This story was originally titled "Your Top Money Stressors Solved" in the February 2010 issue. Subscribe to Canadian Living today and never miss an issue!
1. I am locked into a mortgage with a 5.3 per cent interest rate for the next three years, but interest rates are much lower now. Can I get a better deal?
It's worth looking into. You might be able to renegotiate a mortgage with a lower interest rate, but you may have to pay a penalty to break your current mortgage. "The penalty will depend on how many months are left in the existing mortgage," says Anna Clarkson, a branch manager with Scotiabank in Calgary. You can also ask if you can blend the old and new rates, which may not carry any penalty. Make sure to ask about penalties, though. "Some can be exorbitant and it may not be worth it," says Preet Banerjee, a money expert on the W Network and the author of RRSPs: The Definitive Book on Registered Retirement Savings Plans (Lulu.com, 2008).
2. I owe a lot on my credit cards. Can I withdraw money from my RRSP to pay off my debts, then pay the RRSP back without any penalty?
When you withdraw money from your RRSP, it is taxed as if it were regular earned income, says Banerjee. There are only a few exceptions – such as withdrawing for the federal government's First-Time Home Buyers' Plan – but using the money to pay down credit cards isn't one of them. So, should you withdraw the money? Do the math, says Banerjee. If you are in a high tax bracket (for example, 46.41 per cent is the highest in Ontario), you might end up paying more in taxes than you'd pay in interest on your credit card debt, so it wouldn't be worth it. But if you are in a lower tax bracket, it might make sense.
3. My siblings and I have talked about buying and then renting out a condo. Is this a good idea?
You need to have a good relationship with your siblings, because you must be able to agree on renovations, repairs and who is going to look after the property. Also, be sure to consider whether everyone can afford the venture. "Sometimes it's difficult to rent a property out, so you'll [all] have to cover the expenses while the property is vacant," says Bill Alexander, an Edmonton-based tax consultant. If you decide to go ahead with the deal, it's a good idea to draw up a legal agreement that outlines everyone’s responsibilities.
Page 1 of 5 – Learn what happens to your RRSP during a divorce on Page 2
4. I make significantly more money than my husband. Does a spousal RRSP make sense for us?
Yes. A spousal, or common-law partner, RRSP is one that both you and your spouse (or common-law partner) can contribute to, but only one person (typically the lower- income spouse) eventually withdraws funds from. When the high-income spouse (in this case, you) makes a contribution, she shelters that money from being taxed at a higher marginal tax rate, says Alexander. Then, provided the money is left in the spousal RRSP for at least three years, when the lower-income spouse withdraws the funds he will be taxed at a lower marginal tax rate.
5. My marriage has been rocky. What happens to my RRSP if I get a divorce?
You can transfer all or part of an RRSP between spouses – tax-free – if your marriage breaks down. (The amount is determined in divorce proceedings.) For example, if you were to transfer $40,000 to your husband, you won't get taxed for pulling it out of your RRSP and he won't lose any RRSP contribution room. However, when he cashes in the RRSP, he will pay tax on that money. Often there are additional assets to be divided, such as a house. Rather than selling it, a couple may agree that one person takes the RRSPs and the other the house – if the assets are of equal value. "I [advise my clients] to take the house because they won't pay tax on the profit when they sell it," says Gabrielle Loren, a partner at the Vancouver-based accounting firm Loren, Nancke and Company.
6. My employer has introduced a contribution- matching program at work. Should I invest in it, or am I better off investing on my own?
There are two common scenarios. The first is a group RRSP, where your employer gives you a range of investment options. The second is buying company stock. In both cases, your employer matches your contribution, or a percentage of it. "With a group RRSP, you'd be almost crazy not to take part, because it's free money," says Banerjee. However, with shares in the company stock, Banerjee warns, "you don't want to have all your eggs in one basket." To prevent this scenario, he suggests selling off the stock each vesting period (often two years) and then investing in something else so you can diversify.
Page 2 of 5 – Learn if you should go for a fixed rate mortgage on Page 3
7. When mortgage rates are low, like they have been, should I lock in for the long term to be safe, or go with a shorter term, as rates may still go lower?
"It comes down to cash management," says Banerjee. If you are living paycheque to paycheque, or don’t have substantial savings or extra money each month, it's better to go with a fixed mortgage because rates won't rise unexpectedly and you will know how much you have to pay for a set period. However, if you have the resources and can afford fluctuations in monthly payments, opt for a variable rate. A 2001 study by Moshe Milevsky, a professor at York University in Toronto, found that the average person saves money with a variable rate 75 to 90 per cent of the time.
8. I was recently laid off and can't afford my mortgage. What should I do?
Let your bank know right away rather than waiting until you miss a payment, says Clarkson. If you expect to be out of work for a long period, options include re-amortizing your mortgage for a longer term to make the payments smaller or using some of your RRSP to pay your mortgage (and taking the tax hit). If you are insured by the residential mortgage insurers Canadian Housing and Mortgage Corp. or Genworth, you can even recapitalize the payments (add what you've already paid back onto the mortgage).
9. Do I have to claim severance pay at income tax time?
Yes. However, there are cases where a severance package will include a portion that can be directly transferred into an RRSP or registered pension plan, says Cleo Hamel, a senior tax consultant at H&R Block in Calgary. For each year of service before 1989, you can contribute $3,500 to your RRSP. For the years 1989 to 1995 inclusive, you can contribute $2,000 per year. From 1996 onward, there is no eligible portion. The only way to reduce your tax burden is to contribute to an RRSP. If you take your severance package as cash, it will be taxed at your personal tax rate.
Page 3 of 5 – Learn what to do when a family member asks for money on Page 4
10. My brother wants to start his own business and needs some startup cash. I want to help out, but what are my chances of seeing the money again?
Investing in a family business isn't the best idea, because if the business fails – and many startups do – the relationship is often damaged. Joseph Adler, a partner in franchise law firm Hoffer Adler in Toronto, suggests that if you do decide to lend money to your brother, you should get a promissory note that specifies the terms of the loan, the interest rate (if applicable) and a payback schedule. A security interest (collateral) in the assets will give you a way to recoup some of your investment if your brother defaults on the loan. A written agreement that outlines the nature and purpose of the loan is also a good idea.
11. I was in a car accident and my insurance company has raised my rates substantially. What can I do?
Shop around. Websites such as kanetix.ca and carinsurance.ca enable you to get online quotes from many insurance companies within minutes. You enter some basic information about yourself (age, type of vehicle, whether you’ve had an accident or claim), and you can see if a competing company will offer you a better rate.
12. Can my husband and I both claim day-care expenses on our income tax?
"The rule is that the person with the lower income has to claim [day-care expenses]," says Alexander. There are a few factors that determine how much you can claim, including the age of your child, if he or she has a disability and how much you earn. For more information, visit www.cra-arc.gc.ca.
13. Can I receive financial aid if I return to school for career retraining?
Yes, mature students can apply for provincial and federal financial aid, providing they meet the regular eligibility requirements. Grants may also be available. For instance, all students in Newfoundland and Labrador who are eligible for a loan of $60 per week or more are also eligible for the province's grants. In addition, many scholarships are available specifically for mature students and single parents. There are hundreds of scholarships for adults listed online at www.scholarshipscanada.com.
Page 4 of 5 – Learn how to save more for your child's education on Page 5
14. My parents are going to transfer ownership of their cottage to me. Is there any way they can minimize the capital gains tax they’ll have to pay?
When you sell your principal residence, you don't pay tax on it because you get an exemption. That exemption can be applied to a city house or a cottage, says Loren. If the cottage has increased in value more than the city home has, your parents may be able to reduce or eliminate their capital gain on the cottage by claiming it as their principal residence for some or all of the years of ownership. If your parents claim the cottage as their principal residence, they'll have to pay tax on their city house when it is sold.
15.I am worried that I am not saving enough for my kid's education, but money is so tight I don't have any more to contribute.
You might be able to free up funds by reorganizing your finances. For example, consolidating all your small credit card debts under one line of credit at the bank (which typically has a lower interest rate) could cut your minimum interest payments considerably, increasing your cash flow, says Clarkson. Consider starting a registered education savings plan because the government will match part of your contributions with a Canadian Education Savings Grant. The amount the government contributes annually depends on your net family income. (Visit www.canlearn.ca.) "The government’s contribution will help accelerate your savings," says Banerjee. And the earlier you start, the more time you have for the money to compound.
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