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RRSP Contributions should be planned to maxmize your nest egg

Beware of RRSP Season

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 RRSP sales time is simple.  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 experience 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.

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 requisite 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 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 30% for amounts over $15,000.  This means, that if you will need access to $10,000, you need to withdraw roughly $14,285 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 $14,285 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.

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 main benefits of an RRSP is that it reduces your tax payable in the current year.  If you contribute too much in the wrong year, you may be wasting some of the taxation magic that an RRSP contribution can provide. 

  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.  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.  In another scenario, if you have ample RRSP savings already, with 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 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, 2019, then it won’t be eligible for your 2018 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 2018 or 2019 tax year. 

A word of caution here – your bonus will be taxed as income in 2019.  If you contribute it and elect to use the RRSP deduction for the 2018 year, you would have to pay the income tax on it in 2019, as you wouldn’t have the deduction available following its use for 2018.  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.  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 2020, for the 2019 tax year, and get your refund.

The Brass Tacks

RRSPs are powerful financial tools. 

The financial industry is full of intimidating salespeople.

This 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?

Please let us know in the comments below.


Two women talking while sitting on a window sill

The Stigma Around Money

Let’s Break The Stigma Around Money

Many people living with a mental illness report that negative stereotypes about mental illness, and the resulting potential for discrimination, cause them more suffering than the illness itself. As a result, two-thirds of those suffering from mental illness are too afraid to seek the help that they need.

Mental illness affects people of all ages and from all walks of life. It can take many forms, including depression, anxiety and schizophrenia. Most individuals find ways to live with their illnesses but how they are treated by others often proves to be more of a challenge than the illness itself.

As another successful Bell Let’s Talk Day draws to a close, breaking stigmas and changing the conversation is top of mind for many Canadians.

Your finances are a key building block to your overall life goals.  When we are on a solid financial footing, the rest of our lives become easier.

Unfortunately, one of the largest causes of stress and anxiety for most people is around money and their financial situation. 

The Research

According to a study commissioned by the Financial Planning Standards Council, stress caused by money isn’t getting any better.  This study was performed in 2014 and updated in May of 2018.  This study did not include participants from Quebec.

  • 41% of respondents indicated money as their largest stressor, which was the #1 answer.
    • 41% was also the score in the 2014 survey, and it was also the #1 answer
    • Other potential responses included health (23%, up from 19%), work (22%), relationships (14%, down from 17%)

Embarrassment & Keeping up with the Joneses

An interesting metric from the study was whether or not people felt pressured to keep up with their peers’ financial status.  This metric increased since the 2014 survey from 20% to 23% in the most recent survey.  This rate was most pronounced within the 18-34 age bracket at 52%.  This is hardly surprising given this demographic’s use of social media to share their best selves with each other and the world.

“Too many people spend money they earned… to buy things they don’t want… to impress people that they don’t like.” –Will Rogers

Adding to the stigma is that Canadians tend to be embarrassed when it comes to money.  They seem to think that they might be the only ones making financial mistakes. 

The FPSC study found that 51% of Canadians are either always or sometimes embarrassed about lacking control around their current financial situation, up from 44% in 2014.  Similar to the pressure measure above, this was most prevalent in the age bracket of 18-34 which sat at 70%.  The embarrassment rate also declined as the age of the respondent increased.

However, given the levels of consumer debt in Canada, this embarrassment may not be warranted.  You are not alone in your concern around your money decisions. 

Debt

Our financial planning services tend to cater more toward those with manageable debt and assets that they need to manage.  Their stress tends to come from not knowing if they will have enough for retirement, or not knowing how much they need to save for their children’s education, etc.  These are examples of very common concerns experienced by the typical Canadian.

However, there is a significant portion of the population that live paycheck to paycheck and have sizable concerns about their debt.

BDO published their first inaugural affordability index and found that 3 in 4 Canadians have personal debt and that the average non-mortgage personal debt is nearly $20,000 per person.  This would include car loans, lines of credit, credit cards, etc.  This means that the average Canadian couple carries nearly $40,000 in non-mortgage debt.  These are alarming numbers.

For the segment of the population in debt trouble, the situation can snowball quickly.  High-interest debt, such as payday loans or credit cards, are a primary cause of the growing debt problem.  High-interest debt payments can often have little-to-no impact on reducing the balance owing.

Compounding this problem is that the social stigma around money makes it difficult for people to discuss these issues openly, even with finance professionals.

The debt carriers often don’t know where to turn.  

They don’t think that there is a light at the end of the tunnel. 

But there is.

Feeling like you need help is okay. 

Most people need help when it comes to their finances.  For those that feel like they need help with their debt, there is a solution.  Credit Counselling Canada (CCC) is the national association of not-for-profit credit counselling agencies that work provincially, regionally and locally throughout Canada. Only not-for-profit or charitable organizations are accepted as association members according to their website.  One such member organization is Credit Counseling Society (CCS).

These organizations can help those with debt issues develop a plan to tackle their money issues head-on.  CCS has a summary of their recommended approach to dealing with debt stress and tackling your debt problem.

This is only one example of the CCC member organizations, and anyone of their member organizations will be able to assist you.

“You must gain control over your money or the lack of it will forever control you.” –Dave Ramsey

The Brass Tacks

Studies show that money is the #1 cause of stress for Canadians.  Social stigma prevents us from speaking openly about our financial situations, as we often feel pressured to keep up with the lifestyles of our peers.  This is only exacerbated in the social media era. 

As money anxiety grows, people need to be aware of their options.  For those with significant debt, a non-profit member organization from Credit Counselling Canada will assist you in tackling your debt challenges.  For those with manageable debt and assets to manage, fee-only financial planners can ensure that you receive unprejudiced advice to help you establish a solid financial footing, take control of your finances and reduce your stress.

Don’t let social stigma around money prevent you from addressing your challenges.  You are not alone.  There is light at the end of the tunnel.

The Canadian Association for Suicide PreventionDepression Hurts and Kids Help Phone all offer ways for getting help if you, or someone you know, is suffering from mental health issues.

In case of an emergency, please call 911 for immediate help.

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Self-Directed Brokerage Screen

How To Execute a Stock or ETF Trade

This guide will help you execute a trade through your self-directed brokerage account. 

This walkthrough will show specific screens from the current Questrade platform, but the steps are relevant for any self-directed brokerage account that you may have.  For additional visual help, Questrade has a video showing how to execute a trade.

  1. Open and Fund your account.

We have prepared a guide on how to open a self-directed brokerage account.

  1. Log in to your account and select the account that you want to make the trade from (i.e. TFSA/RRSP/Non-Registered)

  1. Access the Trading Screen

To do so, you can either select the ‘Trading’ icon from the drop-down menu from the top-left of the screen, or you can click the ‘Trade’ button in the top right.

Questrade Account Screen

 

  1. Determine the amount that you can invest on the trading screen

When you reach the trading screen, you can see your current balances in the account:

      • Cash
        • The amount you are currently holding in settled Cash in this account.
      • Market Value
        • The current market value of your investments in this account.
      • Buying Power
        • This is the maximum amount that you are able to invest on your next trade.
        • This amount will be reduced by any buy trade that you execute.
        • See below FAQs for an explanation around buying power vs. cash
  1. Lookup the security that you want to trade

In the top right corner of the screen, look up the security that you want to trade by entering either the symbol or the proper name, and select it from the drop-down that appears.  In the example above, we have looked up XIU, which is the symbol for the iShares TSX 60 ETF.  This security is traded on the Toronto Stock Exchange (TSX), which is why the symbol includes the trailing ‘.TO’ in the name shown in the drop-down menu.

Questrade ETF Lookup

  1. Enter your trade details

NOTE: ONLY PLACE TRADES DURING MARKET HOURS.

After hours trading is risky and is not recommended.  For reference, the TSX is open from 9:30 – 4:30 EST.

On the order entry screen, you are given the current quote information for the security.

NOTE: Quote information is usually delayed by 15 minutes.

Questrade ETF Order Entry

      • Last Price
        • The price paid on the last trade for this security
      • Bid Price
        • The current price being offered on open buy orders
      • Ask Price
        • The current selling price being requested on open sell orders
      • Bid Size
        • The # of units of the current bid order
      • Ask Size
        • The # of units being offered at the current ask price

When buying an ETF, we recommend that you offer as close to the ask price as possible.  When selling, offer as close to the bid price as possible.  If you are trading index ETFs, the spread between the bid and ask will generally be nominal.

In this example, we placed a limit price of $22.37 per unit, which was $0.01 higher than the bid price.  Across the 100 units that were being bought, this was $1 total more than the current ask price for this ETF.  This is a nominal amount to ensure that you should be able to have your trade filled.  If you were to offer only at the bid price, your trade may not be able to be filled by the broker.

Once you determine the price to be offered, you will enter the parameters of your trade and Click “Buy” or Sell”

      • Quantity
        • The number of units/shares to purchase or sell
      • Order Type
        • Only ever execute Limit trades
        • This dictates a maximum price for a buy order and a minimum price for a sell order.
      • Price
        • The price that you are willing to pay for the security (close to Ask on Buy, close to Bid on Sell).
        • Ensure the bid and ask price are close together.
      • Duration
        • How long you want the trade to be open for.
        • As prices are dynamic, there may not be a buyer or seller at the price that you enter at the exact moment that you make your trade.
        • As such, the trade will stay open for the duration you indicate
        • Only execute trades that are open for the Day duration
  1. Confirm that the details of the trade are accurate

A splash screen will appear for you to confirm the details of your trade.  You will see the total trade cost and your updated buying power.  If the details are accurate, click ‘Send Order’.

Questrade ETF Buy Confirmation

  1. Check the status of your order

You will be shown a pop-up with the order details.

In the screen below you see the status as ‘Executed’.  This means that the trade has been filled.  It was filled at $22.36 per unit (the Fill Price), which was less than the limit price we submitted at $22.37.

Questrade ETF Order Details

If the status is showing as ‘OPEN’, then your trade has not been filled.

If the unit price moves higher than your limit price on a buy order, then you may have to raise your limit price by modifying your order.  The opposite is true on a sale, where if the price moves lower you may have to lower your asking price to have your trade fulfilled

After you close the Order Details pop-up, you will be returned to the Trading screen.  Go to the Orders screen by clicking on ‘ORDERS’ in the upper left menu on the Trading screen.

Questrade Order Menu

 

On the Orders screen, you will see the order that you just placed.

Questrade Orders Screen

Select the trade and adjust the limit price if the bid/ask price moves after you have placed your order.

Once the trade has been filled – you are done!

Congratulations!  Understanding how to make a trade puts you in a position to take control of your finances and manage your own investments.

Trading FAQ

Trading (3)

After you place a trade, the transaction is in what is known as the settlement period.  What this means is that there is a period where the brokerage works to move the securities and cash between the accounts of those parties involved in the trade (i.e. cash out, stock in or vice versa).

The day that you execute the trade, to either buy or sell, is the trade date.  The settlement date is typically trade date + 3 days (i.e. T+3).  Your buying power is measured on a trade date basis, where your cash balance is on a settlement basis.  If you execute no other trades, your cash and buying power will be equal after the trade has settled.

This is an instruction to the brokerage.  When you place a market order, the broker will make the trade at any price that the market will bear.  When you place a limit order, they can not go above (on a buy order) or below (on a sell order) the price that you provide.

Your hope is to place orders that are fulfilled very quickly.  A lot can change from day-to-day in the market, and leaving trades open longer than a day is not recommended.  Other duration options are:

  • GTD – Good-Till-Date
    • Expiry date specified by the user, but cannot be open longer than 90 days
  • GTC – Good-Till-Cancelled
    • Expires only if cancelled by the user, or 90 days, whichever is sooner.
  • GTEM – Good-Till-Extended Market
    • This means that the trade will be active in extended trading (until 5:30 pm for Canada exchanges), which is not recommended due to added risk.
  • FOK – Fill or Kill
    • This is a trade that is executed immediately and completely or not at all. This trade type is useful for active traders who trade large volumes of securities.
  • IOC – Immediate or Cancel
    • Similar to FOK, the trade must be executed immediately, but the IOC trade will allow for a partial # of the securities of the order to be fulfilled.  FOK is all or nothing.

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Account Opening Form

How To Open a Self-Directed Brokerage Account

Opening a self-directed brokerage account is an essential step toward taking control of your finances.  This forms an integral component of the Execution phase of the Fee-Only Financial Planning Process.  A self-directed brokerage account allows you to buy and sell stocks, ETFs and other securities.

In order to open an account, you will need some information accessible before you begin, as it will be required as part of the process:

  • Government-issued Photo ID
    • Driver’s License or Passport
  • Current account information if you will be transferring funds into your new account
    • Account #s for each account (RRSP, TFSA, etc.)
    • Institution name and address

The below walkthrough is specifically for our recommended brokerage Questrade, but the steps will be similar for any self-directed brokerage.  This process should take you about 30 minutes to complete but can be done in phases.

Note: We only recommend that you open an account if you will be transferring $5,000 or more.  When you have $5,000 or more, you will not be charged fees for inactivity in your accounts.

Self-Directed Brokerage Account Opening Steps:

  1. Go to questrade.com

  2. Click on “Open An Account” in the top right portion of the landing page

  3. Select the accounts that you wish to open.

Our recommendation is to open an Individual Margin, RRSP, and TFSA account.  These are the 3 basic account types that are appropriate for all Canadians.

Select the Self-Directed account options, not the Questwealth options. Questwealth accounts charge management fees for pre-packaged portfolios.  We have covered elsewhere how management fees negatively impact your portfolio

Questrade Account Opening Selection Screen

On the right-hand side of the screen, you will have the opportunity to enter an offer code.

If you enter the code “uajekubi” you will receive a $50 trade commission rebate.  This is offered as part of the Questrade affiliate program. To understand more, please read our affiliate policy.

  1. Create a user ID and enter your basic personal information

The name that you enter on this screen must match the government issued photo id that you will upload as part of the account opening process.

  1. Build Your Profile

Next, you will expand on the personal information provided in the previous step.

The questions that you answer in the next steps are standard procedure when opening an account with a financial institution.  These questions help to prevent money laundering and sanctions avoidance.  This is a good thing.  You can refer to the Questrade Privacy Policy if you have any questions or concerns.

You will have to enter information in 4 different categories:

      • Personal Information
      • Employment Information
      • Financial Information
      • Citizenship Information

Questrade Build Your Profile Screen

  1. Account Opening Questions and Documents.

For this next step, you have to complete some paperwork and answer questions for each account that you are opening.

From the account summary screen, click on an account to complete the setup.

Questrade Account Setup Selection Screen

There are a separate set of questions for each account, as well as paperwork that must be signed and submitted prior to being able to open your account.  It is during this step where you must upload the copy of your photo-id to the website.

Questrade Account Questions and Documents

  1. Fund your account

Now it’s time to put some of that hard-earned money of yours into your new account.

You have a few options at your disposal.

Questrade Account Funding Options

If you are transferring an RRSP or TFSA to your new accounts, you must use the ‘Transfer account to Questrade’ option.  Any other form of funding would result in a contribution to your account, which may put you over your contribution limits for either your RRSP or TFSA.

When transferring accounts, they can only be transferred into the same type of account (i.e. RRSP into an RRSP).

For a limited time, if you are transferring an account of $25,000 or more, you may be eligible to have your transfer fees that are charged by your current institution (the transfer out) covered up to $150 by Questrade.

If you are transferring your account, you will have 3 options available to you. 

      • Transfer in-kind
      • Transfer in cash
      • Partial

Transferring in cash means that your stock/ETF positions will be liquidated by your current institution and converted to cash.  This can have some unintended consequences, such as incurring brokerage trade commissions, or tax bills for realized gains (or losses) in your non-registered accounts.

Transferring in-kind means that you are moving your stocks and ETFs over while keeping your adjusted cost base/book values intact for tax purposes.  This is the recommended option.

A partial transfer would be for only a portion of your account, as opposed to the full value.  A cash transfer is appropriate if you are holding securities, such as mutual funds, which are unable to be held in your brokerage account.

Account transfers can take up to a month or more, depending on the financial institution.

Minimum initial funding in order to buy stocks or ETFs is $1,000 per account.

 

And that’s it!

Once your accounts are funded, you are now able to trade stocks, ETFs and other securities.

We have prepared a guide on how to execute a stock or ETF trade  for your reference.

Was this guide helpful?  Are there other guides that you would find useful? Let us know in the comments.