement savings plan (RRSP) is registered with the federal government. The purpose of the RRSP is to help you save for retirement, while reducing your taxes when you make the contribution during your working years.
The tax advantage to an RRSP is its deductible from income, which means a contribution reduces the amount of tax that would otherwise be payable. Plus, funds accumulated within the plan, from contributions and investment returns are tax sheltered until they are removed from the plan in which they are taxed.
RRSP’s have maximums in the amount you can contribute, so it’s important to know what the maximums are to avoid over contribution.
Registered Retirement Income Funds (RRIF)
A registered retirement income fund (RRIF) is a registered investment vehicle out of which a prescribed minimum must be withdrawn each year. Different types of investment options exist, so it’s important to speak to a professional when it comes to your overall goals and objectives, as well as risk tolerance. A RRIF can come from a person who holds an RRSP, or is retiring or retired and is close to reaching the age of 71.
Generally speaking, when a client reaches 71 they must collapse their RRSPs and most people generally consider a RRIF because of its unique features. RRIFs require a minimum to be withdrawn, and many variables are used to calculate the minimum. The amount paid out is based on the market value of the balance in the fund and the age of the annuitant at the beginning of the current calendar year. Just like an RRSP, income earned in a RRIF is tax- deferred. Tax is payable on the amount withdrawn each year in the plan.
Registered Education Savings Plan (RESP)
A registered education plan (RESP) is a tax-deferred education savings vehicle where the contributor or subscriber, enters into a contract with the sponsor to invest the funds for a beneficiary or beneficiaries post-secondary education.
Contributions to RESPs are not tax-deductible for the subscriber. As such, while the funds are in the RESP the contributions, grants and earnings are growing tax free. Currently, the lifetime maximum one can contribute to an RESP for a beneficiary is $ 50,000. No annual limits or contributions are applicable on RESPs. Any funds borrowed to contribute to an RESP are not tax deductible (the interest).
The federal government also make’s contributions to your child’s RESP through its grant programs. If you meet the qualifications, the following may be available to the subscriber:
1. Canada Education Savings Grant (CESG) – Children qualify for the CESG until the end of the year they turn 17. The lifetime maximum for the grant is $ 7,200 for each child. If the child does not continue education after high school, you are not able to keep any of the grant money – it is returned to the federal government. However, you can transfer money between individual RESPs for siblings without any tax penalties, without having to repay the CESG. The child who benefits this must be under 21 years old when the plan was opened.
2. Canada Learning Bond – The Canada Learning Bond (CLB) provides an additional $ 2,000 per child to help families with modest income save in the RESP. Eligibility requirements exist, so please consult with your professional to see if you qualify for this. You don’t have to make any contributions to the RESP to qualify for this. As well, if you are not eligible for the bond when you open the RESP, if your circumstances change down the road you can re-apply.
Registered Disability Savings Plan (RDSP)
A registered disability savings plan allows people with disabilities and their families to save for the future. Just like the RESP, government grants are available to help add to the savings while growing tax free (when not used).
You must qualify for the disability tax credit with this type of plan in order to be eligible. There is no annual contribution limit, but the lifetime contribution limit for the beneficiary is $ 200,000. Contributions can continue to be made until the beneficiary turns 59. The contributions are not tax deductible, and savings grow tax free while inside the plan.
Similar to the RESP, the RDSP has government grant programs. Different rules exists for eligibility of the grants, so it’s best to consult with the Canada Revenue Agency (CRA) to verify what the eligibility is.
Canada Disability Savings Grant
This grant is based off the beneficiaries’ family income and the amount contributed in to the plan. The RDSP can get a maximum of $ 3,500 in grants in one year, up to $ 70,000 in the beneficiary’s lifetime. The grant can continue to be paid into the RDSP until December 31 of the year the beneficiary reaches 49 years of age, if the eligibility criteria is met.
Canada disability savings bond
This bond is an amount that is paid by the Canadian Government directly into an RDSP. The bond is up to $ 1,000 a year to low-income Canadians with disabilities. No contributions have to be made to receive the bond. The bond maximum is $ 20,000, and can be put into the RDSP until the beneficiary reaches 49 years of age, if the eligibility criteria is met.
When some of these events occur, the grant and bond have to be re-paid in the preceding 10years before to the Canadian Government when:
– The RDSP is terminated;
– The plan ceases to be an RDSP;
– The beneficiary stops being eligible for the disability tax credit and an election to extendthe period for which an RDSP may remain open is not filed by the plan holder;
– A valid election to keep the RDSP expires;
– The beneficiary dies.
When considering an RDSP, it’s best to have a discussion with a professional to ensure
Locked In Retirement Account (LIRA)
When individuals have a defined contribution pension plan, and leave an organization – one of the options available to them is to transfer the proceeds into a locked in retirement account (LIRA). Some similarities exist between an RRSP and LIRA, accept the ability to be cashed in at any time. A locked in retirement account, is ‘locked in’ and is not able to be unlocked until retirement or at a specified age within the applicable pension legislation. Also, once funds have been transferred into the locked in account, you cannot make continuous contributions like an RRSP (ie. monthly deposits). The investment growth earned within the LIRA is also considered to be locked in.
This is why if you are leaving your company, and it has a defined contribution pension plan – it’s best to consult with a professional to go over all your options to ensure what you select meet’s your goals and objectives, as well as risk profile.
Tax Free Savings Accounts (TFSA)
A tax free savings account (TFSA) is an account that accrues tax free earnings. Even though contributions are not tax deductible, there is no tax payable on income earned within the TFSA or when you take it out of the TFSA.
To contribute to a TFSA, you don’t need earned income to contribute. They are available to Canadians over 18 years old.
The TFSA is an alternative to other registered savings plans. Just like the RRSP, contribution limits are applicable to the TFSA. The contribution room consists of the TFSA dollar limit for that year (as set by the Federal government) plus any withdrawals made in the preceding year, along with any unused contribution room. Unused contribution room can be carried forward and used in the future.
So it’s best to ensure you check what your contribution limit is, before you contribute. Just like RRSPs, over contribution will be taxed at a rate in excess of the contribution amount, every month.
When deciding if the TFSA is right for you, it’s best to have a conversation with a professional to go over your goals and objectives, as well as risk tolerance before helping you set it up.