How to invest $10000 windfall | Page 2 | General financial discussion | Discussion forum

Please consider registering
guest

sp_LogInOut Log In sp_Registration Register

Register | Lost password?
Advanced Search

— Forum Scope —




— Match —





— Forum Options —





Minimum search word length is 3 characters - maximum search word length is 84 characters

No permission to create posts
sp_Feed Topic RSS sp_TopicIcon
How to invest $10000 windfall
August 11, 2014
12:39 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I agree with everything Brian has said, in principle, with the exception that I am not convinced that CDIC is necessarily better insurance than Manitoba Deposit Corp. They are hard to compare because the structures are different. There is another thread which discusses the viability of MB Deposit insurance. I do have significant money in a MB credit union. (You have a right to know that since I am suggesting that it is a sound investment.)

I wouldn't assume the Feds will necessarily bail out the credit unions, especially the current government. It is the MB government who would be more likely to try to help, although their resources are limited as a province with a small population. I read once that something in the order of 50% of Manitobans bank with their credit unions (sorry, can't cite a source), which is a huge percentage, so it would have a big impact on the MB economy if there was a failure big enough that systems already in place couldn't handle it. The Feds would only get involved to the extent that they think it might help them win elections, and are more favourably oriented towards big banks than towards credit unions.

As regards RRSPs, there can be an advantage in contributing even if you don't yet need the income tax benefit. http://www.cra-arc.gc.ca/tx/nd.....s-eng.html states that you can carry the deduction forward to at least 2014 if you had contributed in previous years.
What I am not clear about is whether you can carry it forward beyond 2014, and that would be worth a phone call to CRA. This article says you can carry it forward indefinitely.http://business.financialpost......deduction/ I believe that is correct but would like to confirm with CRA since rules can change.
Assuming the indefinite carry-forward, then you can benefit from having the money tucked away now and use the deduction later without having to worry about being taxed on the money itself or the income from it before you are old. It could be tapped later to help you buy a house or condo, although has to be paid back eventually, although in the longer term an RRSP isn't the best solution for everyone, as that depends on your income in your senior years, and I suppose there is always the risk that they would change the mandatory withdrawal levels (although my guess o n that is that if they changed them, it would more likely be to lower them rather than to raise them, as people are living longer now, so the money needs to last longer). With the price of houses the way they are right now though, you might really want a bit of help from your RRSP when the time comes.

With any government plan, and this is advice I would give to anyone, you need to consider if it is to your advantage, and, if it is, you need to take advantage of it now, because governments come and go and legislation comes and goes. What's available today might not be quite the same tomorrow. I have seen this happen many times, especially in regards to income tax provisions. While nobody is talking about getting rid of RRSPs yet, as far as I know, they might be modified, especially with provinces now getting into the pension game. In reality, RRSPs have not been as well used as was originally hoped. Most people still can't afford to contribute to them. This is partly why TFSAs were introduced, as they are more flexible (you can accumulate contribution limits indefinitely, you can take money out whenever you need to and replace it the following year, etc.) So, it's possible in my mind at least that RRSPs could be phased out or substantially changed, and almost certainly will be sometime during Jon's lifetime. Whatever you have already done at that point will typically be protected or "grandfathered". So, in general, do it while you can! - but not necessarily right now, as you are still very young and don't appear to have any significant earned income upon which to base it yet, which is essential.

Brian's concern about trying to time the market for a downturn is well placed. The same can be said for trying to time interest rates. And this is why ladders are valuable as a strategy. It is said to be a common error of the inexperienced, to think that they can time the markets, although on the surface it can seem so simple and tempting.

August 11, 2014
1:07 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Here's an idea that I just read about that might apply to Jon if he earns any money in the next few years.
The idea is: Put money into RRSP (as much as you are permitted according to your CRA Notice of Assessment) every year; withdraw the money from the RRSP soon after you put it in; move the money you withdrew from the RRSP to a TFSA (as a student, it's unlikely that you'll have more than the TFSA limit); carry forward your tax deduction from the RRSP until you are earning good money, at least in the 2nd tax bracket, maybe the 3rd; use the tax deduction to reduce your taxes in a given year to the next lower level.
This enables you to claim the tax deduction for the RRSP later when it will be of most use to you, to not have the tax liability in your senior years for the RRSP if you think your tax bracket then could be on the high side and/or that tax rates will be higher than now, and to keep your money in an account that will never be taxed.
I couldn't see any flaws in this. Can anyone else see any?

August 11, 2014
4:55 pm
musicalmaestro
Ottawa
Member
Members
Forum Posts: 55
Member Since:
January 15, 2014
sp_UserOfflineSmall Offline

Here's my 2ยข
If I had 10k when I was 18 and I knew what I know now (at 21) I would do the following.
Keep it as an emergency fun or if you already have one...
Invest it and keep it as a nest egg for RETIREMENT in a tfsa. Yes it's far away, but...
Being in gen y the cost of living and retirement is going to be absurd for us so we need to start now or else hope (sadly) to inheret our retirement income.

Now by age 25 if you could save 50k, by the time you are 73 you will have over a $1.5million! (With some luck and perserverence) Assuming 7% returns. The new retirement age is 73 apparently.
Now historically speaking the only way to get that good a return is with a diversified oortfolio. My recommendation the complete couch potatoe. But in this case you rebalance tactically when thresholds are reached and only have 100-age in bonds (ideally, but only if you can stomach that.)
I know, I know, you said no stocks, but a well diversified index fund is slightly less risky than a stock. You shouldn't lose all of it, at most half, so if that is ok to you becuase you don't need it soon, then go for it!
Maybe it's a foolish plan, if so please poke holes, but the way I see it options are limited.

August 11, 2014
5:30 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, as far as I know the last time I checked the RRSP deduction carry forward rules was changed from 7 years maximum to no limit at all.

This was done in the late 1990's and since then this has not changed if my memory serves me correctly. It was done by Paul Martin Finance Minister of Canada at that time.

August 11, 2014
5:40 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, I don't see RRSP's going away or being phased out because it is still a major part of banks, credit unions and other financial institutions plus the financial, investing, retirement industry's business.

For example, I am a Duca Credit Union member and I noticed that at least 50% of their deposits both fixed (GIC's, term deposits etc.) and variable (savings, checking accounts etc.) are from RRSP's, RRIF's etc.

Nobody really knows what will happen in the future but RRSP's are from the 1950's.

August 11, 2014
6:29 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Jack, I am perhaps more concerned with the possibility of RRSP/RiF rules changing than being eliminated. They have changed the rules numerous times over the years, although mostly they have liberalized them rather than restricted them - e.g.increasing limits, permitting US investments etc. But anything is possible when headwinds change. (Think Greek banks!sf-frown) Jon has a lot of years ahead of him. The things that worry me most are often the ones nobody thinks will happen, because it's the unpredictable that is so hard to recover from - and they do happen sometimes. But one can drive oneself crazy worrying about all these things.

Musicalmaestro, I think your comments are valid. You seem to agree with Brian, who thought Jon should be cautious about trying to time the market.
On the other hand, it's a relatively small amount of money and he may need it sooner rather than later, so a conservative and accessible investment is also valid.

August 11, 2014
7:28 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, I agree. I think the biggest threat to RRSP's and RRIF's is a dedicated higher income tax rate. It will be probably brought in gradually and most people will not notice much of an impact until after many years has passed.

I can remember many changes to RRSP's and RRIF's that were brought in the 1990's. You can't deduct RRSP transfer fees and annual RRSP fees anymore from your taxable income.

The annual minimum RRIF withdrawals were cut to 69 years of age but are now back to 71 years old. You don't have to have only 30% as foreign investment content anymore allowing 100% if you wish.

You can't put $2,000 a year in an RRSP for each year of employment from your severance pay. This was starting in 1997.

This is what I could remember anyhow.

August 11, 2014
8:11 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I could be wrong but I think that a dedicated tax grab on RRSP/RIF would draw a huge revolt. Seniors are a growing segment of the population and are much more prone to the voting habit than younger people, having all that time on their hands... I think the easier way for a sneaky government to switch the rules would just be to dicker around with the tax rates more generally, and RSP/RIFs would be swept up in that. But I don't want to give them any (bad) ideas!sf-frown

August 11, 2014
8:38 pm
Jon
Member
Members
Forum Posts: 413
Member Since:
August 9, 2014
sp_UserOfflineSmall Offline

Loonie, I check it again, people cannot contribute income that they didn't earn, so I can only stick to TFSA. Moreover, even if I earn money for me to pay tax, contributing to RRSP will only give me back 24 cent per dollar refund as I am in the lowest tax bracket, so I am out of luck with it, at least for the next 5 to 7 years.

I also don't think your method of beating the system by contributing, than withdrawing will work as you get tax when you withdraw which is equal to the tax credit, so it only breakeven.

But I do agree that the ability to use your tax refund credit/ deduction for the future is useful, especially if you expect that you will receive a huge boost in income in the next few year that come from some "sudden" source, like ones parents' RRSP when they are gone.

August 11, 2014
9:05 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I never said that anyone could contribute to an RRSP if they did not have earned income. I was thinking, though, that Jon might get a parttime job soon, and would thus have some RRSP contribution room in 2015.

I'm not sure we're understanding each other clearly on the issue of the scheme I read about elsewhere and described above. The idea is that you would never get taxed because you would withdraw the money from the RRSP while you were still below the minimum tax bracket. If you earned, for example, $5000 this year from parttime jobs, you could put (I think) 18% of it into RRSP. Let's call it $1000 to use round figures. You then take the $1000 out of the RRSP. You pay
no tax on the withdrawal because you are in a no-tax bracket. You move it to TFSA, where you will never pay tax. The only purpose of this manoeuvre is to create a tax deduction that you can use some years down the road when you are in a higher tax bracket - which you could then put into a down payment on a house, for example.
If you really wanted to build an RRSP, then this would not be the way to do it, but that would indeed be taxed down the road. And that may be the weakness of the strategy. This is for people who aren't too impressed with RRSPs as a strategy or who don't plan to invest in them until they have maxed out their TSFAs etc.

Any RRSPs held by parents upon their death will be fully taxed at their marginal rate when the last spouse dies (assuming the spouses left the RRSP to each other in the first place - if not, it will be when each parent dies), which can be quite expensive. There is no way around it. It is the estate that must pay the tax, but it can diminish the estate substantially. RRSPs can only be transferred tax-free to spouses. This is an argument in favour of taking money out of one's RRSP earlier rather than later, depending on tax bracket. It can also be an argument in favour of an annuity. But all of these considerations are, I hope, far in the future for Jon, and they need to be considered in the context of overall tax planning, a subject upon which I am sure he will become an expert in due course.

August 11, 2014
9:08 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, they will not call it an RRSP, RRIF tax. I can see something like they did with the Ontario Health Premium which is really a tax.

It will probably not be a percentage but a dollar amount. For example, every $1,000 of higher income, they will take $60 to $100 a year in more annual income taxes.

This is just my looking at current tax policy but who knows what they will do. Don't worry about giving them ideas because they have people that work for them that all they do is how to come up with new taxes and revenues for government.

August 11, 2014
9:18 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

One more thing to be aware of with the Hubert 1 year GIC:
In order to get the best return, if you need to take the money out during the course of the year, the best thing would be to do so immediately after one of the 3-month periods. If you were to withdraw it at, for example, 4 months, you would only get the interest for the first quarter and nothing for the final month. Still, it's a great hedge against potentially rising interest rates, should that ever happen, because you can withdraw it at any point where it makes economic sense to do so, and reinvest it at higher return.
If you want more flexibility, you could be better off with Oaken at 2.0, provided that you feel confident that you would not need the money before 3 months had elapsed.

August 12, 2014
5:35 am
Jon
Member
Members
Forum Posts: 413
Member Since:
August 9, 2014
sp_UserOfflineSmall Offline

Ah Loonie, I get what you meant finally, but I am not sure can you game the system like this because you probably don't get any credit as you never pay tax from the beginning, but this question worth asking the CRA through.

I also want to know do Oaken give you any interest when you redeemed it before maturity. If they do, how is it calculate ?

August 12, 2014
6:34 am
xxxx
Member
Banned
Forum Posts: 338
Member Since:
June 29, 2013
sp_UserOfflineSmall Offline

Jon said

Ah Loonie, I get what you meant finally, but I am not sure can you game the system like this because you probably don't get any credit as you never pay tax from the beginning, but this question worth asking the CRA through.

I also want to know do Oaken give you any interest when you redeemed it before maturity. If they do, how is it calculate ?

Jon, please check with CRA before implementing any of Loonie's suggestions re RSP contributions and withdrawals - I have checked this previously myself with CRA and some of his suggestions are how shall I say it - "misleading". I just want to caution you to do your own checking with a reliable source - don't trust some of the information being posted on this forum. I have a financial background and have been around the block a few times.
One cannot contribute to an RSP without earned income. Withdrawing money from an RSP will trigger withholding tax and will reduce future contribution room - you really don't want this. You used the expression "game the system" so I think you picked up on this already.......

August 12, 2014
11:56 am
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Please do us all a favour and tell us about everything that I have said that is "misleading", Brian, because I, for one, would like to know, and you have a moral obligation to do more than just present innuendo. I offer what I can in good faith and have gone out of my way to suggest ways in which Jon should be cautious. I did indeed ask for critical input on an idea I read elsewhere and have yet to hear why it could not be done. Isn't that what this form is about, namely kicking around ideas and seeing what others think?

I will respond to what little you have actually presented. Withholding tax is an understandable concern, but not a major problem. If you made the RRSP contribution at the end of February for the previous year, and then submitted your tax return right away, which you could do, the withholding period would be quite short. You will get all of it back in short order. Forgoing a month's interest would be more than offset by the tax deduction down the road. Surely anyone with a financial background knows this.

As I warned in post #30 above, paragraph 4, "If you really wanted to build an RRSP, then this would not be the way to do it, but that would indeed be taxed down the road. And that may be the weakness of the strategy. This is for people who aren't too impressed with RRSPs as a strategy or who don't plan to invest in them until they have maxed out their TSFAs etc." Thus, I have not "misled" anyone on the question of contribution room.

I have advised Jon to contact CRA, and he has said that he would.

And, by the way, I will have no personal need for this strategy, nor anyone in my family. It's really only conceivable for people in post-secondary schooling. I put it out there for others to consider.

There is tons of bad advice to be had from people with financial backgrounds and even established professionals, just as there is good advice. Similarly with non-professionals.
Personally, what I look for in anyone giving advice is, among other things, a respectful attitude and the ability to listen carefully and accurately, as well as reliable information. ALL advice on any forum needs to be corroborated before taking it.

August 12, 2014
11:59 am
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Jon, my understanding from Oaken, and I did ask them about this a while ago, is that if you cash out your 1yr cashable GIC after 90 days, you would get 2% interest pro-rated for the length of time that you had invested. So, you would only get 2% if you kept it the whole year.
But you would be wise to send them an email and get it in writing so that you can refer to it later if needed.

Do let us know if you receive any clarification from CRA that is helpful. I'm sure we would all like to know!

August 12, 2014
1:03 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

I dug out the response I received from Oaken regarding the 2% cashable GIC, as follows:

"There is no penalty for cashing in the 1 year cashable after 90 days. Interest is pro-rated for the number of days held at the same annual rate (i.e. 2%) at maturity or when you cash it in."

August 12, 2014
1:41 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, cashable GIC's or other names they might use like redeemable GIC's are not all created equal. So, I would say to anyone that does invest in one of these to always check the terms and conditions of the contract they are signing.

As for Oaken Financial, they have a 30 days and 90 days cashable GIC's which from my personal experience with them and other financial institutions, cash them out a few days maybe 2 or 3 days after the cashable period to avoid ever having a problem with losing interest.

Oaken Financial is supposed to not give you the money before that 30 days or 90 days but another financial institution may do that making you lose interest.

For example, Caisse Financial Group http://www.caisse.biz has a 2.00% redeemable anytime GIC that is RRSP, RRIF, TFSA eligible too. There is no penalties when redeemed anytime but you must redeem the full amount as partial withdrawals are not allowed.

The only drawback is they are not available to all Canadians so I don't know how much help this would be to forum readers here.

August 12, 2014
2:50 pm
Loonie
Member
Members
Forum Posts: 9213
Member Since:
October 21, 2013
sp_UserOfflineSmall Offline

Have you had any problem with interest received in cashing an Oaken cashable GIC after the 90 day period, Jack? I know that some, like Hubert, will only give you the interest up to a specified date, after which you must wait for the next specified date, but I didn't get this impression with Oaken, as per above email.
Sometimes, in fact often, it is difficult to extract the exact terms from these institutions before you buy. Buyer beware!

August 12, 2014
3:01 pm
Jack Manning
Member
Banned
Forum Posts: 379
Member Since:
August 5, 2014
sp_UserOfflineSmall Offline

Loonie, I got the interest for 103 days in full which at 2.05% at the time on a $20,000 cashable GIC with Oaken Financial was $115.70 ($20,000*2.05%=$410/365=$1.123287671*103 days=$115.70).

I had the same experiences with other financial institutions because I cashed or redeemed my GIC always many days after the cashable/redeemable period. I never had a penalty to pay or lost interest of any sort.

No permission to create posts

Please write your comments in the forum.