Category Archives: Saving

When You Inherit Money

What happens when you inherit money? or a house? or stuff?

It depends on how you treat the money when it first arrives. If you put an inheritance into a joint bank account, or into a joint trading account, in the future the money will be treated as a joint asset. This means if you get divorced down the road you could lose half of your inheritance. So as a general principle, inheritances should always go into a separate account.

Houses are treated specially. If you put a house you inherited from grandma in both names, then it will definitely be split in a divorce. Even if you don’t put both names on the house, your partner could claim that it was the primary marital residence and make a claim for a share.

Alberta operates under the dower act, which is designed to ensure that a spouse cannot be disenfranchised from their share of marital property. The western provinces also have the homestead act which ensures that a spouse can make a claim on the family farm.

This is especially important for someone who inherits a farm or a family business outright. It is very important to discuss the future of this asset with your lawyer and financial advisor before it is even transferred to you.

If you keep the money separate, the original inheritance will probably not be included in any future divorce settlement or separation agreement. However, it is possible that income produced by the asset or the increased value of the asset might be.

So what do you do? Pre-nup. Or co-habitation agreement. Or post-nup. Talk to your significant other, spousal equivalent or current bed-buddy about money, who owns what, who gets what, and how it could play out if things don’t work out.

Talk to your lawyer. A simple pre-nup/co-habitation agreement shouldn’t cost more than a couple hundred bucks, and can save you thousands of dollars and tons of heartbreak down the road. Define who gets what, and where the money goes if something happens.

Although it’s pretty common for someone to leave that inheritance to their own kids, or grandkids, nothing says that you can’t keep the asset separate, and subject to a pre-nup/co-hab agreement in the event of a couple separating, and yet leave the asset to your significant other in your will later.

 

Was this helpful?

.

5 Comments

Filed under Estate Planning, Estates, Finance, How It Works, inheritance, pre-nuptial agreement, Saving, Wills

How to Get a Bigger Paycheque

Have you ever heard of a Source Deduction Waiver?

Every payday your employer deducts the amount of  tax set by the Canada Revenue Agency. This money is applied against your annual tax bill.

But not everyone has the same income tax circumstances. There are people who have significant deductions, like monthly RSP contributions, child care expenses, or even deductible investment loan interest, which often result in a sizable tax refund each year.

If this describes your situation, you might be eligible for a Source Deduction Waiver. A source deduction waiver means that your employer could deduct less tax from your paycheque each month. If that’s the case, it will mean that you won’t receive a huge refund at the end of the year, however you will get more money every payday.

While it does feel nice to get a big refund every spring, you have to remember that this refund is your own money, which you have given to the government as an interest free loan for the past twelve months. I am sure you could come up with better ideas than of what to do with a little more money every month than the government does.

For the proper forms, go to the Canada Revenue Agency website, www.cra-arc.gc.ca, and search for form T1213.

If you are up to date on your taxes, the government will calculate the proper amount, and authorize your employer to reduce the tax withheld. Please remember that this is not automatically renewed, you do have to reapply each year.

Put a little more money in your own pocket next year.

 

Was this helpful?

.

Leave a comment

Filed under Employment, Saving, Taxes

Flaherty’s Changes to Mortgage Rules

What will the changes to Canadian mortgage rules announced on January 17 mean to you?

If you already have a mortgage – not much. If you buy a house within the next 60 days (before the changes take effect) – not much. If you plan on buying a house during the next few years – not much.

If you are ass deep in debt, and looking to refinance to the hilt with a nice low interest rate, flexible payment, Home Equity Line of Credit in order to bail yourself out – lots.

New rules will restrict the number of years you can stretch out a normal mortgage to 30 years. No more 35 year mortgages with CMHC. You will also need to come up with a minimum down payment. No more “no-money-down” mortgages.

But that’s not the big news. The big news is that the Government through CMHC will no longer insure Home Equity Lines of Credit – called HELOCs.

For the last number of years home owners have been flocking to the banks (and others) to refinance their homes with Helocs. This allows them to use the equity they have built up in their homes to refinance debts like credit cards, or buy things like fancy cars, boats and cottages, or heck, just pay for a trip to Aruba.

These Helocs are sold to people by highlighting the flexibility of the payments, the low interest rates and your ability to pay off as much as you want. In reality most people only pay the minimum interest payment, never reduce their principal, and will get killed if the interest rates go up by more than a percentage or two.

Helocs are a form of never-never plan. Most of them allow you to make minimum or interest only payments, and never actually pay down the principal. I  can’t tell you how many of these things I helped people convert into real mortgages during the last few years I was advising clients.

You could live in your house forever and never succeed in paying it off. These lines of credit are as bad as credit cards, they’re a guaranteed source of monthly income for the banks that you never escape.

And with their floating interest rates on a principal that never declines, they are a time bomb waiting to happen in a world where interest rates have no-where to go but up.

As soon as CMHC insurance for these Home Equity Lines of Credit dries up, expect to the see the banks pull back their helping hands, and tighten up their credit granting procedures.

With any luck Mr. Flaherty will have prevented the banks from letting a few unlucky people from getting in over their heads in the future. If these rules work as intended, uninhibited, intemperate consumer spending will be marginally reduced, and those least able to cope will be protected from the bank’s grasping fingers.

What can you do?

If you have one of these never-never plans, talk to your mortgage lender. You have two options, set up a declining balance payment, which will pay off both principal and interest – or – convert to a regular mortgage with a defined amortization and a fixed interest rate on regular monthly payments.

As soon as you can, stop giving your life away to the banks, and get your house in order.

 

Leave a comment

Filed under CMHC, Economy, Finance, HELOC, Home Equity Line of Credit, interest rates, mortgages, Saving

Get Ready for Inflation

Ben Bernanke’s comments today underline my hunch that the US would try to inflate their way out of their fiscal mess.

Don’t take the Fed’s low interest rates policy at face value. In the long term this kind of policy causes inflation, and eventually we will see that higher interest rates will be necessary to bring the inflation it creates under control.

If you are a saver you will be penalized, as your savings and investments become devalued. People invested in Bonds and Bond funds, and GICs are especially in the firing line. It appears that the best strategy for the next little while will be to think short term. Don’t lock your investments in to contracts longer than 12 months.

Mortgages should be treated the opposite way. If you are not planning on selling, lock in for as long as you can. If inflation gets out of control, it isn’t unreasonable to expect mortgage rates to pass the 10% mark some time in the next 2 to 5 years.

Right now interest rates and mortgage rates are being held down by the lasting dregs of the recession and the appalling housing market in the US. But this will not last.

In Canada the housing market is relatively healthy, prices have not dropped, and anyone with a large mortgage at the high end of carrying capacity will be vulnerable to large jumps in interest rates.

http://www.reuters.com/article/idUSTRE69D5XW20101014

Leave a comment

Filed under Economy, Inflation, interest rates, mortgages, Saving, Uncategorized, US Debt

Rising Mortgage Rates

I have to admit I was a bit shocked today when someone asked me if they should lock in the interest rate on their mortgage .

Shocked mainly that they hadn’t already done it.

Historically mortgage rates have run in the 6% range, I’m talking 100 year averages here. So I consider it a general rule of thumb, that if mortgage rates are below 6% you are in bonus territory, and should lock in for as long as possible.

We are now just beginning the process of making a transition from a period of falling interest rates into what I think will be a fairly protracted period of gradually rising interest rates.

Now, I am not saying that I see rates rising to the levels we saw in the mid-eighties (god forbid) unless some unforseen financial crisis hits (of course that’ll never happen, right). But it is not unreasonable to expect to see mortgage rates climb into the 6-8% range in the next few years.

It is possible that there will be a political imperative which keeps rates lower than this, but honestly, with the mess the deficit mess the US is in, and the bumpy ride the Euro zone is going through, I can’t see the current low rate environment continuing indefinately.

So what to do?

Generally, in a rising interest rate environment you want to be locking in the low rates as long as you can, for as long as they exist.

In the opposite case, in a falling interest rate environment you want to be in short term, variable rate mortgages so that you can take advantage of savings as they occur.

But both scenarios have end points. This is where you must make a personal judgement call based on your own comfort zone. For myself, I called 5% the bottom, and considered anything offered less than 5% as bonus territory. This is probably true of many of us who struggled with 14 and 16% mortgages years ago.

But when mortgages are rising, when do I want to stop locking in, and go short term in hopes that rates will begin to fall again? This is tougher. What happens if you go variable and the rate shoots up to 16%? What a killer that would be. But do I take the chance on a variable if rates are 12% and I think they will fall?

I can only fall back on historical averages again. Personally I would probably only lock in for a year at a time once rates get higher than 8%. If rates go over 10% I am going to be looking to a variable mortgage, knowing that I am going to have to ride the rollercoaster until the rates fall again.

But you can be sure that once they fall, and eventually they will, I will again lock in for as long as I possibly can. Because I know, that one day interest rates will rise again.

And if you ever needed an argument for paying off your mortgage as quickly as possible – this is it.

Leave a comment

Filed under Economy, How It Works, Inflation, interest rates, mortgages, Saving, Uncategorized, US Debt

Spousal RRSPs, How it Works

If you are not familiar with all the mechanisms of RRSPs, Spousal RRSPs, TFSAs and some of the other types of accounts which are offered at Banks, Investment Dealers and Insurance Companies in Canada, it can be very easy to misunderstand how they work and how they differ. This is very common with Spousal RRSPs.

Often when the account is being set up the advisor gives a quick verbal explanation of how the account works and what the benefit will be to you. Sometimes you get the details in writing, but let’s face it, how many people ever bother to read the fine print?

On more than one occasion I have run across people who misunderstood how their Spousal RRSP works.

To cover the basics – It is a retirement savings account which allows one spouse (husband or wife) to make deposits into the retirement fund of the other spouse. They can be married or common-law. This is most useful in cases where one spouse earns a higher income than the other, or one spouse will have a higher retirement income from a fully funded defined benefit pension plan, and the other will not.

The main things to remember are

  • the account is set up in the name of the receiving spouse
  • the spouse who makes the contribution is the one who gets the tax deduction
  • the receiving spouse, who’s name is on the account, is the owner of the account
  • the owner of the account makes all the decisions about how and where the money is invested
  • the contributor has no say in how the account is operated, or how or when money is withdrawn
  • in the event of marital breakdown the money in this account will be included in the marital assets calculations and apportioned according to the divorce agreement, the contributor does not have a right to ask for the return of the money
  • tax attribution rules mean that if money is deposited by the first spouse and withdrawn within the first three years by the receiving spouse, it will be taxed back to the original contributor
  • exceptions to the three year rule occur in case of marital breakdown or death of the account owner

So are Spousal RRSPs a good idea? Yes. Although new pension splitting rules have reduced the income splitting benefit slightly, it is still good financial planning to equalize income as much as possible and ensure the both spouses have fully funded retirements.

 

Was this helpful?

Leave a comment

Filed under How It Works, Investing, Pensions, Retirement, Saving, Spousal RRSP, Taxes