Should You Rent or Own in Retirement?
By iA Private Wealth, May 18, 2023
If you’re approaching retirement, it can be both exciting and stressful. Sure, after years of juggling a full workload along with family and other obligations, having the freedom to set your own schedule is enticing.
However, given the recent spike in inflation and subsequent high interest rates, the basic cost of living has jumped significantly. Money isn’t going nearly as far as it used to, and you might be wondering if you’ve actually saved enough to enjoy your retirement years.
Running out of money is a legitimate concern. Many retirees live on a fixed income, such as government benefits, a company pension plan and maybe RRIFs or annuities. While some income sources are indexed to inflation to help keep pace with rising costs, ultimately you’re drawing down on your money in retirement, rather than growing wealth as you did when working. Nobody wants to experience a shortfall that may require amending retirement plans or result in financial insecurity.
Should you sell your home?
One possible solution as you enter retirement is to sell your home and rent instead. Although renting isn’t typically a goal for people who already own their home, let’s consider the potential benefits of this strategy.
Real estate values in Canada have declined somewhat as higher mortgage rates dampen the enthusiasm of prospective buyers. However, if you’ve owned your home for several years or even decades, chances are you’ve built considerable equity in that property as housing prices have risen steadily over time.
If you sell your home and rent when you retire, you’ll have a tidy sum of cash available. Some of it can be put toward regular living costs and discretionary expenses like a vacation, a new vehicle or pursuing hobbies. You may also wish to invest for the future. With guidance from your Investment Advisor, you can decide how to allocate your money across various investment products. Having the potential to grow your assets through investing is a proven way to extend how far your money can stretch in retirement.
Over longer periods, the stock market has generated higher returns than real estate (here’s one study as an example), so relying on the value of your home might not be the best option to achieve long-term growth. Also, investing in a range of securities provides diversification as you tap into different sources of growth potential. This approach may help reduce overall risk if one (or more) of your investments declines in value at a given time. On the other hand, when the bulk of your assets is invested only in your home, you may face a sharp decline in wealth if the real estate market weakens.
Three other benefits of renting
Home ownership involves maintenance and repair costs, property taxes, insurance, utility bills and other expenses that add up in a hurry. The older your home, the higher the expenses could be. Also, the older you are, the less likely you’ll want to deal with the maintenance and repairs. Renting will shift the burden to your landlord.
Property taxes usually increase each year, taking a bite out of your retirement savings and cash flow. If you sell your home, you avoid property taxes, plus capital gains from the sale of a principal residence are tax exempt, leaving more money in your pocket.
Selling your home gives you flexibility to decide where to live. Maybe you want to move to a warmer climate or be closer to children and grandchildren. Perhaps relocating near parks, golf courses or other preferred amenities is appealing. Selling also provides an opportunity to downsize from a large house to a condo or apartment, for a more carefree lifestyle with less hassle and fewer responsibilities.
Speak with your Investment Advisor for guidance on which approach is best suited to your unique needs and goals.
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New Tax-Advantaged Account for First-Time Homebuyers
By iA Private Wealth, March 15, 2023
It’s no secret the housing market in Canada has been overheating for years. With real estate prices remaining stubbornly high, many prospective first-time homebuyers are feeling squeezed out of the market.
While there are no instant fixes for the challenges created by insufficient affordable housing, the Canadian government introduced a measure in its 2022 Federal Budget that aims to help first-timers save money to purchase a home. The government is working with financial institutions on finalizing details of the Tax-Free First Home Savings Account (FHSA), with expectations for an April 2023 rollout.
What is the FHSA?
The FHSA is a registered account for Canadians 18 years of age or older who have never owned a home or haven’t owned one in the past four calendar years. While the account is a bit of a misnomer since you technically don’t need to be a first-time homebuyer, nonetheless the FHSA allows eligible Canadians to contribute up to a lifetime limit of $40,000.
The annual contribution limit is $8,000 and unused room can be carried forward to a future year. For example, if you contribute $3,000 in 2023 your limit for 2024 will be $13,000 instead of $8,000.
The FHSA provides two notable tax benefits:
Contributions are tax deductible – just like your RRSP contributions – so your taxable income for the year in which you contribute will decrease by the amount contributed to your FHSA.
Any withdrawals (including investment-related gains) from the FHSA are tax free, provided that you withdraw the money to help purchase a home.
Like most other registered accounts, you can hold a wide range of investments in your FHSA, from stocks and bonds to mutual funds, ETFs and more. Keep in mind, however, that your FHSA can only stay open for up to 15 years. If you invest in risky securities prone to dramatic price movements, you might not have enough time to recover from significant losses – especially if the securities decline sharply closer to the 15-year mark. The best course is to consult with an Investment Advisor for guidance on the investments that best suit your specific timeline and capacity for risk.
If you don’t use your FHSA to buy a home within 15 years, you must close the account. You can move the assets to an RRSP or RRIF tax free or simply withdraw the funds, but in the latter case the amount will be fully taxable as income.
FHSA, HBP, or Both?
The FHSA is not the only option the government has provided for first time home buyers. The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP on a tax-free basis to purchase your first home. You’re given 15 years to repay that amount to your RRSP, based on a prescribed schedule that includes a minimum annual repayment (you’re permitted to repay a larger amount in a given year, or the entire amount any time before the 15-year period ends). If you don’t repay the full amount within 15 years, the outstanding balance is considered taxable income.
Whether you should choose the FHSA, the HBP, or both will depend on your personal circumstances. Many people start contributing to an RRSP before they’re ready to buy a home, so the HBP lets you tap into money you’ve already saved. If you don’t have much cash available, it’s not feasible to open an FHSA; but if you can contribute a meaningful amount, the FHSA might serve you better than the HBP since you have no obligation to repay any withdrawals. The FHSA is also useful if you’ve maxed out annual contributions to other registered accounts and want another tax-efficient way to save for a home.
Get in touch with one of our Investment Advisors today for personalized guidance that can help you achieve your dream of homeownership.
Take advantage of the TFSA
By iA Private Wealth, January 23, 2023
Looking for something positive about soaring inflation? Given the rising cost of many goods and services, the Canadian government has raised the 2023 contribution limit for the Tax-Free Savings Account (TFSA) to $6,500, an increase of $500 from 2022. That’s good news for people who can contribute the maximum amount this year, and it may even benefit those who can’t (more about that later).
How does the TFSA work?
In 2009, the TFSA was introduced as another tax-advantaged way for Canadians to save for the future, joining established programs like the Registered Retirement Savings Plan (RRSP).
While both savings vehicles are valuable, there’s a big difference between them. RRSP contributions are made with “pre-tax dollars” because you deduct the amount from your taxable income. Investment growth in the RRSP is tax deferred until you start withdrawing from the account. TFSA contributions are made with “after-tax” dollars with no deduction on your income tax return. However, investment growth isn’t taxed, nor are any withdrawals you make from your TFSA.
Here's another great feature of TFSAs: since income earned in the account is tax-free, it won’t affect eligibility for income-tested benefits like Old Age Security, Employment Insurance, the Canada Child Benefit and credits related to HST/GST.
If you’re a Canadian aged 18 or older with a valid Social Insurance Number, you can open a TFSA at a qualifying financial institution and start contributing. The federal government sets the annual contribution limit based on several factors, including the rate of inflation. If you don’t contribute the maximum amount in a given year, you may accumulate contribution room for future years.
That’s why, as mentioned above, you can benefit even if you don’t contribute the maximum in 2023. TFSA contribution room is currently $88,000 (i.e., the amount available if no contributions were made from 2009 to 2023). Let’s say you managed to contribute $63,000 to your TFSA over the years. If you have the money available this year, you can contribute $25,000 ($88,000 – $63,000) to reach the limit, or chip away at your contribution room in the years to come.
Just be sure you don’t exceed the contribution limit in any given year, because over-contributions face a penalty of 1% per month. For instance, if you contributed $8,500 in 2023, that’s $2,000 above the limit. You’ll be penalized $20 per month for every month the over-contribution remains in your account. Paying this tax defeats the purpose of a tax-free account, so keep track of your contribution amounts each year.
Also note you can withdraw from your TFSA without tax consequences, and may recontribute the withdrawn funds to preserve your total allowable contribution amount. The only stipulation is that you cannot recontribute in the same calendar year of the withdrawal.
What’s the purpose of a TFSA?
Ideally, you’d allow your contributions to grow in value over time, and then make use of your savings when you need cash flow in retirement. However, there are also shorter-term uses for a TFSA. You could use your account as a tax-efficient way to save for a vacation, auto purchase, down payment for a home or another financial goal. When you need the funds you can withdraw them tax-free and still have the option to recontribute the withdrawn amount in future years.
How should you invest in a TFSA?
There’s no right answer since it depends on your unique circumstances, such as time horizon, risk tolerance and financial objectives. Like the RRSP, many different investments can go into a TFSA, from stocks and bonds to mutual funds, ETFs and more. Work with your Investment Advisor to create a suitable approach to TFSAs that can meet your short-term and long-term needs. For all the reasons listed above, the TFSA is a powerful tax-free investment account, so consider making the most of it for your portfolio.
We can help incorporate a sound TFSA strategy into your overall wealth plan, so contact us today.
RRSPs: Not Just for Retirement
By iA Private Wealth, January 20, 2023
When you think about putting away money for retirement, the tax-efficient Registered Retirement Savings Plan (RRSP) probably comes to mind – and with good reason.
RRSP contributions garner an immediate tax break because you can deduct the contribution amount from your taxable income. Using spousal RRSPs, couples with significant differences in taxable income can split their income and lower the overall tax burden.
Any growth in RRSP value (e.g., from dividends, interest and capital gains) will remain tax sheltered until you withdraw from the plan. For many people, withdrawals begin when the RRSP converts to a Registered Retirement Income Fund. Since that usually takes place in retirement when they’re likely in a lower income tax bracket, the tax impact of these withdrawals is reduced.
Other RRSP uses
While the RRSP is ideal for enhancing retirement savings, other strategies for this plan may be viable, depending on your circumstances. Let’s consider four different uses for an RRSP.
Fund a home purchase. Under the Home Buyers’ Plan (HBP), you’re currently allowed to withdraw up to $35,000 from your RRSP to help buy or build your home. If you’re looking to increase your down payment – perhaps to avoid having your mortgage designated as “high ratio” – borrowing from your RRSP can help. Any down payment less than 20% of the purchase price results in a high-ratio mortgage. To protect the lender from default (since high-ratio mortgages are typically riskier), you’ll need mortgage loan insurance. The premiums for this coverage are added to your mortgage payments.
Even if you’re not breaching the high-ratio threshold, increasing your down payment helps reduce your mortgage and saves on interest charges. Spouses and common-law partners can also withdraw up to $35,000 in RRSP funds under the HBP. Be sure to replace the borrowed RRSP money according to the specified schedule (currently over a 15-year period). Adhere to this schedule to avoid any tax consequences.
Fund your education. The Lifelong Learning Plan (LLP) currently allows you to withdraw up to $10,000 from your RRSP in a calendar year to help cover expenses related to full-time training or other learning pursuits at a qualifying educational institution. If you continue meeting the LLP conditions, you may withdraw RRSP funds in subsequent years, up until the fourth calendar year following your initial LLP withdrawal, and up to a combined total of $20,000.
Repaying these funds to your RRSP takes place over a 10-year period, typically with 10% of the withdrawn amount repaid each year. The repayment schedule begins in the fifth year after your first LLP withdrawal. Each spouse/partner may withdraw up to the maximum LLP amount, either for individual use or to help fund one spouse’s/partner’s education.
Support children with a disability. The Registered Disability Savings Plan (RDSP) is designed to enhance the long-term financial future of people who qualify for the disability tax credit. An effective way of achieving this goal is to transfer an RRSP via your will to an RDSP as a tax-free rollover of assets. In addition to helping your child or grandchild with a disability who was financially dependent on you at the time of your death, this strategy may lead to substantial savings in estate taxes. Note that RDSP rollovers cannot exceed the beneficiary’s lifetime contribution limit (currently $200,000). This rollover will reduce the beneficiary’s contribution limit, dollar for dollar, but won’t impede eligibility regarding income-tested disability benefits for which they qualify.
Gain creditor protection. Much like insurance policies, assets held in an RRSP are protected from creditors in the event of bankruptcy (note that this does not apply to contributions or transfers made within 12 months of declaring bankruptcy). In several Canadian provinces, your RRSP is also protected from creditors even if you don’t declare bankruptcy. Additionally, RRSP assets invested in eligible products like GICs and term deposits qualify for coverage under the Canada Deposit Insurance Corporation (CDIC), where the maximum protection is currently $100,000 per qualifying deposit category, per CDIC member institution.
We can build your personalized wealth plan that includes RRSPs, so contact us today.
Will Inflation Impact Your Retirement?
By iA Private Wealth, January 04, 2023
Planning for retirement is a challenge under normal circumstances. It might be many years before you retire, so imagining your future lifestyle, estimating expenses and anticipating your level of savings and income is difficult.
Today’s high inflation and rising interest rates add complexity to retirement planning. For decades, inflation and interest rates were low, making the planning process more predictable since people didn’t worry much about a soaring cost of living. These days, you only need to look at gas and food to recognize that prices have jumped significantly.
Retired people often live on a fixed income, so it doesn’t take many years of high inflation to erode savings faster than expected. For example, the income stream of retirees with a workplace defined contribution (DC) pension plan is linked to how their investments perform. If markets are declining – which typically happens during periods of high inflation – the investments in their DC plan might not generate returns that keep pace with inflation.
Conversely, retirees in a defined benefit (DB) plan could be better off because these pension plans guarantee a specified income stream and are indexed to inflation (partially or fully). As a result, DB plans help retirees withstand higher inflation and maintain their purchasing power. Note that both Canada Pension Plan and Old Age Security payments are indexed to inflation, so that also helps retirees contend with rising costs.
Benefits of financial advice
As you plan for retirement, it’s valuable to work with an Investment Advisor. They’re trained to help create and maintain customized wealth plans flexible enough to endure different economic and market conditions. Experienced advisors can also recognize shifting circumstances and make financial adjustments accordingly.
When it comes to retirement planning, consider these four strategies to help you manage the potentially wealth-eroding effects of high inflation:
Diversify your portfolio. As mentioned, many investments decline in value when inflation is high, since rising costs often lead to rising debt. This may prompt people to reduce spending, which negatively affects business growth. However, not all investments follow the same pattern, as high inflation actually benefits some industries, such as commodities like oil and gold. Diversified exposure to industries, sectors and geographical regions may help manage volatility and risk, as some (or all) of your losses will be offset by the winners.
Be selective with fixed income. Similar to the point above, diversifying fixed-income exposures may also help when inflation and interest rates rise. In addition to traditional bonds that many investors hold, your advisor may suggest investing in securities like floating rate or real-return bonds (or funds holding such securities). As market rates rise, these bonds tend to maintain value better and generate more income than traditional bonds. Also, an allocation to GICs can lock in today’s higher rates before they decline, helping you put away more cash for retirement.
Use registered products. RRSPs and TFSAs are proven options to save tax efficiently for retirement. At any time, but especially when inflation is high, you should preserve as much wealth as possible. While your advisor helps you save tax by using vehicles like RRSPs and TFSAs, they also instill a disciplined approach so you can save money regularly, either for investing or as part of your retirement cash reserves.
Be opportunistic. Since retirement can be costly as people are living longer, an important planning goal is building long-term wealth. Over the short term, stock markets tend to decline when inflation is high, but everything moves in a cycle. Eventually the markets will rebound, so if the strategy matches your time horizon and risk tolerance, your advisor may recommend investing now to take advantage of lower prices. As the markets recover, your “buy low” investments could benefit significantly and enhance your retirement nest egg.
We can create a retirement plan that works for you – even in inflationary times – so contact us today.