This & That: All Kinds of Questions

C Wrote: How (mathematical formula?) can I figure out how much income tax should be taken out of me at the source? If too much is being taken currently, can I simply request a reduction via my employer, or is it more complicated than that?

Gail Says: The best way to do this is to use this website, which I go to all the time: http://lsminsurance.ca/calculators/canada/income-tax.

If you think too much is being taken, you can ask your employer to look at the numbers. Perhaps you did not fill out your paperwork correctly and too much is being deducted. The government actually has a site you can use to see what your deductions should be. If you’re making RRSP contributions or there are other things you pay for regularly that reduce your taxable income (like daycare), you can fill out a form T1213, which you must get approved by the tax man. Then you present it to your employer and they’ll reduce the amount of taxes they are withholding.

 

L Wrote: I am 66 years old, married and we are comfortably living on a government pension and have no debt at all. I recently received a bequest of almost 90 thousand dollars. How can we invest this money so that some is available when we want to travel and small (+or- $10 000) indulgences for the improvement of our property? We have only a small amount invested in RSP’s and little else.

Gail Says: While the interest rates are low now, and that makes them feel like no investment at all, you have to ask yourself how you would feel if you lost 10%, 30%, 50% of your $90K because of a market downturn. At 66, waiting 10 years for your investments to recover might feel like a punishment. So your first question: How much of a chicken are you? Big chicken: Find a high interest savings account (try Manulife Bank, Achieve Credit Union, Tangerine) and get the best interest rate you can. Medium chicken: something like a mortgage-based mutual fund will give you a higher return, but there is some risk attached. Brave like a lion: Hey, the world is your oyster. Just make sure you know what you’re buying and are fine with lose the money if that’s what happens next.

 

S Wrote: I was hoping to get some unbiased advice, my wife and I have recently come into an inheritance that would allow us to be mortgage free, however I keep hearing conflicting information about the best way to handle this money. A little about us:

there is approx. $250,000 left on the mortgage
we have a newborn son, with the possibility of having another
aside from our mortgage, we have no debt
my wife has a very good pension through her job, I’m self employed so I have an RRSP that I should start taking more seriously
we are both on our early 30’s

We have a financial advisor who we will consult, but I wanted to get input from someone who doesn’t stand to gain anything from this.

Gail Says: Ah yes, I expect you’re hearing all about how much money you could have if you invested that money in the markets and let it grow. So nice in theory. In reality if you aren’t knowledgeable about investing, plunging 250K into the markets at once could end unhappily. If it were my money I’d pay off my mortgage. That should give you heaps of cash flow because you no longer have a mortgage payment. Before you go hog wild with all that extra money make sure you establish a healthy emergency fund, set aside some money for the next mat leave, and ensure you are maxing out your RSP/TFSA. You’ll also want to set aside some money for kiddo(s) for school; budget $2500 a year per child to get the max free money (Canada Education Savings Grant) from the government. After that, spend away good man, and have a great life.

 

S Wrote: My 53 year old brother recently approached me for a $2000.00 loan and I’m wondering if it’s a good idea to lend him the money. He says he’ll be in a “better position” in a couple of months to repay the money at $200.00 a month. Not sure exactly why he’ll be better off then. He came to another brother a couple of years ago with the same request. I’m wondering if it’s a good idea to simply hand over a sum of money and hope to see it again. Might I be better off offering to pay a bill or two for him instead? Would you have any general advice when it comes to lending money to relatives?

Gail Says: If you are a financial position to help your brother, give the money to him as a gift. The expectation of repayment is what usually creates frustration. If you cannot afford to give him the gift, you cannot afford to lend him the money, plain and simple.

 

N Wrote: Are personal health benefits a smart financial choice? I don’t have any health benefits through my employer & doesn’t look like in the foreseeable future that will change. I have looked into several companies with a wide range in coverage. I guess bottom line is cash flow is king so I am a little worried about making a monthly commitment especially when I find in every benefit package there seems to be lots of stuff I don’t really need & the things I do need are capped at pretty unrealistic amounts such as dental.

Gail Says:   You know what babe, I looked into them as well because I’m self-employed. I never could justify the premiums based on the limitations they set. So I “self-insure” putting a specific amount away each month for medical costs. In the years I don’t use as much, the pot builds for the years in which I am constantly forking out money for one thing or another.

 

J Wrote: My husband and I are both now 50 years old and have been contributing to RRSP’s for quite a few years. He also has a provincial government pension (assuming it’s still there when he retires). My question is whether we would be better to maximize our TFSA’s (I have one, hubby has not set one up yet) rather than continuing to put the money into RRSP’s given our age and that he is eligible to retire in 7 years. We like having the nice tax return that comes with the RRSP contributions, but I am worried about what will happen re: taxes when we have to transfer RRSP funds into RIFF’s as we will be receiving his pension at that time as well.

Gail Says: If you’re still deriving considerable benefit from the RSP in terms of tax savings, then you could continue to do so slapping the tax savings into the TFSA. Since you’re prepared to “give up” the tax savings, save them instead using the TFSA. Also, if your honey has a pension and you don’t, consider making all the contributions to the RSP in your name. You could contribute your money, while Honey puts money into a spousal RSP for you. Honey will get the tax benefit, but the money will be in your hands to take out as is most appropriate tax-wise to supplement the pension you receive.

 

N Wrote: My husband and I have a 13 month old son and just found out we have another baby on the way. We were in the process of looking at doing a consumer proposal for our debt but now we are unsure if we should continue with the proposal or file for bankruptcy? We have $92,000 in debt which is a combination of old student loans, our wedding, relocating across the country and job loss. We are not extravagant people but we relied on our credit to survive. We both work part time to care for our son so our net monthly income is only $3500. Soon we will be a family of 4 and we don’t know what the best solution for us will be. We want to own a home one day and save for a down payment, retirement and our children’s education. The proposal estimate is $400 per month for 5 years. Any advice you could offer would be greatly appreciated.

Gail Says: Consumer proposals are best when you have assets you want to preserve like a vehicle on which you own more than you owe or a home that you’ve built up some equity in. If you have no equity to preserve bankruptcy is usually the better option. Remember, with a CP, that $400 is payable every month whether you have a job or not… there’s no wiggle room. Fail to pay and you’re back at square one.

 

K Wrote: We have a mortgage and a large line of credit should we combine the two and close the line of credit? $510k + $110k? The line of credit was used to renovate the house and pay off car loans that were at a much higher interest rate. This is the only credit we have. Our credit card is paid off monthly and is used for gas and items that require credit card payment. We pay $1000/mo on the line now but at this rate it will take ten years to pay off. We are unsure of what to do and would appreciate your advice thank you!

Gail Says: I can’t answer this question because you haven’t told me how much equity you have in your home. If you have enough equity that the bank will consolidate without putting you in CMHC territory, yes, as long as you swear you will a) not use any credit again — cancel the line, and b) put every extra penny you have to paying off that $110K lickety-split so you don’t end up carrying it until you’re old and grey.  

 

P Wrote: My question is that I am going to be 60 soon and I have some RRSP’s. Do you think that it is a good idea to transfer them into a TFSA? Also, I am going to be taking my CPP at 60 as well.

Gail Says: You can’t “transfer” RSP money to a TFSA. You must withdraw the money and pay the tax you owe on the RSP money and then contribute it to the TFSA, assuming you have that much TFSA contribution room. If the RSP withdrawal is heavily taxed because you take out a lot at once, you’ll have totally defeated one of the benefits of the RSP: to move money from high tax years to low tax years. You should take out only as much as you need from the RSP (or a little more if it doesn’t push you into a higher tax bracket.)

 

B Wrote: Are car lease payments considered debt payments for the GDSR calculation in consideration of buying a home?

Gail Says: You betcha baby.

 

M Wrote: I read your column religiously and I want to know if age 30 is a good age to start estate planning. I wish not to be resuscitated and I have had a bout of serious illness in my twenties. For me, it will be a medical document more than a financial document. Is it still good to have so early?

Gail Says: It is never too early to execute personal care powers of attorney including a document that makes clear what your wishes are for medical intervention. Make sure you give the power of attorney to someone who will follow your instructions.

 

L Wrote: I’m currently putting $200 bi-weekly into a TFSA and $200 bi-weekly towards a $10,800 credit line debt. I also have a mortgage payment of $464. Ultimately, my plan is to pay that credit line off as fast as possible so that I can then put extra money on my mortgage to reduce the years I have left to pay – while still contributing to my TFSA. Should I stop funding the TFSA for now and put all that money on the credit line debt?

Gail Says: Once you feel like you have enough accumulated in your TFSA to handle any emergencies, put all the money you can towards paying off the line. Once the LOC is gone, split the payment you were making towards it 3 ways: 1/3 to savings, 1/3 to mortgage pay down and 1/3 to your current budget. If you don’t need extra in your budget, just split it two ways.

 

M Wrote: I live in Alberta, and I am on the AISH (Alberta Income for the Severely Handicapped) program.

I receive $1500 per month to live on and I do live in low income housing. I do my best to make ends meet and make a home. My question is, how can I save with so little and for retirement, and how much should I be saving per month? I do worry that if I am able to save, they will take money away from me and then I will have less to live on. I am not able to work, hence the reason for being in my position in the first place, but I do keep trying to get better.

I love the jars you use and would like to know how you would divide mine. I can’t do math to save my life, so I do need you to spell it out for me.

Gail Says: People living on really low incomes do not have the money to save; their primary objective is to make ends meet. If you can squirrel away a five here and a ten there for emergencies that may crop up, that’s a good idea. As far as retirement goes, between OAS and the Guaranteed Income Supplement, you’ll likely get as much income during retirement as you have now. So learning to live within your means is your goal, and figuring out how to be happy without buying the stuff everyone else is scrambling for is your challenge.

 

S Wrote: I watch your show every morning and I would like help in reducing my RBC interest rate. I have called the Royal Bank of Canada to ask about this and they pretty much laughed at me. My interest rate is at 18 percent and as you have told us we make large payments. We just got married in November 2014 in Las Vegas and our rings cost us $13,000.00 and we have paid off $5600.00 and with our payments of $2000.00 per month we will be paid off in July 2015. Is there a way to get the bank to lower our interest rates so that we are able to have it paid by June?

Gail Says: Unless you have a fabulous credit rating and can apply for another form of credit (like a line of credit or low-interest CC) you won’t likely be able to get your interest rate down. Lenders have realized that they have over-extended themselves — lent too much money — and need to keep charging high interest rates (in their minds) to offset the risks they’ve created for themselves. That being said, what were you thinking putting a wedding, a trip to Vegas and $13K in wedding rings on credit? I face palmed and then decided that what’s done is done. Get that debt paid off lickety-split.

 

L Wrote: I am a medical student and although I managed to go into medical school debt free, I have accumulated about $100,000 worth of debt through both government student loans and my bank line of credit. I will be graduating from medical school this summer, and as a resident I don’t think I will be earning enough to pay down my debt, about $50,000-$60,000/year for the next 4-6 years depending on whether I specialise. Fortunately as a resident I will still be considered a student and my government loans will not accumulate interest over this period of time.

My question is: how would you suggest I plan my budget for the next few years? I understand that debt repayment is important, and I will first focus on paying off my line of credit as that is accumulating interest, but I wasn’t sure whether it is worth trying to allocate a portion of my income to repaying my government loans? The amount of money that I can expect to contribute to debt repayment will probably be minimal compared to the overall amount of debt and I wasn’t sure whether it would be a better use of my money to allocate my salary to housing/transportation/savings etc and focus on repaying my debt once I finish my residency? I am a pretty conservative person and I feel a bit panicky when I think about my debt, but I know that it is worth it to invest in my future, I just don’t know how best to balance being comfortable taking on “good debt” with being financially savvy.

Gail Says: Congrats on finishing school. You’re right to put your initial focus on the bank line of credit. Since the interest clock is ticking, this is the one that needs your attention. I did not know that a being a resident keeps you in “student” territory for your government student loans. That’s good news. Since those loans are accruing no interest, make no payments now. Instead, focus on building up your emergency fund (and paying down that icky line). You should be able to live quite comfortably on $50K. By the time you’re ready to start tackling your student loans, you should have a higher income. If you’re used to living on that $50K, you’ll have lots of money to use to pay down your student debt.