The Tax-Free Savings Account – Wow! Or Wow?

Last year in the 2008 Budget, the Federal Government introduced the ‘next big thing in tax reduction’ -- the Tax-Free Savings Account (TFSA. The TFSA became effective in 2009 and the question is: Just how much of a ‘Wow’ is the TFSA for everyday Canadians?

The government hails it as ‘the single most important personal savings vehicle since the introduction of the Registered Retirement Savings Plan (RRSP)’* and estimates that ‘a person contributing $200 a month to a TFSA for 20 years will enjoy additional savings of $11,045 compared to saving in an unregistered account.’*

That’s because a TFSA will allow you to use your savings to invest in eligible investment vehicles and the capital gains and other investment income earned in your TFSA will not be taxed. Here’s how it works:

• Starting in 2009, any Canadian over 18 years of age can save up to $5,000 each year in a TFSA.

• A person may have more than one TFSA but cannot exceed the $5,000 limit in total.

• ‘Eligible’ investments are generally the same as those allowed in an RRSP.

• Unlike RRSP contributions, which are deductible from income and reduce taxes, TFSA contributions do not qualify as deductions.

• Investment income, including capital gains, earned in the TFSA will not be taxed, even when withdrawn.

• TFSA funds can be withdrawn at any time for any purpose – from buying a new car to starting a business.

• Withdrawn amounts can be put back into a TFSA without reducing contribution room.

• Unused TFSA contribution room can be carried forward to future years.

• Neither income earned in a TFSA nor withdrawals will affect eligibility for federal income-tested benefits and credits – such as the Canada Child Tax Benefit, Age Credit, Guaranteed Income Supplement and Employment Insurance Benefits.

• Contributions to a spouse’s TFSA are allowed.

Investment experts suggest that a TFSA may deliver better after-tax value than some non-registered investments, certainly over longer terms. On the other hand, the experts also point out that what is ‘eligible’ for a TFSA and what is ‘suitable’ are two very different issues. For example, an investor may make very conservative – meaning low-earning -- choices for a TFSA because capital losses on more speculative investments will not be deductible – but that strategy may not be consistent with the investor’s overall financial goals and objectives.

As Your Life Changes, So Should Your Investment Strategy

It is said that a constant in life is change. That is why the 'set it and forget it' investment strategy is outdated - especially when it comes to making sure that your investments will deliver the returns you need for the quality of retirement you want.

Let's look at how change can affect your retirement date, your retirement lifestyle and your requirement for retirement income:

• Life expectancy is increasing. People are living longer and healthier lives and that means your retirement plan should ensure you don't outlive your income.

• It is no longer mandatory to retire at age 65 in most occupations. That means you may wish to work after age 65 to fund your longer retirement. Or, you may decide to continue working part time after retirement either to supplement your income or just because you want to.

• Companies are learning to value older, more experienced employees. Yours may offer incentives that will keep you on the workforce after the old-school 'traditional' retirement age of 65.

• Defined benefit pension plans are becoming less common. That means a growing number of employees can no longer assume they will have a 'defined' retirement income. Instead, these employees must bear more responsibility for their retirement plans and, perhaps, more uncertainty about a feasible retirement date.

So, the key is to maintain a flexible investment strategy that allows you to make revisions on your own schedule as your personal 'life changes' dictate. The lifecycle approach to investing takes into account your financial needs and ability to save at the three main stages in your life:

Ages 25-40

These are the saving years when you typically have higher expenses and less to invest. You should maximize contributions to your Registered Retirement Savings Plan (RRSP). However, because you have a long time horizon to retirement, you can also choose a more aggressive investment strategy that targets volatile investments that might go down in the short term but may produce higher returns in the long term.

Ages 40-60

These are the wealth-building years. Your debt is reduced or eliminated so you have more capital to invest. Maximizing contributions to your RRSP is still a very important part of your retirement plan and, as your retirement years approach, you may want to redirect your portfolio into lower-risk, fixed-income investments.

Age 60 and over

These are the retirement years. You will likely need to begin tapping into your accumulated investments in order to sustain your retirement lifestyle.

Focus on investments that preserve your capital but also consider growth investments that can add to your retirement income and protect against the effects of inflation over the extended years of your retirement.

There are other important aspects to your retirement planed based on an effective income investment strategy - such as diversification and asset allocation - and a professional advisor can help you make the best choices to suit your lifestyle, regardless of changes.

Are You Ready To Pass The Family Farm On To The Next Generation?

If you’re a Canadian farm owner over the age of 60, you’re part of a growing group. According to Statistics Canada, there are now more Canadian farm owners in your age bracket than ever before*. Whether you’ve reached your sixth decade or not, you may be thinking of retirement – and of what you’re going to do with the family farm.

You probably want the farm to stay in the family – but which of your children should get it … and where does that leave your other children? Then, there’s you and your spouse -- the choices you make can have a huge impact on the level of your retirement income. They can also affect the amount of taxes your estate will pay.

Farm succession planning is a process without a one-size-fits-all solution. A farm transfer and estate plan could help smooth the transition from one generation to another, ensure you get the retirement income you need, and limit estate taxes. Here are some basic steps to developing the plan that works best for you:

• Review your current situation – the net worth of your family and your farm and your current cost of living.

• Sit down with your spouse and budget what your retirement expenses will be. If you intend to move off of the farm, you may incur expenses that you have not experienced before such as rent, condominium fees, and municipal taxes including cost for water and sewer. And, don’t forget about replacement of your vehicle every 5 to 10 years. Strive for financial security -- not simply transferring the farm to a child as quickly as possible.

• Determine the most appropriate sources of retirement income for you and your spouse. Would it be better to live on buy-out payments from your farming children (supplemented by investment income) or should some of your income come from your continued involvement in the farm? Keep in mind the potential cost of debt servicing to the farming children.

• Get everybody involved – you and your spouse, your farming children and non-farming children. Ask each person, “What does the farm mean to you?” You may be surprised at the answers. By taking each person’s hopes and expectations into account, you’ll avoid future disagreements and ensure family harmony after your death.

• Treat all of your children fairly and equitably – but not necessarily equally. Consider life insurance as a useful tool in funding an equitable distribution to your non-farming children and/or covering estate expenses.

• Preserve the value of your farm by ensuring it (and your estate) qualifies for all the special tax reductions available to you – especially the $750,000 capital gains exemption for qualifying family farms and the tax-free rollover of farm assets to children through various forms of equity transfer.

Tax laws associated with farms and succession are complex. Be sure to get expert advice from your lawyer, accountant and financial planner who can quarterback your team to succession success.

Who Needs Segregated Funds? Maybe You.

It's easy to overlook potentially powerful additions to your investment plan when they have complex-sounding names like - well, Segregated Funds. But you could be short-changing your financial plan when you ignore certain investments like Segregated Funds.

Segregated Funds (sometimes called 'Seg' Funds) are offered by insurance companies. Like mutual funds, these funds pool money from investors and invest in a variety of individual securities. They provide the benefits of professional money management, simplicity and choice, plus the protection of life insurance.

A Segregated Fund investment could be right for you if you.

• Want the growth potential of a mutual fund with the additional advantages of capital guarantees. A Segregated Fund can allow a cautious investor to participate in equity markets with less worry that volatility could erode the investment because, by leaving the money invested for the duration of the contract, 75 to 100% of your original investment is guaranteed (depending on your contract).

• Are a business owner, self-employed person or a professional requiring creditor protection because a Segregated Fund policy is a type of life insurance, and its value "may" be protected in the event of bankruptcy. Talk to your lawyer about whether creditor protection in your province is available.

• Want to establish and maintain a fixed amount to pay to your beneficiaries. The value of a Segregated Fund policy flows directly to the beneficiaries, bypassing your estate, potentially reducing probate fees and avoiding access by creditors. Unlike a will (but subject to provincial legislation) the payment to your beneficiary is usually automatic.

• Seek a death benefit guarantee. If you should die before your policy matures, your designated beneficiary receives the greater of the market value or the guaranteed amount (less a proportion of withdrawals) and all deferred sales charges are waived.

Retirees may also benefit from a Segregated Fund investment. During a time when nest egg preservation assumes greater importance, transferring assets to a Segregated Fund can provide added protection from the uncertainties of investment markets.

When you look carefully, a Segregated Fund isn't all that complicated -- and it could be a valuable addition to your financial plan. A professional financial planner can help you decide if a Segregated Fund is right for you.

Unbalanced Portfolios Cause Falls

In every horse race there is one winner and a bunch of losers. Yet, by nature, we humans are ever optimistic - that's why we bet on horse races even though the odds are never in our favour. But every once in a while we win - and that's when another aspect of human nature kicks in: the optimistic tendency to 'ride a winner.'

Many investors carry that 'ride a winner' philosophy into the selections in their portfolios and that is usually a very risky investment decision - here's why:

• If you're an investor, you have no doubt looked into effective investment strategies - and one of the most effective is to build a diversified portfolio in which you divide your investments within and across asset classes to take maximum advantage of market conditions and economic changes while protecting yourself against downturns.

You may even have created such a portfolio for yourself - and then you let it get out of whack . because you are, after all, an optimistic human.

• You see that some of the investments in your portfolio are real winners while others are lagging. So you switch to the 'optimistic' strategy of 'riding a winner' and transfer an additional portion of your assets from the 'laggards' to the 'winners'.

• And just like that, your balanced portfolio becomes unbalanced and ripe for a fall. Study after study and investor experience in capital markets that always include a degree - and sometimes a high degree - of volatility have proven without a doubt that a properly diversified and balanced portfolio strategy is the best strategy over the longer term.

Large institutions, foundations, and other organizations that make huge investments know that a balanced portfolio is a 'best practice' investment management strategy. And they also know that when a portfolio swings out of balance, it's time to rebalance it.

The same holds true for individual investors like you. Every so often, it's necessary to rebalance your portfolio to bring it back in line with the original allocations that match your personal tolerance for risk, your age and family status, and your financial goals. And sometimes that can mean hopping off a 'winner' and reinvesting that money in an investment that has lagged.

Having the discipline to maintain a balanced portfolio - and knowing when it is necessary to rebalance -- can be difficult and complex. A professional financial planner can help keep your portfolio true to your goals.

Thinking Of Ethical Investing?

Are you warming up to global environment messages? Does the Kyoto Accord strike a chord with you? Are you thinking about what you can do, as an individual, to help make our world a bit better?

If so, you’re far from alone. More people are becoming actively involved in a host of environmental and ethical issues – including a growing number of investors who are seeking holdings that reflect their values. They want to support companies that behave in ways they consider to be appropriate or responsible, companies that are trying to do the right thing on a range of ethical, social and environmental issues.

This type of ‘ethical’ investing has gained so much traction it has been given its own name: Socially Responsible Investing (SRI) and, these days, it’s getting plenty of attention as investors increasingly search out socially responsible investment alternatives.

SRI is simply the integration of your personal values with your investment decisions. In addition to the profit potential of an investment, you also consider the investment’s impact on society and the environment. SRI investors typically avoid industries such as gaming, tobacco and armaments and companies with a poor record for environmental concern, governance, labour relations and/or human rights in favour of those with a focus on the environment, solid social performance, or sustainability. Companies involved in renewable energy, biotechnology, water or waste management and health care often fall into this category.

Mutual fund managers develop an ‘ethical’ fund using techniques like these:

• Negative screening – avoiding certain types of investments like weapons manufacturers.
• Positive screening – giving preference for company activities or characteristics considered to be desirable, such as industries involved in renewable energy or health care.
• Best-of-sector – selecting the leading companies in a business sector based on their environmental and social performance or sustainability.
• Social responsibility – adding a process for selecting shares that addresses issues related to social responsibility.

It is also important to note that a fund is not automatically “unethical” just because it isn’t termed ‘ethical’. Fund managers typically are of the view that natural market forces will suppress the price of stock in a company that has been publicly identified as being ‘unethical’ – so, like any informed investor, they typically will not include ‘iffy’ companies in a fund’s portfolio.

Ethical funds are not for every investor. They are often more volatile than ‘traditional’ funds but, over the long term, some have produced good returns. Are they for you? Maybe, if they’re part of a balanced portfolio. Your professional advisor can help you make the decision whether or not to ‘go ethical’.

Tax Tips For Students

It's that time of year again, students have bought their supplies, and are packing the classrooms. The cost of education rises every year, but what can we do about it? Here are some basic tips to help ensure your student is taking full advantage of the tax relief the government is offering:

• Scholarships and bursaries are not taxable and not reported on the student's income tax return when the student is registered in a program that entitles the student to claim the Education Tax Credit.

• Interest paid on a student loan is eligible for a tax credit when the loan is part of a federal or provincial student loan program. The student cannot claim interest paid if the student loan has been renegotiated with a financial institution or has been consolidated with other loans. If the student has no tax payable in the year the interest is paid, the amount can be carried forward and applied in any of the next five years.

Other tax deductions available to students:

• Moving expenses - if a student moves more than 40 kilometres to be closer to school or to take a summer job.

• Child care expenses may be claimed by the higher earning spouse/common-law partner if the lower income spouse is enrolled in a qualifying secondary or post-secondary program.

• GST rebates - a student must apply for the rebate on his/her tax return each year.

Other tax credits available to students:

• The Canada Employment Credit on the first $1,000 of employment income.

• A Tuition, Education and Textbook Credit for:

• Tuition fees when students are enrolled in full-time or part-time studies and when the fees are more than $100 for the year.

• An Education amount for each month of enrolment -- $400 a month for full-time students (or part-time students with a disability) and $120 a month for part-time students.
  

• Textbooks to a total of $65 a month for full-time students and $20 a month for part-time students.

• A Public Transit Pass Credit for monthly or longer transit passes. Receipts are needed to make this claim.

• Unused Tuition, Education and Textbook Credits can be transferred to a spouse, common-law partner, parent or grandparent when the student first uses the tuition, education and textbook amounts to reduce taxes payable in that year to zero. The maximum transfer amount is $5,000 minus the amount used by the student. Alternatively, any unused tuition, education, and textbook amounts can be carried forward indefinitely by the student.

• Parents may claim for a dependent under 19 years

You can find out more about tax-saving strategies for students and everyone else in your family from a financial advisor.

Never Retire - From The Right Investment Strategy

You started planning for retirement a long time ago - and now, the retirement of your dreams is just around the corner. You worked hard and invested to grow your retirement nest egg so that one day you'd have the money you need to live comfortably and enjoy life. But don't be too quick to crack your retirement piggy bank without a plan that will ensure your hard-earned investments and other income will last for all your retirement years.

Here's why you need a retirement investment strategy:

• The average age expectancy is rising. You may need to maintain your retirement income for more than 20 years.

• Even low inflation can damage your purchasing power. For example, $50,000 in 1970 would have only $8,902 of purchasing power today based on an average annual rate of inflation of 4.77% from 1970 to 2007. *

• Your rate of withdrawal must be based on your risk profile and total portfolio value. For example, if your investments are earning a 5% rate of return, they will not support a 6-7% withdrawal rate.

• A market downturn can prematurely deplete your investment portfolio. A negative market cycle just before your retirement or in the first few years of retirement can mean a much lower income than you expected.

Here's what you need to know to develop an effective retirement investment strategy:

• Know your expenses and manage them. You will have essential expenses -- food, electricity, health care, and so on - that you can't live without and discretionary expenses - travel, a new car - for 'fun' activities. One common rule of thumb is that you'll need 70-80% of your pre-retirement household income to maintain your lifestyle in retirement, as long as your expenses do not change dramatically as you age.

• Know your sources of income and manage them. In retirement, your income will derive from many sources - your investments and personal savings, government benefits, and employer-sponsored pension programs. Things can get a bit complicated - so plan to stay on top of your income sources.

• Know effective tax-reduction strategies: be aware of potential 'clawbacks'; take advantage of all your tax credits and deductions; and make use of pension income splitting opportunities (if available).

Here's how to implement an effective retirement investment strategy:

The key to a successful investing is maintaining a balanced, diversified selection of investments.

You can achieve this by dividing your assets into three 'pots' to help achieve the following goals as an example:

1. Long-term goals - a retirement income that will last 20 years or longer.
2. Mid-term goals - replacing your car in five years.
3. Short-term goals - making a down payment on a retirement property next summer.

Money from each 'pot' should be distributed among the three classes of investments:

1. Cash or cash equivalents such as government savings bonds, T-bills and money market funds.
2. Fixed-income securities such as GICs and fixed-income mutual funds.
3. Equity investments, including Canadian and international stocks and equity mutual funds.

Goals will be different but you should assume only as much risk as you are comfortable with in planning to meet goals and at level that matches your personal risk tolerance.

A sound post-retirement investment strategy starts with a good understanding of your sources of income and your goals. A professional financial advisor can help you achieve the right balance between risk and reward.