RDSP and Disability Tax Credits Common Misconceptions

A Registered Disability Savings Plan (RDSP) is a registered savings plan, similar to an RRSP; but it is intended to help parents and others to save for the long-term financial security of persons with severe or prolonged disabilities.  In order to qualify for government grants the person who is disabled must be eligible for the Disability Tax Credit, and be 49yrs or younger.

RDSPs are still relatively new and there is a lot of misinformation out there, some common misconceptions on RDSPs and other government benefits include:

You no longer qualify for the Disability Tax Credit if your adult child no longer lives with you.  Wrong.

The credit continues to apply if your adult child lives with you, and/or your child moves to assisted living as long as you continue to provide food, clothing and occasionally shelter.

In order to qualify for specific benefits, you must make meals for your adult child and charge them rent. Wrong.

Charging rent and making the meals yourself won’t meet the requirements, however if you don’t want to repay benefits, have the child plan and prepare their own meals.  If they are not capable; to ensure the rental agreement is acceptable; hire someone to help your child with food planning and preparation.

It is okay if an investment in your child’s name grows in value above $5000.  Wrong.

In Ontario, for people to qualify for support they cannot have more than $5000 in liquid assets.  To avoid disqualification of benefits, invest your child’s money through RDSPs, Segregated mutual funds or inside a Henson Trust.

The RDSP is a tremendous savings tool, although there is no annual contribution limit; there is a lifetime maximum of $200,000.  If opening a RDSP with a lump sum, make sure you leave room for an additional $1500 annual contribution for the next 20 years.  This will ensure you continue to qualify for up to $4500 per year in matching government contributions.

When the beneficiary is a minor, the parents or legal guardian can set up an RDSP and remain holders of the plan until the beneficiary turns 18.  If the beneficiary is over 18yrs and legally competent to manage property, then he/she must be the holder of the plan.  Although there can be more than one holder of the plan (both parents) there can only be one beneficiary per plan, and there can be only one RDSP per beneficiary.

In addition there are some general rules you should keep in mind; including age limits, vesting rules and competency of those over the age of 18.  For example, if the disabled person cannot sign for Powers of Attorney, a guardian would have to apply to the courts before they can sign the papers to open and/or manage a RDSP.

Not all financial institutions offer RDSPs make sure you are getting your advice from someone who deals with them on a regular basis.  If you have any questions, or want more information please don’t hesitate to give me a call, as we do offer them through Security Financial Services.

Have a great weekend,

Tracey

Sources:  Advisor.ca original article by Christopher Mason posted 03-07-14.  The Money Tree post 10-26-11   

 

What would you do with a Million dollars?

Whether your new money comes from an inheritance, lottery winnings or selling your business, it is easy to believe you are set for life upon receiving a large windfall.  However, most people; as many as 70% who receive large sums of money end up frittering it away within 1-3 years.

It doesn’t really matter where the money comes from, what is important is how you are going to handle this new and greater financial responsibility. 

The initial amount might be mind-boggling, hundreds of thousands to millions, and could temp you to satisfy too many personal and family requests.  Don’t make any major purchases or extend loans to family members – this could very quickly whittle the principle down to an insignificant amount.

One of the first thing most people should do is pay off high interest debt, then low-interest debt; followed by topping up RRSPs and TFSAs.  After that top up your emergency savings, kids education plans and non-registered investments.

Following that, the best thing to do is nothing, until you have had time to think.  You can park the balance of your windfall in a high interest savings account until you come up with a plan. 

It is also important to control your spending, with a lump sum windfall no matter how large, it should not be treated the same as a continuing high income, you don’t want to burn through your newly acquired nest egg.

Learn to say no.  Such a windfall could mean a lot of unsolicited calls from friends, family and charities for seed money, loans, and gifts.  Learning to say no will help prevent a lot of stress and hassles.

Once you have had time to absorb your new financial reality, it is time to make a plan.  What do you really want out of life?  Can you afford to stop working?  What about other lifestyle goals like travel, vacation properties or starting a new business? Remember, a large windfall is usually a one-time event, wealth and estate management is not.

If you don’t have one already, it is time to build a team.  You will need to revise your Financial and Legacy Plans with me; your Financial Planner, as well as your Accountant and Lawyer.    

Part of my job will be to take the emotion out of the financial decision making process and to guide you to ensure you have financial stability and income to last the rest of your life.

So, whether you find yourself with a large windfall or just need to help with day-to-day cash flow management, I am here to help you make the best decisions for your personal situation.

Have a great weekend,

Tracey

 

 

 

 

 

 

 

 

 

 

 

 

 

Sources:  Article by Camilla Cornell posted Advisor.ca 11-29-13, article by James Dolan posted Advisor.ca 09-05-13, original post on The Money Tree 11-08-13

 

Risk Aversion May Be Your Biggest Retirement Planning Risk

There have been many studies done that show Canadian investors are highly adverse to risk when it comes to their investment portfolios.  However, what most people don’t realize is that risk aversion can be the biggest risk of all when it comes to retirement planning.

When asked, many believe the way to reduce risk in a portfolio is to invest in GICs, T-bills,  Canada Savings Bonds and high interest savings accounts.  The return may be small, but your money is safe, right?  Wrong.

What most people fail to realize is that these ‘safe’ investments are exposed to long-term ‘Inflation Risk’.   With interest rates at historical lows there is a good chance most if not all of your return; as well as some of your principle; will get eaten up by inflation. 

Simply put; inflation is the cost of everyday items continually going up in price. For example, when I started in this business (almost 20 years ago) a stamp cost $0.29 today that same stamp is now $0.85.

When considering your investment options it is important to look at the long-term purchasing power of your money.  The current rate on a 1 year GIC is 1.3%, therefore if you invested $10,000 your money would grow to $10,130 by year’s end.  The problem; with the current rate of inflation being 1.8%, you would need $10,180 just to maintain the purchasing power of your money. 

Furthermore, if your investment is held outside your RRSP or TFSA your investment gains will be subject to income tax.  With a marginal tax rate of 46% your gain is reduced from $130 to $70.20, putting you even further behind.

As an investor you need to invest in securities that will not only keep up with the rate of inflation, but will grow your assets as well.   Furthermore, the fact that you will probably live longer than previous generations means you will need to save more money by the time you retire; also known as ‘longevity risk’.

 

Determining what kind of return you need to grow your assets sufficiently to fund your retirement is a complicated calculation.  There is a range of variables to consider including; how much have you accumulated thus far?  How much do you need to live on?  And what will be your withdrawal rate?  

There is no question that everyone’s situation is different and your lifestyle goals will determine how much you will need to save.  Hopefully one thing is clear, to avoid running out of money in retirement it might be worth taking on a little more investment risk today. 

If you would like to review your portfolio in relation to your retirement planning don’t hesitate to give me a call, this is my area of specialty and what I love to do.

Have a great weekend,

Tracey

Sources:  Advisor.ca article by staff posted 07-28-14, BBC News, In the 90s.com, Scotiabank

Credit Myths and Realities

Your credit score is a numerical representation based on your current and past credit history, it will range between 300 (worst) and 900 (best).   There are always misconceptions on what affects your credit; here are a few myths and realities:

Myth:  There is no harm in paying bills late, as long as you pay the full amount and it doesn’t happen often.

Reality:  Your payment history has the largest negative impact on your credit score.  It is important to pay your bills on time, and for the right amount. 

Myth:  Applying for multiple credit cards does not affect your credit score.

Reality:  – Multiple credit inquiries can lower your credit score.  However if you are looking for mortgage or auto financing and have inquired at different institutions; lenders will usually give you a thirty-day buffer.  For example, if you apply for a mortgage on June 30^th, and the credit report shows three previous inquires in June, those inquiries will be ignored since they took place within the thirty-day buffer zone. 

Myth:  In Canada, your credit rating is affected by your age, gender and income level - The higher your income, the better your credit rating.

Reality:   Your credit rating is based on how you manage your finances.  Lenders will look at whether you pay your bills on time, carry a balance or regularly miss payments.

Myth:  Reducing your credit card limits will improve your credit score.

Reality:  Lenders like to see a gap between your limit and the balance you’re carrying.   A good rule of thumb is to keep your balances owing below 30%.   So if you line-of-credit is for $10,000 keep your balance owing below $7000, balances over this amount may lower your credit score.

Myth:  Repeatedly replacing old credit cards for newer ones with lower interest rates is a positive thing.

Reality:  The longer your credit history with one lending institution the higher your credit score.  Therefore, if you are considering reducing the amount of credit cards you have, cancel the one that you most recently acquired.

Myth:  Using cash all the time is good because you don’t owe anything, therefore you must have great credit.

Reality:  Using credit responsibility is one of the easiest and fastest ways to increase your credit score.  Unfortunately those people who use cash to make purchases on a regular basis may have a lower credit score than those who use credit.

Maintaining good credit is one of the most important things you can do for your financial health.  Since checking your own credit does not affect your credit rating, it is recommended you request a report at least once per year, read it carefully and reporting any discrepancies.  You can attain a copy of your credit report at www.equifax.ca or www.transunion.ca .  

Have a great weekend,

Tracey

 

 

Source:  Mortgage Brokering in Ontario, Agent Edition, written by Joseph J. White, Advisor.ca by Staff posted 3-9-14