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Retiring and Not Sure What To Do With Your Pension?

Transfer your pension plan from your employer to a locked in retirement account managed by the experienced financial advisors at Accountable Inc. Wealth & Asset Management.

Many of our clients are choosing to transfer their pension plans from their employer to a locked in retirement account and have a financial advisor manage their funds.

Registered Pension Plan’s (RPP) are funded by employee contributions, employer contributions or a combination of both. The goal is to allow a pension income to be received at the employee’s retirement.

With the way RPPs work, the plan’s assets become “fully vested” with the employee after a certain amount of time – in most cases this is a period of two-to-five years. The term fully vested refers to the plan’s funds becoming full property of the employee once a specified age/service requirement is met.

When employees have reached the fully vested stage and leave an employer, they are afforded a choice with respect to their RPP funds. The amounts in the plan have become “locked-in”, and the first option would be to leave it with the former employer and receive a pension income at a later date. The individual would receive their pension at retirement.

The second option is to transfer the locked-in funds to a locked in retirement account (LIRA), which allows an individual the benefit of self-direction as it relates to managing the investments in the plan.

Let’s take a closer look at the two options with a simple case. Consider John, 54 years of age, who is considering leaving his employer at age 55, after many years of service. He meets his advisor who highlights the options relating to his RPP funds.

Keep pension with former employer:
  • Michael has no control over the way his RPP funds are invested.
  • He will have a CPP offset at age 65 – meaning his pension will be reduced from the age of 65 by the amount of the CPP payment.
  • If John were to pass away, his spouse Susan would only receive approximately 66.66% (two-thirds) of the income.  When Susan passes, John’s children would receive nothing.
  • If the former employer were to become insolvent or declare bankruptcy, there is no guarantee John would still receive his pension.
  • John would receive a steady monthly cash flow.
Benefits of transferring the pension to a locked in retirement account (LIRA):
  • John has full control of the funds; so he is free to choose where assets are invested and ensure proper diversification.
  • There is no CPP offset at 65 – therefore John has a full entitlement to both pension plans.
  • If John were to pass away, his spouse Susan (named beneficiary) would receive 100% of the assets.  The children would inherit the assets when Susan passed.  A very attractive characteristic.

It is quite clear that the choice of transferring the pension plan to a locked in retirement account is the better option. It allows flexibility in the form of self-direction, a higher total income received (no CPP offset), and can provide full – rather than partial – inheritance to named beneficiaries.

Since the funds are locked-in, they cannot be withdrawn prior to retirement (in most situations), or received as a lump sum. Instead, by December 31st of the year in which the individual turns 71, the locked-in RRSP must be converted into a Life Annuity, Life Income Fund (LIF), or Locked-In Retirement Fund (LIRF). In this manner, the LIRA is designed to truly replicate the RPP, but with obvious benefits to the former employee.

Contact or call us at 519-434-0449 for assistance with your pension transfer

Received a Severance Package or Termination Pay?

Termination pay or severance package? Accountable Inc. Wealth & Asset Management offers financial planning and tax planning strategies to make the most of your severance pay.

Have you received a severance package? How will you manage the severance package? Can you reduce the tax that you will pay? Do you need legal advice to ensure that you will receive a fair severance package? The advisors at Accountable Inc. Wealth & Asset Management can answer your questions.

Losing your job is a stressful event. You may have been employed with your current / former employer for many years and now you are without work. First things first; you will need some answers to a few questions. You will need to determine the amount of severance pay you’ll be receiving if you do not know this already.

Once you determine the amount of the severance, you will need to calculate how much you will need for the short term and how much you can invest for the long term. You may have to do a budget to assist with this decision. You will need to determine how much money you will need to live on before you will find new work. You will also have the opportunity to transfer your group RSP or pension plan to your own RSP or a locked in retirement account. We can assist with the transfer of your group RSP or pension plan. Reducing the tax on the severance should be reviewed, as well. In some situations, there are opportunities to reduce your tax bill on the lump sum; the tax grab can be significant on the severance pay.

Quick Facts about Severance Packages:
  • Consider transferring your group RSP / pension to your own RSP or a locked in retirement account.
  • Review your tax position and determine if you can reduce the tax on your severance pay.
  • Review your RSP contribution room.
  • Consult a lawyer to ensure your severance pay is fair.
  • Consider a trust to minimize tax.

Tax on severance pay can be steep. The unfortunate thing about a severance package is that it may push you into a high tax bracket and your marginal tax rate may be slightly over 45%, ouch! It is definitely a benefit to receive the severance; however, it is painful to see large portions of your hard earned money go to the government’s bank account. There may be options to help you reduce your tax bill. We can help review your situation and determine a tax efficient structure and minimize losses to income taxes.

Completing the paperwork for transferring your existing group RSP and pension plans can be an onerous task. We can help reduce the overwhelming burden of the financial paperwork. We can also recommend investments that meet your risk tolerance so you can meet your investment objectives. We will reduce the stress of losing your job, and enable you to concentrate on finding your next high level position.

Accounting Checklist for Start-Up Entrepreneurs

As a start-up entrepreneur, one of your top priorities is to organize your accounting system to manage your cash flow and prevent financial obstacles.

Figuring out how to set up accounting for your start up can be daunting when you’re starting out, especially when your plate is full of other tasks and responsibilities. But it’s essential to the foundation of building a profitable and sustainable business.

To help, I’ve put together this accounting checklist for start-up entrepreneurs:

1. Register Your Business Name
2. Set Up Your Company Structure

When setting up a new company, you must first decide whether you’ll be a sole proprietor, partnership or an incorporated company. Be sure to set this up correctly the first time as it can be costly to change things down the road. For example, if you need to incorporate your company, you’ll need to consider variables such as share structure and family trust for asset protection.

To help you determine the best structure for your company, visit the Canada Business Network  to learn the differences between each.

3. Set Up A Business Bank Account

Tracking your business income and expenses separately from your personal will make record keeping and tax filing at year end easier.

4. Register For Business Accounts

When starting a company, be sure to register for the accounts you require to run your business including your business number, HST, PST, payroll and WCB. Setting them up right from the start will prevent extra work in the future. Once your business accounts are set up make sure you submit payments on time, as the penalties for late or missing payments are high.

5. Set Up An Accounting System

An effective accounting system is essential to managing the money flowing in and out of your business.

With an effective accounting system in place, you’ll be able to stay organized, track your profitability and make adjustments proactively before year-end.

Two of my favorite accounting systems are Sage 50 and QuickBooks On Line. Sage 50 is a desktop accounting system. QuickBooks On Line is a cloud-based accounting solution you can access anytime from anywhere you have an internet connection. With both of these systems, you can easily track your expenses, sales, and analyze your financial position.

6. Set Your Goals

Continuously working on your success mindset is just as important as accounting software and government forms.

Setting clear and measurable goals is critical so you know what you’re working towards and why. Writing your goals down, keeping them in front of you and having an accountability partner will help you stay on track to achieving them.

We’d love to help
If you need assistance with setting up your accounting system or to book a free consult to help you get your business on the right track, contact us by email or phone at 519-434-0449.

Refinancing Your Home? 5 Things To Consider

This year’s home-buying season started with a bang when one of Canada’s major banks dropped its mortgage rate. These record-low rates are obviously appealing to people looking to buy their first home, and people looking to upgrade their current one. In addition, current homeowners with higher rates may also see an opportunity to refinance or remortgage their home and save some money. If you are looking to lock down a lower rate or pull equity from your current home, here are five things to consider before calling your lender:

1. Penalties for leaving your mortgage early

If you leave a closed mortgage early, you will likely incur a penalty. The penalty is usually the higher of the amount of interest you would pay in three months at your current rate, or the interest rate differential (IRD). The calculation of IRD can vary from lender to lender (and most major lenders also offer penalty calculators on their websites), but it is generally an estimate of the amount of interest the lender would receive on your remaining principal, based on current rates. For example, if you have two years left, the IRD would be the interest amount at the current two-year rate, although the rate might be based on the mortgage-qualifying rate – the current five-year posted rate published by the Bank of Canada.

Along with the penalty, other fees may apply when exiting your mortgage early, such as administration fees and an amount equal to any initial discount on the rate you received. Ask your current lender to calculate the costs you can expect to pay.

If the penalty for leaving your mortgage early is more than the amount you will save by refinancing, you may not be better off refinancing. Our mortgage calculator can help you figure out some of the math.

2. Refinancing vs. using a home equity line of credit

If you need money to cover an expense – such as a home renovation, second property, education fees, debt consolidation or other costs – you have a few options. You can refinance your existing mortgage or use a home equity line of credit (HELOC). Both allow you to access the equity in your home, but have different features.

  • Refinancing – You can borrow up to 80% of the appraised value of your home, less the current balance of your mortgage. For example, if you owe $200,000 on a home appraised at $400,000, you can borrow an extra $120,000. Your new mortgage total would be $320,000.
  • HELOC – You can borrow up to 65% of the appraised value of your home, with the total of the line of credit and your mortgage amount adding up to a maximum of 80% of the home’s value. For example, you can borrow a maximum of $260,000 on a home worth $400,000, but if you owe $200,000 on your mortgage, you can only borrow another $120,000 ($200,000 + $120,000 = $320,000, or 80% of your home’s value). However, unlike the refinancing option, the amount that you can borrow with a HELOC is adjusted as your pay off more of your mortgage.

Both options may come with additional costs, such as administrative, appraisal and legal fees. In addition, you may not get the same rate on your current mortgage as you do on the refinanced amount or the HELOC. Visit the Financial Consumer Agency of Canada for more information about this.

3. Avoid unnecessary mortgage additions

In low-interest periods, the option to refinance is tempting. However, consider that using your home equity means that you’ll be paying for that home renovation or debt consolidation for the life of your mortgage. If the value of your home decreases, there is a risk that you’ll owe more than your house is worth if and when you decide to sell. Can your renovation wait a year or two? Do you have some areas in your budget that you could cut to help pay off credit card debt or save for other expenses? Ultimately, debt acquired at a low interest rate is still debt – and will still cost you something. If you decide to refinance your home or get a home equity line of credit, only borrow what you need.

4. Do you have good credit?

Lenders may add a premium to your rate if they consider you a credit risk. As a result, you may not be able to get the lowest rate on refinancing options. Lenders may also offer a different rate if your income or employment situation has changed since your current mortgage began.

5. Shop around

You don’t have to stay with your current mortgage lender when you refinance. You may be able to find a better rate elsewhere. Start looking a few months ahead of your mortgage expiry
date – you may be able to hold a rate, or your current lender may be able to match a lower rate.

Choosing a mortgage that’s right for you can greatly impact your immediate and long-term finances. Before refinancing a mortgage or taking on any new debt, check the terms of your current commitment and compare your options. Give us a call and we will help you with this at 519-434-0449.

WILL You Be Prepared?

What is the one thing that every living adult should have? That’s right…a will.

A will is important even if you don’t think you have anything of value to pass along. Here’s why: If you die without a will, the laws of the province in which you live will determine the division of your property and assets without any consideration of your wishes, or the wishes of your family members. This could result in significant conflict within your family when it comes to items of sentimental or monetary value. Other matters that will be decided without your input if no will exists include guardianship of minor children and the executor of your estate.

There are many things to consider when creating an estate plan. Due to the complex nature of tax and estate laws, it is strongly recommended that you obtain professional legal and tax advice. And remember to update your estate plan whenever you have a major life change such as a marriage, divorce, birth or death in the family.

Best Wishes,

8 Things to Know When Tax Loss Harvesting

You want to maximize your earnings, but you also want to minimize your tax exposure. A great way to do that is through tax-loss harvesting. That’s when you sell poorly performing stock and use that capital loss to offset your capital gains, reducing your tax.

Once you’ve found the stock you want to sell, check these eight things before you proceed:

  1. The type of income. If you get share or option awards through your job, you might be earning employment income (and not capital gains). That income can’t be offset by capital losses.
  2. The lifetime capital gains exemption. If you have a large gain from selling a private company or a farm or fishing property, up to $813,600 of that gain qualifies for the lifetime capital gains exemption (in 2015).
  3. Whether losses are superficial. This happens when you sell a security to trigger a loss, but then you, your spouse, or a corporation or other entity controlled by either of you rebuys that same security 30 days before or 30 days after the security was sold. If it falls within that window and that other person continues to hold the security at the end of the period, the loss is deemed superficial and denied.
  4. Whether superficial loss rules may work in your favour. If your spouse has significant gains while you hold losing investments, consider selling your shares and having your spouse acquire the same shares within 30 days. The denied loss will be added to the cost base of your spouse’s holding, allowing for a potential future sale at a loss.
  5. Loss carry-forward balances. Check these balances against your notice of assessment, but you may need to consult your accountant.
  6. Whether the loss stems from a business investment. If you lose money on a private investment, determine if the loss qualifies as an allowable business investment loss (ABIL) that can be used against any source of income in the year claimed.
  7. Your marital status. If you’re going through a divorce or separation, you can trigger losses when transferring investments to your spouse.
  8. Any charitable intentions. Consider donating publicly listed securities with accrued gains to fulfill your pledges. The income for such gains is often nil.

Best Wishes,