Affiliated with Sentinel Life & Sentinel Financial Management Corp.
This message comes to you and your loved ones with my warmest wishes. And a special "Thank You" to the many clients, friends, and associates for all the wonderful referals you have sent our way this past year. The most sincere compliment you can pay us is to refer us to family members, associates, colleagues, and friends. Your referals are the lifeblood of our thriving, ever-evolving and improving Financial Services practice and have allowed us to serve all of our clients better.
November/December - 2001
Commentary - Hans H. Mathisen
Strategies to Enhance Your RRSP is the subject of LIFE LETTER for November. As the RRSP season is approaching, you will find helpful information in this bulletin. One of the strategies is: Borrow to maximize your RRSP. I have RRSP loans available at prime MINUS 1% ! That should bring your cost of borrowing to about 3% per annum! Why not maximize your RRSP NOW? For details, see below!!
The Income Tax Bond is covered in the December issue of LIFE LETTER. The dilemma we all face is: Who do we want to inherit our RRSPs or RRIFs - our children and grandchildren or the Government of Canada?
Please read the example in LIFE LETTER again: It’s equivalent to borrowing a large sum of money at 1.5% interest per annum for the rest of one’s life, and never having to repay the loan and the accrued interest! Think about it. And then call me. I’ll be glad to give you a personalized example.
THE STOCK MARKETS - The major markets have now recovered from the Sept. 11 disaster, and all indications are that they will continue to move upwards. A full commentary will be found in the next issue of this Newsletter.
Strategies to Enhance Your RRSPs
Since their introduction in 1957 as an incentive to save for retirement, Registered Retirement Savings Plans (RRSPs) have evolved into the most popular savings vehicles in Canada. All too often, though, RRSP decisions are made in a panic to meet a deadline, with little or no planning or understanding of the effects of our actions.
Here are a few top strategies to help you get the most from your RRSP and retirement plans:
Make systematic RRSP deposits - Most of us plan and budget on a monthly basis. You can do the same with monthly pre-authorized deposits to an RRSP. it is also possible to get an instant tax break by contributing this way. With approval from CCRA (Canada Customs and Revenue Agency, formerly Revenue Canada), your RRSP deposits can be subtracted from income before deductions are calculated. This reduces the amount that needs to be sent to Ottawa each pay period but also reduces any tax refund that may be coming to you.
Use RRSPs to save for or make a home down payment - Income Tax legislation allows qualified home buyers to withdraw up to $20,000 per person of existing RRSP funds for the purchase of a home. Income tax will not be withheld on this withdrawal. Payments are required to be repaid to an RRSP over a 15year period. If a repayment is missed in any year, it will be considered a taxable RRSP withdrawal.
Borrow to make your RRSP deposit - You may want to consider borrowing to maximize your RRSP deposit if you don’t have the cash or have waited until the deadline. Although RRSP loan interest is no longer tax-deductible, the immediate tax savings and long-term tax-deferred growth usually more than makes up for any loan interest costs.
Re-invest your tax refund - A few weeks after filing your tax return, a refund cheque arrives in the mail. It's only natural to want to spend it. A 30-year old depositing $5,000 per year to their RRSP at 8% compounded annually will have about $861,584 at age 65. Assuming a 40% tax savings, the RRSP will grow by an additional $330,680 by depositing the tax savings as well. So don’t blow your tax refund.
CCRA makes it easy for us to maximize contributions. After we have filed our tax returns, they tell us what our RRSP deposit limit is for the next tax year. This amount appears on your most recent tax assessment.
While the mechanics of RRSPs are relatively simple, the ongoing retirement financial planning associated with them can be more complex. It is highly recommended that you work with someone experienced in the area of RRSPs and retirement planning to help set up and monitor your program. Your financial comfort in retirement may just depend on it.
1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
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The Income Tax Bond
They don’t have a problem while they are both alive or even if one of them dies. Thanks to some good estate planning advice, there won’t be much, if any, of a tax grab on the first death as everything goes to the survivor. RRSPs and RRIFs can pass tax-free to the surviving spouse, thus postponing taxes until the second death. The big tax bite will occur on the second death. Other assets may be subject to taxes at this time, too.
Glenn and Gail have decided to take an income from their RRSPs in the form of a RRIF. An income of $2,500 per month, increasing by 1.5% each year to allow for inflation, will leave about $465,000 at their life expectancy. With the top income tax rate at almost 50% in most provinces, that leaves only $116,250 each for Larry and Lynn after Canada Customs And Revenue Agency (CCRA, formerly Revenue Canada) finishes running the money through the income tax filter. And this filter is virtually unavoidable.
There is a better way to take care of this tax problem, a unique type of joint life insurance policy, called joint-and-last-to-die. It is more economical than usual because it doesn’t pay out until the second death. This policy can be an even better deal if purchased at younger ages in preparation for the inevitable tax bill.
Think of it as an "Income Tax Bond." Here's how it works - Glenn and Gail buy an income tax bond to pay off their $235,000 estimated tax bill. They pay a very low interest service fee for this bond, just 1.5% per year as non-smokers. When the second person dies, the bond matures for the full amount and gets paid to their kids, tax-free, and no further interest payments are required. In other words, the bond matures at the exact time the money is needed most to pay the taxman.
By adjusting their RRIF income a little higher to make the $300 monthly interest payment, Glenn and Gail will leave a bit less in their RRIF at life expectancy, about $425,000. The income tax bond matures on the second death, just in time to pay the tax bill. The full amount of the RRIF then goes to Larry and Lynn - some $212,500 each. If the bond pays more than required to pay the taxman, the balance goes to the kids, too.
If Glenn and Gail have a favorite charity they would like to leave a legacy to, they can actually avoid paying the taxman anything at all by willing their entire RRSP and RRIF proceeds to that charity. They would then simply use a joint-last-to-die policy to leave an equal amount to their children, tax-free.
1999 Bowen Financial Inc. and Donald F. Pooley, Inc.
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