Archives January 2020

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Wealthsimple Cash – Not A Chequing Account

Remember the first time you got into an UBER or streamed a show on Netflix?

Every so often, a new product or service comes along that takes aim at the norms that we all grow accustomed to. January of 2020 may turn out to be one of those times. Financial products typically don’t face disruption quickly, as there are many barriers to change.  Cumbersome barriers such as fees, administration around account opening, transfers, etc.  There are a number of reasons why we don’t see new mainstream financial product disruptors all that often, but we may very well be in the midst of one with respect to traditional day-to-day banking.

This week, although it is still early days for the product, Wealthsimple introduced a new product called Wealthsimple Cash.  The new product is similar to a savings account.

What’s so special about a savings account, you ask?

Well, this account is more of a hybrid account that allows you to spend out of it, while also saving.

This account pays a “non-promotional” interest rate of 2.4%.  I use quotes around “non-promotional” because rates offered by any account are subject to change. 

However, unlike a savings account, this account will let you spend like a traditional bank account.  The account will offer a “Cash card” and will operate like a Visa debit card with no transaction limits or transaction fees.

Day-to-day spending accounts rarely offer high interest on the daily balance.  This is truly where the primary differentiation exists.

Currently, spending functionality is not active.  This will, however, be turned on in the coming months.

You may find other write-ups on this new account calling it a chequing account.  Wealthsimple Cash isn’t a chequing account.  It cannot replace all of the functionality of your current chequing account.  According to their customer service line, chequing is not planned to be offered for these accounts.  Similarly, you could not obtain a bank draft or certified cheque via this account.  Anyone who has entered into (or tried to enter into) a house or condo purchase recently will understand the importance of being able to get access to a bank draft. 

Changing bank accounts is so hard, you say?

I can’t emphasize enough how great the account setup experience was.  Start to finish it took less than 10 minutes and was done completely online.

No forms to sign.

No wait time for the account opening to be processed.

It was a very impressive onboarding experience.

Now that you spent 10 minutes opening your account, funding is the next step.

You are able to link your existing account from major institutions (i.e. TD, Tangerine, etc.) via a software tool called Plaid.  Plaid’s approach is one that allows your banking credentials to remain protected, according to their website, by using an API to connect to your current bank.

How are they able to offer this type of account?

The account is based on a partnership with banks.  For example, their previous product Wealthsimple Save was in partnership with Equitable Bank.  Wealthsimple will then take the cash held in your account and deposit it in savings accounts at their partner banks.  If we looked at Equitable Bank, for example, their current savings rate was just raised to 2.45% (likely as a result of the Wealthsimple offering) and has held fairly steady in the >2% range since the accounts launched back in late 2017 under the operating name EQ Bank.

Wealthsimple may change partners or account structures in the future, and as such, the rates that they may be able to offer can change in the future.

So, it’s a bank account?

Not exactly.

Welathsimple is not a bank.

Wealthsimple operates as a brokerage (through an entity called Canadian ShareOwner Investments Inc.).

Brokerages are covered under the Canadian Investor Protection Fund (CIPF).  The CIPF is a trust fund set up to protect investors’ assets in the event that a CIPF member firm becomes insolvent.  The CIPF covers up to $1 million per account type

The CIPF, however, does not cover when the issuer of the underlying security goes under.  In this case, the underlying asset is a savings account at a bank.

Banks are covered by the Canadian Deposit Insurance Corporation (CDIC)  .  The CDIC is a federally operated corporation whose purpose is to protect the money that you save at a federally regulated bank or credit union.  The CDIC is funded by its member institutions (i.e. the Banks)

The CDIC will insure up to $100,000 per account category in cash and marketable securities (GIC’s with up to 5-year maturities) in the event that a bank goes under.  Learn more at their website.

The accounts that Wealthsimple has at its partner banks are NOT covered by the CDIC.

Given the above, there are some questions as to whether or not these accounts are as safe as a standard savings account at a CDIC member bank or credit union.

So, what does this all mean?

Given this addition to WealthSimple’s already impressive product offering, which includes Wealthsimple Trade (self-directed brokerage), Wealthsimple Invest (robo-advisor) and SimpleTax (personal tax filing) this gives them a leg up on competitors …..but for how long?

Questrade has filed an application for a banking license to make a similar move into the cash account space.
If you are a current Questrade customer, then you may be better served to wait and see what their future holds with respect to a similar offering.
Wealthsimple does not offer account transfer fee rebates.  These costs can add up if you have to move multiple accounts (RRSP, TFSA, LIRA, RESP, etc) for both you and your spouse/family members.  Given the lack of a rebate, moving everything to Wealthsimple may be a bit premature.
In addition, as of this writing, Questrade’s robo-advisor is still the lowest cost option in the marketplace.
Another looming question is, what will be the response from the banks?

2.4% is not the leading rate for a savings account in the marketplace, but it is on the higher end of the range.  At this time, Laurentian Bank offers a 3.3% savings account (rate subject to change).

Most traditional bank accounts typically have transaction limits or fees associated with transactions.  Some of the mid-tier banks and credit unions offer no-fee/unlimited accounts as well.  However, these institutions tend not to be tied to discount brokerages and low-cost robo-advisors.  Perhaps the big banks will be forced to adjust their approach with the millennial-friendly institutions like Wealthsimple encroaching on their territory.

As you can see, Wealthsimple Cash is not the only solution in the market, but it is an intriguing one with lots of potential

The Brass Tacks

If you are a current Wealthsimple customer, opening one of these accounts feels like a no-brainer.

Given that there are no low balance fees, opening an account seems about as low risk as you can get.

As the spending functionality begins to come online, this account’s usefulness will only increase, as well as put pressure on the banks to respond to potential shifts in customer expectations.

If you are not currently a Wealthsimple customer, you may be better served by waiting to see what their competitors to as a response.  On the flip side, if you are an early adopter by nature, I couldn’t blame you for jumping in with two feet.

Here is a summary of the characteristics of the account.

Pros

  • 2.4% “non-promotional” interest rate
  • No fees
  • No minimum balance
  • Connect directly to existing accounts
  • Setup automatic deposits/contributions from your existing bank accounts
  • Simple 10-minute onboarding and account setup process
  • Uses Plaid APIs to connect other institutions
  • CIPF protected in the event that Wealthsimple becomes insolvent

Cons

  • No TFSA/RRSP options
  • No chequing is planned to be offered
  • No drafts or certified cheques available
  • Underlying bank accounts are not CDIC protected – and there appears to be some potential risk of loss if the banks were to become insolvent.
  • No current spending functionality (but coming soon)

Future Enhancements

  • Cash card – which operates like a Visa Debit card – and associated spending functionality
  • No-fee foreign exchange transactions
  • ATM fee reimbursement
  • Email transfers
  • Pre-authorized debits for rent, mortgage, condo fee payments, etc.
  • Automatic deposit of payroll
NOTE: Information regarding the Wealthsimple Cash account was obtained from their website, or via their telephone support line, if not otherwise referenced in this article and is subject to change.

RRSP Contributions should be planned to maxmize your nest egg

Beware of RRSP Season

Originally Published on February 5, 2019

Updated January 23, 2020

 

By any chance, have you been off the grid for the last month or so?  No?  Then I am certain that you have seen an advertisement for RRSPs during that time.

This is a big season for the average bank, fund provider, asset manager and just about anyone else involved in the investment or financial services industry.

The reason that this is such an important time is simple – RRSP sales.  And why are RRSP sales so important? RRSPs stay invested – for a long time.

Let’s use a simple example.  In this example, you invest $10,000 in an average mutual fund within your RRSP.  You are 30 years old when you contribute and plan to retire at the age of 65.  Let’s say this mutual fund has a 2% Management Expense Ratio (MER) and grows at a rate of 5% a year.   By the time you reach retirement, the mutual fund will have earned $10,326 in fees over that 35-year period.  $10,000 of income, from a single contribution!  In addition, you will keep your funds invested throughout your retirement as you withdraw from your RRSP as a source of income.  This example doesn’t contemplate admin fees, transaction fees, or management fees paid to your advisors.  These fees would be over and above the MER for the mutual fund.

As you can see, RRSPs are BIG business for the industry.

The problem with the sales cycle that we all endure during the early part of the year is that it doesn’t contemplate the most important factor.  YOU!

Blindly contributing to your RRSP is not a winning financial strategy.  When deciding whether you should contribute to your RRSP, you should take into consideration your individual financial situation. 

Isn’t Saving For Retirement A Good Thing?

Absolutely!  Start saving.  Right now.  Start yesterday if you are somehow able to do that.

According to a study by BDO, nearly two-thirds of Canadians say that they don’t have much, or anything, saved for retirement.  A key statistic from the report is that 47% of millennials have no retirement savings.

Saving for retirement helps to solidify your financial future.  Of the people surveyed in the study, 75% of those who haven’t retired yet expect to work longer than their parents did. 

Saving for your retirement is critical and I encourage you to do so, but blindly contributing to an RRSP is not the only way to achieve either your retirement or your broader financial goals.

Is An RRSP Contribution Right For Me During RRSP Season?

There are several considerations to take into account when determining your tax and retirement strategy.  RRSPs are an integral component of both.  Here are a few of the key items that you should keep in mind.

  1. Am I carrying credit card debt?

Not only is it RRSP season, but it is also the time of year that we have to pay off our credit cards from the December spending spree.  Paying down high-interest credit card and other types of debt should be prioritized over contributing to your RRSP.

  1. Do I have an emergency fund?

Retirement is a long way away for some.  You need to get there first.

An often-overlooked area for most, an emergency fund is mandatory to weather the ups and downs of life.  Identity theft, cracked foundations, leaky roofs, unexpected medical expenses, job loss, serious injury, elderly parents in need of care, vehicle breakdown or a surprise baby on the way.  These are just a sampling of the reasons that you should ensure that you have an adequate emergency fund at the ready.

  1. Can I lock these funds in until retirement?

An RRSP isn’t a typical savings account.  When you put money into one, the general expectation is that you will keep the money there until it is time to fund your retirement.  As such, you won’t have access to the funds without penalty.  Funds that are withdrawn early experience 2 major consequences.

First, the funds withdrawn have a withholding tax applied against them.  The Federal withholding tax rate is 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000.  In addition, if you live in Quebec, there is also a provincial withholding tax.  This means, that if you live in Ontario will need access to $15,000, you need to withdraw roughly $19,500 in order to be left with the cash that you need after federal withholding tax.  When you file your tax return for the year of withdrawal, the $19,500 would be included in your income.  If you have a marginal rate below the 30%, you should receive a refund for the difference, but you have just given the government an interest-free loan for the period between your withdrawal date and when your tax refund gets paid out.  If your marginal rate is greater than 30%, then you now need additional cash to cover the tax bill for the difference in tax rates.

Second, you lose the RRSP contribution room forever.  Unlike a TFSA, when you make a withdrawal from an RRSP, you do not get to put the withdrawal back in.  With a TFSA, you can re-contribute the amount that you withdrew in the following year.

  1. What is my marginal tax rate, and what will my tax rate in retirement be?

This is the money maker when it comes to using RRSPs.  The best use of an RRSP is when you contribute money at a higher marginal tax rate than your planned marginal tax rate in retirement.  In a simple example, if you contribute at a 30% tax rate, but withdraw at a 35% tax rate, you will be paying more tax than you would have saved on the contribution.

That being said, the tax-deferred treatment of the investments within an RRSP can still result in a positive outcome despite the above tax rate scenario.  This will depend heavily on investment performance and the length of time the funds are invested.  Whether or not this will make sense for you will depend on several factors, however.

  1. How much tax do I have to pay this year?

One of the immediate benefits of an RRSP is that it reduces your tax payable in the current year.  contributions made in tax years with higher marginal rates than are typical for you, provide the best bang for your buck.  If you contribute too much in the wrong year, you may be wasting some of the taxation magic that an RRSP contribution can provide given that contribution room is limited.   Which is a great segue…

  1. How much contribution room do I have?

Unfortunately, the benefits of an RRSP are not unlimited.  You accrue 18% of your employment income as RRSP contribution room every year, up to a maximum of $27,230 in 2020.  If you have a limited amount of contribution room, you may be better served by using it in a later year when your marginal tax rate is higher.

  1. Do I already have enough in my RRSP?

There is also the possibility that you don’t need to make any contributions.  If you have a workplace defined benefit pension, this may satisfy your retirement income needs by itself.  This is not a typical scenario, however. 

Another scenario of note is where you have ample RRSP savings already to fund your retirement needs.  In this case, additional contributions you could put yourself in a position where when you convert the RRSP to an RRIF you will end up in too high a tax bracket.  If this is the case, TFSA, non-registered accounts or Spousal RRSP contributions are more appropriate for your situation.

Buyer Beware: RRSP Loans

Another tactic that the financial industry likes to use is the offering of RRSP loans.

The general idea is that you take out a loan to contribute to your RRSPs, and then pay off as much of the loan as you can with your tax refund.

The major problem with this approach is that when you borrow money to invest in an RRSP, the interest that you pay on the loan is not tax-deductible.  In addition, as with most loans, there is an inherent risk.  The risk here is that unforeseen events could arise, or you simply get invited to go on a great spring break trip, and you may not pay the loan off in full.  All the while, you can’t deduct the interest because it was used to fund your RRSP.  Not a winning play.

Your Bonus & RRSP Season

Another item to consider is that this also happens to be around the time when many employee bonuses are paid out.  If your employer offers a savings program, such as a Group RRSP, then typically your employer will provide you with the option of having your bonus paid straight into your workplace RRSP plan.  In addition to the items mentioned above, there are additional considerations to keep in mind around this option.

  1. What is the timing of the bonus payment?

This is critical from an RRSP perspective.  If the bonus will not be paid until after March 1, 2020, then it won’t be eligible for your 2019 tax year filing.  If this is paid prior to March 1, and you elect to contribute it to your Group RRSP, then you would have the option to apply it to either the 2019 or 2020 tax year. 

A word of caution on the prior to March 1 example – your bonus will be taxed as income in 2020 regardless.  If you contribute it and elect to use the RRSP deduction for the 2019 year, you would still have to pay the income tax on it in the 2020 tax year, but with the cash flow of the bonus to cover the tax owing.  As such, this would not be a generally recommended approach. 

  1. What are the fees associated with my Group RRSP?

This is one that you will have to do some research around.  Mind you, this is research that I would recommend you perform no matter what.  Gaining an understanding of the investment products that are offered as part of your employer-based savings plans, and their fees will help piece together the overall cost of your portfolio.  While the fees associated with the products offered can vary, there may be an offsetting benefit to utilizing the savings plan, such as an employer savings match.  For example, if you contribute 5% of your savings each month into the plan, they may offer to match this 5%.  A 100% match of your money will offset the increased fees that they may offer. 

However, when it comes to your bonus, there won’t be an accompanying match on your contribution (like a standard pension contribution).  High fees may make this option an unattractive one.

  1. Do I need the cash from the bonus payment for another purpose?

If you do not contribute your bonus to the savings plan, this will be paid out just like your normal paycheque.  However, there will be one key difference.  When the bonus gets paid out, there will typically be a withholding tax at a fairly high marginal rate, along with CPP and EI deductions.  Similar to the early RRSP withdrawal example above, this means that some of your money may be tied up until you file your tax return in 2021, for the 2020 tax year, and get your refund.

The Brass Tacks

RRSPs are powerful financial tools. 

The financial industry is full of intimidating salespeople.

The combination of these facts can result in some unwise decisions being made.

In order to determine whether contributing to your RRSP is the right thing for you, there are a number of important factors to consider.  You shouldn’t simply blindly contribute to your RRSP like the salespeople would like you to.

To discuss your tax and RRSP strategy for the coming year as part of a Fee-Only Financial Plan please contact us.

Did you find this blog post helpful?  Anything else you think that we should include?

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