— Patricia Lovett-Reid answers:
The Tax-Free Savings Account (TFSA) is a new type of savings plan introduced by the federal government. It will be available in January 2009.
Canadian residents aged 18 or older with a Social Insurance Number can open a TFSA and contribute up to $5,000 per year.
The income and growth in the plan are not taxable, and any withdrawals are also tax-free. In addition, any withdrawals are added to your contribution room in the following year. Unused contribution room in the TFSA can be carried forward indefinitely.
A flexible savings tool
The TFSA is a flexible savings plan that can be used for any purpose — from a major purchase, a vacation fund, rainy-day savings, or retirement.
Unlike a Retirement Savings Plan (RSP), contribution room is not based on earned income, and there is no upper-age limit to the plan.
The TFSA and retirement planning
The TFSA can be the perfect complement to an RSP or Retirement Income Fund (RIF). It can be used to provide a source of tax-free income, without affecting government benefits such as Old Age Security. Individuals gain peace of mind knowing that they can access the TFSA tax-free without being bumped into a higher tax bracket, or worrying about the impact on income-tested benefits.
Sometimes retirees receive more RIF or pension income than they need — in which case they can contribute the excess to the TFSA and benefit from the tax-free income and subsequent withdrawals.
The TFSA is a unique new savings tool. Its flexibility, tax-free withdrawals, and the ability to contribute up to $5,000 each year regardless of income and even throughout retirement, make it a natural fit for any savings and retirement plan.
— Patricia Lovett-Reid answers:
The earlier you start contributing to your RSP, the better. By starting your RSP early and making regular contributions, your RSP portfolio reaps the benefits of time and compounding in a tax-deferred manner. As a general rule, assume approximately 70% of your current income is needed to support your retirement lifestyle. But you may need more or less depending how lavish or conservative a lifestyle you intend to lead in retirement. Your RSP asset allocation would in turn be determined by your income needs in retirement, adjusted for any supplementary income sources during retirement.
— Patricia Lovett-Reid answers:
An RSP contribution earns you a tax deduction at your marginal rate of tax. The value of the investments grow in the RSP on a tax-deferred basis. The recommended long-term approach to building your retirement portfolio is to focus on building a diversified selection of investments that meets your investment objectives. This could include a combination of cash, fixed income and equity investments. If the portfolio is small, then a self-directed diversified portfolio of mutual funds or a professionally managed Asset Allocation Program could be cost-effective options. Discuss the available solutions with an experienced financial professional and choose the one most suitable for you.
— Patricia Lovett-Reid answers:
Even if retirement might be more then 30 years away, by starting early you can get a head start. Savings double in approximately 7.2 years at a 10% rate of return, so planning early may provide you with more choices, such as retiring early or more cash flow later on. While there may be other priorities in your life currently, such as paying the rent/mortgage, tuition or traveling, asking the retirement question now is the first step to fulfilling your retirement dream.
— Patricia Lovett-Reid answers:
Paying down high interest debt like retail store cards, with rates as high as 28.8%, is like putting money in your pocket by not having to pay the interest. On the other hand, making an RSP contribution and using any tax refund to prepay your debt (such as a mortgage) can give you the best of both worlds. Taking the idea one step further, if you contribute to an RSP on a monthly basis and provide your employer with tax form T1213, “Request to Reduce Tax Deductions at Source,” then you can reduce the amount of income tax taken per pay period and allocate it to your debt payments. This can save you interest and reduce the duration of the debt, while at the same time allowing you to contribute to your RSPs.
If you are a low income earner, however, you may not want to contribute to an RSP. When retirement comes along, you may be entitled to government retirement benefits such as Old Age Security or Guaranteed Income Supplement. If there is extra income from an RSP when the government benefits start, then those benefits could be reduced or eliminated. In this situation, paying down debt could be the best way to go.
— Patricia Lovett-Reid answers:
As a general rule, about 40% of your gross income (before taxes) should accommodate your monthly debt expenses such as a mortgage payment, rent, condo fees, heating and property taxes. Minimum payments on your loan, credit card or line of credit should also be included.
The other 60% should be comprised of savings, taxes, food, insurance and other personal expenditures. I suggest that a savings of 10% of your gross income is appropriate; however, the amount that you save depends on the choices you make and on your priorities. Therefore, you should make a list of what is important to you, and then make your decision from there.
— Patricia Lovett-Reid answers:
A Will is the cornerstone of an estate plan. Some misconceptions that Canadians might have about estates are:
1. Everything will go automatically to their spouse.
2. They do not have sufficient assets to warrant a Will.
3. The government will ensure their assets will be distributed evenly.
Having an estate plan may expedite the distribution of your estate, minimize the cost of administering the estate, and ensure your assets go to the intended people. For example, if you have a family heirloom that you want a specific person to have, then your Will can speak to your wishes. If your goal is to leave a lasting legacy, then having a Will is an important tool that you should use.
— Patricia Lovett-Reid answers:
The Executor of a Will has two key duties. First, you must make sure that the deceased's wishes are carried out exactly as stated in the Will. Second, the Executor is responsible for meeting all the legal and financial requirements of settling an estate and managing the assets until they are distributed or placed in a trust. A Trustee is responsible for all aspects of operating a trust. This includes managing the assets, banking, record keeping, and distributing the income and capital to the beneficiaries.
— Patricia Lovett-Reid answers:
Your investment goals are unique to you. The higher the risk, the higher the potential return on investments. Depending upon your investment goals and how close you are to achieving them, you should determine how much risk you want to maintain in your portfolio. Some of the factors that determine your risk tolerance include age, net worth, comfort with market volatility, time horizon and personal goals. At different points of your life, risk tolerance may change.
You may consider switching your investments whenever one of the factors that determine your risk tolerance changes. Generally, the closer you are to retirement, the lower the risk you might want in your portfolio. As you get closer to retirement, it is important to review your investments at least annually.
— Patricia Lovett-Reid answers:
Goals depend on several factors, some of which are your personal circumstances, current age and financial situation. When listing your financial goals, think first about the ones that you want to accomplish in a one-year time frame. For a one-year time frame, financial goals could include paying off credit card debt or reducing the outstanding balance on the mortgage by one paycheque. Your medium-term goals that range from one to five years could include paying off a substantial amount of the mortgage or funding a child’s education.
For the long term, think about retirement goals or estate planning goals. For example, you may want to retire at 60 and leave an estate legacy. Incorporating your long-term goals within short- and medium-term goals is a great way of striking a balance and tracking your progress. Review all your goals annually with your financial advisor so that if there are any changes, then your financial plan may account for them.