You’ve maxed out your RRSPs and TFSAs, you have more assets than you will use through in your lifetime, and you want to efficiently give either to the next generations(s) or to registered charities that you support – using life insurance could be a useful tool to accomplish some of these goals efficiently as part of a long-term planning strategy.
Let’s look at three scenarios:
Scenario One
Lenny (age 70) is earning just over $15,000 in interest payments from the bonds she holds in her non-registered investment account each year. She uses $7,000 to fill her TFSA, but has no use for the remainder, and this excess tends to purchase more fixed-income. Lenny would like this money to be gifted to her adult children when she passes and is concerned about how much tax she’s paying on the interest income each year. Lenny purchases a permanent whole-life insurance policy for $8,800 annual premium which provides her with an insurance policy for $150,000 and a death benefit that will grow over the years (expected death benefit of $259,000 at age 90). Now Lenny’s interest income excess is being sheltered in the insurance policy, the funds destined for her children will be paid to them tax-free on her death, and she is not adding to her interest earnings each year.
Scenario Two
Carl’s registered accounts are significant and he will be unable to use the value of the accounts prior to his death. He also owns a cabin property that has appreciated significantly since he purchased it. If he passes at age 90, there will be a significant tax liability which will reduce the value of his estate. His goal is to gift to his family and to do so tax efficiently. Carl (age 64) purchases a permanent life insurance policy with a face amount of $375,000. He will pay $19,750 annually for 20 years, at which point no further premiums are required. Carl’s death benefit is expected to grow to $800,000 at his age 90, which is the tax liability his estate is expected to need to cover at the time of death.
Scenario Three
Margaret supports a registered charity she is passionate about. She has a large RRSP account and a sizeable pension she receives monthly. Margaret is concerned about her taxable income and wants to try to continue to manage her tax while she’s living. Margaret purchases a permanent life insurance policy, owned by the charity she supports, while Margaret pays the premiums. Margaret receives a charitable donation receipt for the premiums she pays; upon her death, the charity will receive the death benefit.
As you prepare for your retirement, we know that although it is an exciting time, it can also be a bit nerve-wracking as you move from earning an income to drawing an income from your investments, pension, etc.
In this video, Kelley Doerksen, CFP® walks you through some of the steps you can take to feel more prepared and confident that you will have what you need to live comfortably, retire successfully and enjoy the wealth you have accumulated.
Watch the video here:
https://youtu.be/usUtMbKUqTs
A large part of what we do when preparing financial plans for clients is helping to prepare for retirement of course; and although clients are excited to make the transition from working life to retirement, it also comes with some stress and concern related to whether or not you will have enough financially to do the things you want to do when retirement comes. It also can be a challenging period of time mentally, moving from the process of earning an income to drawing an income from your investments, pensions, and so forth. Even though a lot of clients might know factually by way of our financial planning, that they are going to be fully capable of retiring financially, and they might know intuitively that they are going to be able to retire comfortably, it still can be challenging.
One thing that we often recommend clients do is get a good understanding for themselves of what their expenses might look like; and this will help pair the financial plan really successfully with the goals and values that you as the client would like to see achieved over your retirement.
An easy way to start looking at your costs, first and foremost, is understanding what you are spending currently. We all have certain months of the year where we are going to spend a little bit more than usual, so assess your regular spending months – months that you do not have big events or parties or travel or so forth and get a good handle on what those regular costs look like. Understand your fixed expenses – your property taxes and utilities, and all of those things that you can understand are going to be fairly consistent from month to month.
Go forward from that and understand what it is that you might need to spend money on, or more importantly might want to spend money on throughout your retirement stage.
We do recommend that people quite literally take a walk through their homes prior to retirement. Assess for yourself what major expenses are going to be needed through your house, whether that is a new roof or a fence that needs to be replaced or updated. All of those large expenditures can and should be projected in your financial plan. Again, knowing what those might look like and an estimate of cost will help us determine whether or not the assets that you have accumulated are going to be sufficient to cover off those large expenses.
Another thing that you want to keep in mind is, oftentimes, people in the first few years of retirement or maybe just prior, will look at purchasing a vehicle – maybe it is the last vehicle you intend to purchase or own, and understanding what that cost might look like and how that would impact potentially drawing from your assets can be beneficial as well.
The most important part of understanding your retirement expenses is to try and get an assessment for yourself of the expenses that you are excited to spend money on.
Many people are going to put the most time into travel for example, in the first 10 years of their retirement. And so, understanding what that looks like for you, whether that is a number of small trips or a number of once in a lifetime experiences. We can work with those expenses; we can project them into your financial plan and you can walk away feeling confident that the dollars that you have accumulated are going to be able to provide you with your basic living expenses of course, but also most importantly, those need to do, want to do experiences throughout retirement that you have worked hard to save for and you want to be able to comfortably use your money for.
When planning for retirement, understanding your goals and your objectives and what you value is absolutely critical; and pairing those with the expenses that you would like to see for yourself is a really meaningful use of your time and helps us build a financial plan that is going to help you see that you can meet those needs comfortably, retire successfully, and enjoy the wealth that you have accumulated.
Learn more about our retirement planning services here.
We are asking our retired clients to share their experiences as inspiration for those of you approaching retirement. Here is Joanne’s experience of finding new activities in retirement.
“When I was looking at setting a date for retirement, I needed to sort out a transition plan. I was moving from working full time to not working. I needed to make sure things were in order so that I could successfully do this.
I knew that my finances were in order because of the input from Kelley and Stephen and I knew my legal papers had all been completed so those items were done, but I needed to look at the activities that I could do.
“I needed to look at the activities that I could do”
I had lots of things that I could do in terms of crafts at home that would keep me busy forever. I could travel and I could golf, but those are time limited. So I needed to look at other things that would keep me busy and would get me out to meet new people.
“What I decided to do is to start running.”
What I decided to do is to start running. I took a learn to run class in the summer prior to my retirement. I persevered through that, meeting some new people, had a lot of support from my family and my coworkers at the time to keep on running. I completed that course, did the race, and another one at the end of the year.
One of the participants from the learn to run class got a hold of me the following winter and asked if I would join her in a 5k clinic. I did that and I’ve since taken the 5k, the 10k, and done a number of races.
“I’ve since taken the 5k, the 10k, and done a number of races.”
I’ve met a lot of people running and have actually developed a small group of people who run like I do, who are slower paced, who are out there just to keep active.
It’s not easy, it’s not something I’ll do by myself. I take my dog with me when we do run. And we set our own pace and our own distances now just to keep going. It’s interesting, it’s nice to have met a very different group of people.
I’m very glad that I did it and I hope to carry on doing my running. It’s one of those many things that keep me active. It’s got me back into swimming and back on the bike, and keeps me very active and happy in my retirement.”
“…and keeps me very active and happy in my retirement.”
This will serve as a friendly reminder of the contribution limits and cut-off dates for RRSP and TFSA contributions if you are planning to make one this year and have not already done so.
RRSP Contributions:
The cut-off date for your RRSP contributions to count toward reducing your income for 2022 is Wednesday, March 1, 2023. The contribution limit for the 2022 taxation year was 18% of your taxable income up to a maximum of $29,210, whichever is less. The contribution limit for the 2023 taxation year is a maximum of $30,780. If you have unused contribution room from previous years, you may utilize this room as well.
TFSA Contributions:
If you would like to contribute to a TFSA for 2023 the limit is $6,500 for the year, unless you have not maxed out your contributions. The maximum one could have deposited into their TFSA account since 2009 is $88,000 as of 2023.
Our clients can make contributions through one of the following methods:
Transfer from Non-Registered Account: If you have a Non-Registered account set-up with enough funds in it, you can simply send us an e-mail indicating the amount you would like transferred from this account to your RRSP or TFSA.
Online Banking Transfer (Bill Payment): Add your Custodian (“Credential Securities” or “National Bank Independent Network” / “NBIN” – note it may show up as either, depending on your bank) as a “Payee” through your online banking and enter your account number as the bill account number. If you need assistance finding your account number or are unsure who your Custodian is, please contact our office. If you choose this method, please also notify us with the amount you are contributing, so we can have your Portfolio Manager watch for it.
EFT from your Bank: You will just need to sign an EFT form if you have not already done so, which allows your Custodian (Credential or NBIN) to take the money directly out of your account with your consent. Once you have signed the form, we will require an email from you indicating the one-time amount you are authorizing them to withdraw from your bank account and which account (RRSP or TFSA) you would like it deposited to.
If you have any questions or would like to book a video or phone appointment to review your accounts, please contact our office at 780-490-4200.
Today we’re talking about another common question from clients – what is a RIF and how does it work?
A RIF is simply a conversion from your Registered Retirement Savings Plan (RRSP) to a Registered Retirement Income Fund. So the income version of the tax sheltering that you receive from a registered account. A RIF is set up so you can continue to enjoy growth on your assets without paying tax as the assets grow.
Of course, you are going to be taxed when you take money out of your RIF. So how does that work?
You have to convert your RRSP to a RIF at age 71, and you must begin to draw income out of the RIF at age 72.
You can convert to a RIF prior to that if you choose to. You can also convert partially to a RIF from your RRSP account if you choose to, which can be a great way for you to use the pension tax credit for example.
So how much do you take out of a RIF when it’s time to convert? You have to take out a designated amount that’s specified by the Government as a percentage of your assets. Your assets will be calculated on December 31 of the previous calendar year and a percentage applied to it based on what CRA determines. This will give the minimum amount that you have to take out of your RIF once it’s in RIF format. You can always take more out of your RIF if you choose.
When you take money out of your RIF, it is taxed as ordinary income. The RIF minimum will not be taxed immediately, but you need to consider it in your tax planning for the year. Anything over and above RIF minimum will incur a withholding tax, and that portion will be taxed as you go. You can ask to have your RIF minimum taxed as you go as well, but it’s not automatic.
Another common question we get asked is whether you are taxed twice on a RIF? And the answer to that is absolutely not.
When you make a contribution to your RRSP in your working years, typically you are at a much higher income than you are in your retirement years. Often this means you get a great tax benefit throughout your working career to make those RRSP contributions. Following that up, you pay a much lower rate of tax when you draw that money out from your RIF.
So are you taxed on your RIF? Absolutely, but you’re certainly not double-taxed. And typically, you are seeing a significant benefit in terms of tax planning from your working career to your retirement years.
If you have any questions about how your RIF fits into your financial plan, please contact your advisor or give us a call.
If you or someone you know is caring for a senior you may find this list helpful. The National Institute of Aging (NIA) has created a list of current programs and services that seniors can benefit from. You can view the list here.
The list is organized by province and territory, along with nationwide resources under 4 key categories:
1. Promoting Preventive Health and Better Chronic Disease Management
2. Strengthening Home and Community-Based Care and Supports for Unpaid Caregivers
3. Developing More Accessible and Safer Living Environments
4. Improving Social Connections to Reduce Loneliness and Social Isolation
