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Managing Your Money
Time to convert? If you're approaching age 69 it is.
If your family is tuning up to sing 'happy 69th birthday' to you sometime within the next 12 months, there's a conversion in your near future that you should be thinking about right now. The Federal Income Tax Act stipulates that you can't hold Registered Retirement Savings Plans (RRSPs) past the end of the year in which you turn age 69. So, unless you start making plans for that money right away, you could suddenly find yourself with investments and cash on hand from your RRSP and no way to continue sheltering it from the tax folks at the Canada Customs and Revenue Agency (CCRA). In fact, the way in which you deal with your RRSP investments could have a powerful impact on the comfort and quality of your remaining retirement years.
By December 31st of the year you reach 69, you have no choice. Your RRSP must mature, but you do have choices about where you want that money to go. Your three basic options are these:
Choose to do nothing. If you decide to do nothing, the full value of your RRSP immediately becomes taxable at the end of year that you turn 69. That means not only will you lose the tax-sheltering benefits of your RRSP, but as well your money will likely be taxed at the highest marginal rate. For most people, the huge tax bite makes 'cashing out' the least attractive option.
Choose an annuity. When you buy an annuity, you trade the proceeds in your RRSP for a fixed, regular payment that will continue for the rest of your life. For some people, the simplicity of receiving a guaranteed lifetime income in set amounts makes the annuity option very attractive - but there are drawbacks. Buy a guaranteed life annuity and you're stuck with it for life. You can't change your mind later and choose a different annuity with a higher interest rate. In addition, your payments truly are fixed - meaning that rising inflation or increased living costs could take an ever-bigger bite out your income.
Choose a RRIF. Registered Retirement Income Funds (RRIFs) are the number one choice of Canadians by far and operate like an RRSP in reverse. Instead of putting money in, you take retirement income out on a regular basis. You also retain control over the investments in your RRIF, and can review and revise the asset mix to offset inflation. Your RRIF payments are taxable and there is a minimum annual withdrawal required each year, except in the year you open your RRIF. Other than that, you can choose to receive RRIF income each month, like a pension or on a quarterly, semi-annual or annual basis. The key is to set your withdrawals at a realistic level so your capital does not run out before death.
Take time to consider your options - but not too much time. It could take a few months to wind down your RRSPs - especially if you've got a number of them - and it's often best to consolidate your RRSPs before making the transfer of proceeds.
There are certain advantages to consolidating your registered investments into a single annuity or RRIF. Your administration costs will likely be lower and there'll be a lot less paperwork to deal with. But, your situation may call for a slightly more complex solution - such as a combination of a RRIF and an annuity - and a financial advisor can provide invaluable assistance in helping you pick the right products for your retirement income needs.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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Heading South? Here's how to avoid excess financial baggage
If you're among the more than 450,000 Canadian seniors* who head south each year for an extended warm weather stay, there are certain important steps you should take to avoid overheating your finances.
'Home-in' on money management: Your financial life doesn't go on vacation when you do. There are still bills to pay and investments to manage. Be sure you make arrangements to deal with investments that may need to disposed of or reinvested while you're away. You'll also need to ensure the payment of regular expenses and quarterly income tax payments (if required) as well as arranging for the automatic deposit of Registered Retirement Income Fund (RRIF) payments If you're going to be away from Canada at the end of April, be sure to make arrangements to file your tax return.
Some of these matters can be taken care of before you leave; others may have to be handled from a distance - unless you put them in the hands of a relative or close friend back home whom you can trust to manage your affairs while you bask in the warm sun. To do this, you'll need to execute a Power of Attorney (POA) that designates a person of your choice to make financial decisions while you're away.
Take a healthy dose of medical coverage with you. Government health plans vary considerably from province to province - but with the top provincial plan paying just over $400 Canadian per day for hospital care in the U.S., where surgical procedures can run as high as $150,000US, you can anticipate that your government plan won't fully cover all U.S. health care costs. Avoid having your life savings wiped out by illness or accident - always purchase additional health insurance before leaving Canada and be sure you're familiar with the terms of your policy, particularly sections concerning existing medical conditions, which may not be covered.
Prevent a willpower brownout. Be sure your will is up-to-date and takes into account cross-border tax implications. Owning property in a foreign country can complicate estate issues and if you own US real estate, there may be American federal and state estate taxes to pay. Your executor should know exactly where to find your will, and it is a good idea to append to it a listing of your assets (and liabilities) including property that you own outside Canada.
Consider 'variable' tax implications. The U.S. uses a complex formula to determine when a visiting foreigner is subject to their taxation laws - including the average time you were in the country over the past three years. Spending as little as four months a year in the US might mean you have to file American tax forms.
It's a good idea to check the Internal Revenue Service (IRS) web site (www.irs.gov/) to find out if you qualify to be exempted from filing a U.S. return by filling out The Closer Connection Exemption Statement (Form 8840), a declaration that you are considered a resident of Canada.
There are also a host of other details to consider before you head south - such as obtaining a duplicate ATM card in case your original goes missing or stops working and, perhaps, arranging a U.S. dollar chequing account with your Canadian institution so you can write cheques in the U.S.
Make your trip as financially secure as it can be by reviewing all your arrangements with your family and appropriate legal and financial advisors.
* Source: Canadian Snowbird Association
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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About (nest) eggs and baskets and maximizing long-term investment returns
It's a common saying, 'Don't put all your eggs in one basket' - and, as experienced investors know, it's also an uncommonly important strategy when it comes to assembling and maintaining your investment portfolio.
Here's a simple example: If you commit all your investment 'nest eggs' to a single basket - a hot stock, for example - your 'egg-value' may grow, but you may also lose the total value of all your 'nest-eggs' if your investment fails. However, when you selectively place your investment 'nest-eggs' in a number of baskets, representing a mix of investments that react differently to market conditions, inflation and interest rate changes, you can reduce the impact of losing 'nest-egg' value in any single basket while maximizing your potential for overall 'nest-egg' growth in the long term.
In financial circles, the 'eggs and baskets' strategy is known as asset allocation - or how your investments are divided among the different asset classes (the three principal asset classes are stocks, bonds and cash) and within each asset class to obtain the best risk/return ratio for your situation and financial goals.
Here are some essential rules for achieving the most advantageous asset allocation strategy:
Think and act long term. Markets do move up and down, sometimes rapidly, but the historic trend is up - so stick with your long-term investment plan, remain focused on your goals and be confident that if your plan is well designed, it will still be right for your goals. Remember that 'chasing the market' by constantly moving investment dollars around trying to 'catch' fast-rising stocks or hot mutual funds is a "mugs" game. Study after study (and the unfortunate experiences of too many everyday investors) have proven that staying true to a long-term investment strategy usually delivers far higher returns than jumping in and out of the market.
Invest regularly. This is important because investing even small amounts regularly will generally accumulate large sums over time. Figure out a personal investment schedule that fits your budget and stick to it - you'll be strongly rewarded later for a bit of financial discipline now.
Select an optimal asset mix. The optimal asset mix for you will usually include a combination of equity and fixed-income investments tailored to your financial means, goals and tolerance for risk. Your 'mix' should maintain a volatility level you're comfortable with, while allowing you to benefit from whatever asset class the market is favouring.
Diversify at home and abroad. Your portfolio should be well-diversified to take advantage of both Canadian and international investing opportunities.
Any investment plan shouldn't be written and then forgotten. You should revisit it at least once a year to ensure that it continues to be right for you as your life, finances and objectives evolve. A professional financial planner can help you craft the optimum asset allocation strategy for you and keep it on track as time goes on.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact your Investors Group Consultant.
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