Tag Archives: Tax-Free Savings Account

How to save for retirement (Part 2)

July 31, 2014 saskpension Leave a comment

By Sheryl Smolkin

Every family has multiple financial priorities. If you have small children and a big mortgage it is often daunting to think about saving for anything more than a family night out at a local fast food restaurant.

But one way to manage your money is to pay yourself first by allocating specific amounts to savings and having these amounts moved into different jars (or accounts) as soon as your paycheque is deposited into your account.

In Part 2 of the series “how to save for retirement” we will focus on several of the tax-assisted or tax–deferred savings plans available to you and some tips for using them effectively.

Government benefits: Every working Canadian must pay into the Canada Pension Plan or the Quebec Pension Plan until age 65. In addition, Old Age Security is payable to Canadians or legal residents living in Canada who lived in the country at least 10 years before age 65 and Canadians or legal residents living outside Canada who lived in the country at least 20 years before age 65. Lower income OAS recipients may also be eligible for the Guaranteed income Supplement (GIS). But changes to government benefit programs mean you can take benefits later or in some cases earlier (with a penalty). When developing a retirement savings plan you should understand how these programs work and the benefits you can expect to receive. You also need to decide when it makes the most financial sense for you to start collecting CPP and OAS.
Saskatchewan Pension Plan: The Saskatchewan Pension Plan is a defined contribution pension plan open to all Canadians with registered retirement savings plan (RRSP) room. You can contribute up to $2,500/year or transfer in up to $10,000/year from another unlocked RRSP. Low fees (one percent/year on average) and consistent returns (average of 8.13% over 28 years since inception) make SPP an excellent investment. The program is very flexible because how much you contribute and when is up to you. Funds are locked in until your selected retirement date, between ages 55 and 71.
Registered Retirement Savings Plan: In 2014 you can contribute 18% of your previous year’s income to a maximum of $24,270 to your RRSP minus specified amounts contributed to other registered savings accounts. Unused contribution room can be carried forward. You can find your RRSP limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment from the Canada Revenue Agency.
RRSP withdrawals: One weakness of an RRSP as a retirement savings vehicle is that you can withdraw money at any time. If you do withdraw RRSP funds you will pay tax on withdrawals at your normal tax rate, the contribution room is lost and you lose the benefit of future tax-free compounding. However, the Home Buyers’ Plan and the Lifelong Learning Plan permit you to withdraw amounts from your RRSP in specific circumstances without triggering a tax bill and require you to repay the money, usually over 15 years.
Tax deductible: Contributions to SPP, RRSPs and other registered pension plans are tax deductible. If you participate in one or more of these plans and have not already arranged to have less tax taken off at source, you may get a hefty income tax return. There are lots of ways to spend this windfall including taking a vacation or paying down debt. However, in his book The Smart Debt Coach, author Talbot Stevens says reinvesting your tax returns into an RRSP is the best way to get the full benefit of compounding in the plan.
Deferring tax deduction: There is no minimum age for an RRSP. In order to make contributions to an RRSP account, a minor needs to have earned income the previous year and have filed an income tax return. If a thrifty young person or anyone with a low income makes RRSP contributions, deferring taking the tax deduction until they are in a higher tax bracket means they will get a bigger bank for their savings bucks. The last RRSP contribution a taxpayer can make is in the year they turn 71.
Tax Free Savings Account: A Tax Free Savings Account (TFSA) allows you to currently save $5,500 a year. Contributions are not tax deductible, but investment earnings accrue tax free in the account. If you withdraw money, you can re-contribute the amount to the account in the next or subsequent years without any penalty. You can only begin making contributions at age 18 but there is no upper age when you have to stop contributing. How do you decide if a TFSA or an RRSP is best for you? Gordon Pape says TFSAs are better for short-term savings goals and if you don’t want to undermine possible eligibility for government benefits like the GIS. But if your income will be lower in retirement he suggests saving in an RRSP.
Automatic withdrawal: Whether you participate in a company pension plan, SPP, RRSP, TFSA or a combination of all or some of the above, set up automatic withdrawal so a specified percentage of your income is moved into these accounts every payday. David Chilton made “pay yourself first” a popular mantra in The Wealthy Barber, first published in 1989. If savings are skimmed off the top, you will learn to live on less while you get on with the business of day-to- day living. And when you do retire, you will have a significant part of the nest egg you need to live on.
Automatic escalation: To find out how much you need to save for retirement, you need a financial plan. But in a recent column in the Globe and Mail, personal finance expert Preet Banerjee suggests that in the absence of a plan, the rule of thumb should be at least 10% or as much as you can save. In other words, you are not going to have enough if you keep saving a flat dollar amount each year. But if you select a percentage of income and ensure you increase your contributions every time you get a raise, it is more likely that you will reach your retirement savings goal.
Consider insurance: Nobody expects to become disabled or die young, but it happens more often than you think. Regardless of how much you are saving for retirement, an unexpected loss of income can derail all of your short and long term goals. You may have some life insurance, disability insurance and maybe even critical illness insurance at work. Review your coverage with a financial advisor to determine if you need more individual coverage or if you can afford to self-fund the risk.

In Part 3 of this series we will focus on some basic investment principles that will help you grow your retirement savings.

Also read:
Retirement savings alphabet soup
SPP or TFSA?

Money saving tips

How to grow your retirement savings (Part 1)

July 3, 2014 saskpension Leave a comment

By Sheryl Smolkin

It seems to me that I live and breathe retirement planning every day. I read about retirement planning. I write about retirement planning. And I frequently visit our money online to reassure myself that one of these days my husband and I will actually embark on the retirement we have planned for.

After reading numerous personal finance blogs, books and articles I have concluded that people who have good “financial hygiene” from a young age are the ones that are most likely to be successful over the long haul in saving for retirement.

Therefore, over the next several months in a three part series, I will discuss 30 ways you can grow your retirement savings, from before you start your first job until after you’ve locked your office door for the last time.

Invest in yourself: In order to get a well-paying job with future prospects of growth you will need some form of post-secondary education and on the job experience. In addition, you will need to continue enhancing your skills and abilities throughout your life. Jobs for life have become the exception rather than the rule, and you are your own career manager.
Develop a financial plan: Regardless of how much money you have to live on and what your personal or family expenses are, you need a budget. Allocate amounts to rent, utilities, food, other recurring expenses, discretionary spending and savings. Then stick to your budget and revise it annually, or more often as required.
Decide how much you will need: When retirement is 30 or 40 years away, it is impossible to accurately figure out how much money you will need. However, financial planners typically calculate that most people will need 50% to 70% of their income while working to retire on. You can start with a somewhat arbitrary number when you are young and adjust it as you get closer to retirement age.
Calculate how much to save: There are many retirement savings calculators online that will help you calculate how much you have to save to generate the annual income you need to fund your retirement. It is important to select a conservative annual rate of return both before and after retirement and keep in mind that a 65 year old can expect to live an additional 20 years or more.
Start saving early: In your 20s and 30s saving for a wedding or a car or a house or your children’s education may be at the top of the list. Nevertheless, the earlier you start saving for retirement, the greater the power of compounding and the smaller the amount you have to save on a regular basis to reach your goal. The Saskatchewan Pension Plan allows you to save up to $2,500 per year between ages 18 and 71.
Have an emergency fund: Over your working career, there will be periods in which you are out of work or unexpected expenses arise. Financial planners typically suggest that you have an easily accessible, liquid emergency fund of at least three months’ pay. In this way, your longer-term savings goals will not be permanently derailed if you have temporary setbacks. A Tax Free Savings Account is a great place to invest your money as funds withdrawn in one year can be replaced in the following year without any penalty.
Avoid consumer debt: There is good debt and bad debt. An affordable mortgage to buy a family home is good debt. High interest credit card bills are bad debt. Your rule of thumb should be that unless you can pay off your credit card in full each month, don’t use it. Airline points and cash back deals on credit cards are tempting, but if you are on a tight budget spending cash only can help to inhibit over-spending.
Forget the Joneses: As your family grows and your income increases, it may be tempting to buy more tech toys, a bigger house or take more expensive vacations. But you don’t have to keep up with the Joneses. If over extending yourself means you go into debt and have to forgo saving for retirement, you could be heading for Freedom 85. And you won’t be satisfied with a modest lifestyle when you do retire.
Save at work: If your employer offers a defined contribution pension plan or a group RRSP, chances are that your contributions will be matched up to a certain percentage of income. Enroll as soon as you are eligible to receive this “free money” and contribute enough to get the maximum employer match.
Reduce withholding taxes: One of the advantages of contributing to a pension plan or an RRSP is that you get a tax break. However, if you wait to the end of the year to get a refund, you are giving the government an interest-free loan. If you are making regular contributions to a personal or workplace retirement savings program you can file a T1213 Request to Reduce Tax Deductions at Source to CRA.

In Part 2 of this series featured next month, we will discuss 10 more ways you can grow your retirement savings.

Do you have any ideas for saving money? Share your money saving tips with us at http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.

Interviews

Dave Dineen’s retirement journey

May 22, 2014 saskpension Leave a comment

By Sheryl Smolkin

Hi,

Today in savewithspp.com we continue our series of interviews with personal finance bloggers. Dave Dineen’s blog “Dave’s retirement journey” appears on Sun Life’s brighterlife.ca

Dave retired in December 2010 in his mid-50s. Before retiring, he spent 30+ years in marketing for several financial services companies, most recently, for Sun Life.

He writes about what it actually feels like to be retired – the pitfalls, as well as the joys. He shares many real-life experiences and what they’ve taught him about how to retire successfully.

Thanks for joining me today Dave.

My pleasure Sheryl. Great to talk to you.

Q: More and more people are now saying they are aiming for Freedom 70 or older. You’ve achieved Freedom 55. Why did you decide to retire so early?
A: Well, a few reasons really. My parents were dairy farmers and my dad died at age 62 before he could retire. And before that, my parents’ vacations actually fit between milking the cows in the morning and milking them again at night, 365 days a year. So I decided to retire while I was young enough, healthy enough and vital enough to do the things I wanted to do.

My career choices along the way, also really led to my retirement. My first career was as a journalist. My second career was in marketing with big financial companies like TD Canada Trust and Sun Life where I created retirement websites and wrote retirement newsletters, blogs and brochures. So I know quite a bit about retirement.

And my third and kind of final career – if there is such a thing as a final career in life – was in market research. In that position I created Sun Life’s Canadian Unretirement Index, which has really contributed to how we understand the idea of retirement and the reality of how retirement is changing in this country.

Q: How are you funding such a long retirement?
A: I’m going to be 58 this year, so I can’t apply for CPP any earlier than two years from now. I can’t apply for OAS for over seven years. And I don’t want to start my workplace pensions too early and get really small payments.

So for now, my wife and I are living off two sources of income. Our basic day-to-day living costs are paid from a stream of dividends on her non-registered investments. The income I get from freelance writing and marketing is what we’re using for the “nice to haves” like travel or even to up our TFSAs.

Q: How many hours a week do you devote to freelance writing and marketing consulting?
A: It really varies. Actually when I retired, I had no intention of freelancing, but I kept getting offers from people who needed some help and knew what I could do. I’ve done work for people even while I’ve been away traveling in England, Scotland, Wales, Italy and Spain. All it takes these days is a laptop, a phone and Skype.

Q: Can you estimate what percentage of your pension income you are earning from your freelance work? 20%? 40%?
A: Oh, it’s more than either of those numbers. It’s made a tremendous difference. So much so, that after more than three years, we actually have yet to touch a penny in our RRSPs or our TFSAs or our pensions. We are preserving our retirement savings and enjoying a better retirement lifestyle than we really expected.

Q: So, let’s get to your blog. What have some of your most popular blogs been about?
A: Well, my blog “Dave’s Retirement Journey,” really is my personal story. And people are interested in living a good life without going through their money too quickly. In our case, we travel a lot. We were on the road almost 12 of our first 36 months of retirement.

So, one of my most popular blog posts was around spending money slowly while you’re taking a long trip. By the way, we just got back a couple of weeks ago from three months in Europe where we ate like royalty, lived centrally in wonderful cities and we did fun things. Yet we still arrived home with a zero credit card balance.

Q: How important do you think it is to retire without debt?
A: Oh boy, it is absolutely necessary. In my mind, if you are in debt, you are not ready to retire. Obviously, if poor health or a job loss forces you out, you kind of have to muddle through somehow. But otherwise, I believe even thinking about retiring with debt is just crazy.

Q: One of the things that you blogged about is how downsizing in retirement doesn’t always work. Can you tell us a little bit about your home and cottage buying and selling and where you’ve finally landed in terms of your housing choices?
A: Yes, it really was complicated. A couple of years before retirement we sold our big four bedroom house and downsized to a one bedroom city condo, plus a cottage. But we realized the upkeep on the cottage was keeping us from travelling, so we sold it. Then we found that the one bedroom condo on its own was too small and my wife really missed her garden. So we ended up selling the condo as well right about the time we retired. In the end, we bought a new condo in Stratford, Ontario, which is in the MoneySense list of the best places to retire in Canada.

Q: With the benefit of over three years as a retiree, what are several unexpected things you’ve learned?
A: Boy, I love that question. I’d say that the first thing is that if you’re the kind of person who’s disciplined enough to have saved well for retirement, then you’re probably going to find it pretty easy to adjust to the financial discipline of living within your means in retirement.

Another unexpected thing for me has been the power of social media. A couple of years after retiring, I remembered that I had a profile on LinkedIn. I figured I’d better go in and update my profile to show that I was retired. Within a day, someone that I hadn’t worked with in 17 years reached out to me as a result of that LinkedIn update, and asked if I was interested in doing some freelance work for them in the marketing department at Investors Group. Another of my freelance clients actually has paid Google so that if somebody searches for my name, that client’s website comes up.

And I suppose a third unexpected thing I’ve learned along the way is that I actually like doing some freelance work. That’s a big surprise to me, because I really thought that I’d closed the door to work.

Q: So what was the best investment you ever made?
A: This will sound odd, but I believe my best investment was actually to buy a good-quality treadmill about five years ago. It helps keep my wife and I healthy, and to us that’s more valuable than a big tall stack of money.

Q: If you had one piece of advice for Canadians thinking about retirement, what would it be?
A: That’s a tough question. I think Canadians need all kinds of advice when it comes to retirement. But I think for me it all starts with thinking about what kind of retirement you want to have. I like to use a simple analogy.

In your working career, chances are, somebody else wrote your job description. And at the end of your life, somebody else is going to write your epitaph. But it’s that in-between part that you get to write.

So what kind of retirement do you really want to have? Figure that out and of course seek all the help you need to deal with the financial stuff.

Thank you, Dave. I really appreciate talking to you today.

My pleasure, Sheryl.

—

This is an edited transcript of the podcast you can listen to by clicking on the graphic under the picture above. If you don’t already follow Dave’s retirement journey on Sun Life’s brighterlife.ca, you can find them here. Subscribe to receive blog posts by email as soon as they’re available.

Money saving tips

Avoiding penalty taxes on your “Truly Fantastic Savings Account”

April 10, 2014 saskpension Leave a comment

By Sheryl Smolkin

For the last five years all Canadians over 18 have been eligible to open a “Truly Fantastic Savings Account” (aka a Tax-free Savings Account). These accounts are a particularly valuable retirement savings option for lower-income people who will not be taxed at a reduced rate after retirement and more affluent Canadians who have used up all of their RRSP contribution room.

You can open a TFSA at age 18 even if you are not earning income, as long as you have a social insurance number. TFSA contributions are not tax-deductible, but investment earnings accumulate tax-free. You can also continue contributing to a TFSA beyond age 71 when RRSP contributions must end.

According to the BMO Annual TFSA Report released in late December, almost half of Canadians (46%) now report having TFSAs – up 23% from 2012. However, one-third of account owners are still not fully familiar with how TFSAs work. As a result, since opening an account, one in 10 people have over-contributed and paid a tax of one percent per month on overpayments.

To avoid a penalty tax, you must understand how much you can contribute each year, the way unused contributions are carried forward and when withdrawals can be replaced.

Starting in 2009, TFSA contribution room accumulates every year even if you do not file an income tax return or open a TFSA. The annual TFSA dollar limit for the years 2009, 2010, 2011 and 2012 was $5,000.The annual TFSA dollar limit for the years 2013 and 2014 is $5,500.

The TFSA dollar limit is indexed based on the inflation rate. The indexed amount will be rounded to the nearest $500.

Investment income earned by and changes in the value of TFSA investments will not affect your TFSA contribution room for the current or future years. For an example, if you earn $1,500 in interest on your 2013 balance, you can still contribute $5,500 in 2014.

The TFSA contribution room is made up of:

Your TFSA dollar limit ($5,500 per year beginning in 2013 plus indexation, if applicable);
Any unused TFSA contribution room from the previous year; and
Any withdrawals made from the TFSA in the previous year.

The mistake that many people make is to withdraw funds and re-contribute them in the same year, after they have made their maximum contribution for the year, thus triggering an overpayment.

For example, assume that at age 18 in 2011. Jane opened a TFSA. At the end of 2012, Jane had contributed $10,000 to her account and had used up all of her 2011 and 2012 contribution room.

In January 2013 she contributed the maximum amount of $5,500 for the year.
In March 2013 Jane withdrew $10,000 to buy a new car.
In September 2014, using her annual bonus, Jane re-contributes $10,000 to her TFSA.

Jane will have a $10,000 over-contribution that will be taxed at 1% per month until the end of 2013. To avoid triggering the tax, she should have waited until the next year (January 2014) to pay back the money she withdrew from her account in 2013.

Your TFSA contribution room information can be found by going to one of the following services:

If the information that CRA has about your TFSA transactions is not complete or if you have made contributions to your TFSA this year, use Form RC343, Worksheet – TFSA contribution room, to calculate your TFSA contribution room for the current year. If CRA has deemed your unused TFSA contribution room to be a specific amount and you believe it is incorrect, instead of using this form, contact CRA for more information.

So keep records about your TFSA transactions to ensure that you do not exceed your TFSA contribution room. CRA will also keep track of your contribution room and determine the balance of room at a particular time for each eligible individual based on information provided by TFSA issuers.

Feb 17: Best from the blogosphere

February 17, 2014 saskpension Leave a comment

By Sheryl Smolkin

Whether you are saving for retirement or for other long-term goals, the key is that you have to spend less than you earn.

In What is “Saving?” Gail Vaz-Oxlade says it’s also important to distinguish between saving to buy a car or go on a vacation which is planned spending and saving for another chapter in your life like retirement.

Big Cajun Man says in I did my RRSP and TFSA Now What? that opening accounts and depositing money are just the beginning. Unless you develop an investment strategy and make sure you aren’t paying exorbitant fees, your money won’t grow the way it should.

The Toronto Star’s Ellen Roseman recently wrote a great column about How to plan for retirement on a low income. She says people who expect to receive the guaranteed income supplement (GIS) to top up their old age security (OAS) pension after age 65 should save in a TFSA and not an RRSP because TFSA withdrawals will not impact GIS eligibility.

First Foundation is an Alberta and Saskatchewan based financial services company. In their owngrowprotect blog they have started a 52 week money challenge. The author of Go To Disney Land or Pay Bank Fees, Your Choice! calculates that his family can save over $500 per year by shifting to no-fee banking which in ten years will add up to a family visit to Disneyland.

And Mark Seed from My Own Advisor asks the million-dollar question how much money do you need to retire well? He says that the magic number is indeed $1m or more. Even if some costs disappear in retirement like saving for retirement itself and mortgage payments there are costs in your future like property taxes, utilities, gas and food that are going to grow over time.

For those of you who think saving $1m before you retire is an unattainable goal, frugal lawyer Dave explains how he reached $1M net-worth by the age of 34 in this post on the Million Dollar Journey blog. It helped that he rode his bike to work instead of buying an expensive car like many other young lawyers in his firm.

Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere. Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.

Blogosphere

Feb 10: Best from the blogosphere

February 10, 2014 saskpension Leave a comment

By Sheryl Smolkin

It’s only February 11^th and it feels like personal finance writers should have run out of things to say about RRSPs by now, but somehow they still find more to write about.

One of the more interesting things I came across this week was the results of a BMO survey that reported 69% of Canadians expect the Canada Pension Plan (or Quebec Pension Plan) to cover their retirement costs with nearly one-third, planning to “rely heavily” on it. This is despite the fact that CPP has an average monthly payout of less than $600 a month! And many people are also pegging their hopes on an inheritance or a lottery win to fund their golden years.

Well, someone once told me that lotteries are “a tax on the statistically challenged,” so you should probably take careful note of Brenda Spiering’s blog on brighterlife.ca discussing how much you can contribute to an RRSP.

The annual maximum contribution for 2013 is the lesser of $23,820 and 18% of your earned income for the previous year. But you may also have unused contribution room from previous years that has been carried forward and you can over-contribute up to $2,000 without a penalty.

But don’t forget to save some RRSP contribution room to make your $2,500 maximum Saskatchewan Pension Plan contribution.

Also, check out Gail Vaz-Oxlade’s interesting 2014 RRSP Update. Did you know that kids CAN have an RRSP although they can’t have a Tax-free Savings Account until they’re 18? If a child contributes when she doesn’t have to pay any tax, don’t claim the deduction. Hold it for later when her income and her tax rate go up so she gets a bigger bang for her buck.

On moneysmartsblog.com Mike Holman pokes a few holes in the RRSP Myth that an RRSP is only advantageous if your marginal tax rate in retirement is lower than your marginal tax rate when contributing.

He gives examples to show that when you make a contribution to an RRSP the tax deferred from RRSP contributions is calculated at your marginal tax rate (or close to it, if your RRSP contributions span more than one tax bracket). However, when you withdraw money from your RRSP or RRIF – the tax is calculated using your average tax rate (after other income sources such as pensions) which is typically lower.

Finally on retirehappy.ca, blogger Scott Wallace weighs in on the new Pooled Pension Plans to be offered by the federal government and some provinces such as Quebec and Saskatchewan. PRPPs are intended to provide a savings vehicle for small business or self- employed people who don’t have access to larger pension plans..

Scott says the industry already has low cost Group RRSPs and DC pension plans. And of course my readers already know that SPP allows employers to set up an easy, no-cost workplace plan. That’s why I agree with Scott that the real issue is not creating new kinds of retirement savings accounts but finding ways to make more people save!

Blogosphere

Jan 27: Best from the blogosphere

January 27, 2014 saskpension Leave a comment

By Sheryl Smolkin

RRSP season is in full swing and since the beginning of the year, we have been bombarded with a media blitz suggesting few Canadians are saving enough and exhorting us to maximize contributions to our retirement savings plans by the end of February.

If you wonder what all this retirement planning is for, anyway, take a look at Sandi Martin’s blog or boomer & echo. She says planning for that inevitable day when you stop collecting a paycheque, or invoicing clients, or collecting ad revenue is an exercise that will let you spend more money than vaguely worrying about “saving enough” or “running out” will.

In order to save enough to retire worry-free, you need to figure out how much you will need. On the Canadian Finance blog Tom Drake suggests that for every dollar of annual income you need in retirement you should plan to have $20 in savings. That doesn’t include the value of your home because it is not earning income.

You can save in many different kinds of accounts including the Saskatchewan Pension Plan, employer-sponsored pension plans and RRSPs. But Jonathan Chevreau at MoneySense says investing in a tax-free savings account (TFSA) should be a priority for most Canadians. In fact he says the moment you make your January contribution, you should start accruing for the next year’s installment, even if it means parking in short-term cash vehicles and paying a little tax for the balance of the calendar year.

Brighter Life discusses how you can pay yourself from your retirement savings when you retire. Some of the options are annuities, registered retirement income funds, and payments from several kinds of locked-in accounts holding funds transferred from locked-in company pension plans.

And Jim Yih on retirehappy.ca reminds us that one area of tax planning that does not receive enough attention is the designation of beneficiaries when it comes to Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs).

When you open up an RRSP or RRIF, you are opening up a special contract under the Income Tax Act, which allows you to designate one or more beneficiaries. Far too often, this is done too casually and without enough thought. More importantly, as your circumstances change, like marriage, divorce or children, you should consider reviewing your beneficiaries to make sure you have the right people designated.

Money saving tips

How to prepare financially for a new baby

June 6, 2013 saskpension Leave a comment

By Sheryl Smolkin

When my daughter was born almost 34 years ago, a wise aunt told me that “babies bring their own love with them.” But they also bring sleepless nights, less family income while on maternity leave and lots of other bills like daycare when parents go back to work.

If you are planning a family, you can accumulate money in a tax free savings account for a year or more before you get pregnant. Funds you withdraw can be put back into the account in the next year or subsequent years without penalty.

You can also make an RRSP contribution, get back the tax return and put that money in your “baby fund.” Another option is to withdraw money from your RRSP in the year you and/or your spouse are off work and earning less income. However, think this option over carefully because once you withdraw funds from an RRSP, the contribution room is lost forever.

A birth mother who plans on nursing her baby may need to be the primary caregiver for most of the first year. Nevertheless, if the other parent has a generous Employment Insurance top-up for some period of time, it may make more economic sense for the other spouse to take a good chunk of the available parental leave.

Regardless of how you plan to split up the leave, speak to your HR department and make sure you fully understand both the Employment Insurance rules and provincial labour laws so you are in the best position to take full advantage of the available benefits and protected leave period.

For example:

You are eligible to receive EI maternity or parental benefits if you have paid premiums; your normal weekly earnings are reduced by at least 40%; and, you have worked at least 600 hours in the qualifying period (generally the previous 52 weeks).
Only a birth mother is entitled to 15 weeks of maternity benefits after a two week waiting period. However, parents can share the 35 weeks of parental benefits.
EI benefits are taxable income so federal and provincial income tax will be deducted from your benefits.
You will go back to your previous job or a similar job with the at least the same wages and benefits.
If you work while receiving EI maternity benefits, the entire amount you earn dollar for dollar will be deducted from your benefits.
Under the new EI while working on claim pilot project, when you or your spouse are on parental leave you will be able to keep 50 cents of your EI benefits for every dollar you earn, up to 90% of the weekly insurable earnings used to calculate your EI benefit amount.
To be eligible for job-protected adoption, maternity or parental leave in Saskatchewan, you have to work 20 of the 52 previous weeks. Leave eligibility varies between provinces.
You must give your employer four weeks written notice prior to returning to work. An employer does not have to allow you to return until this notice is received.
You will continue to earn credits toward length of employment, length of service, vacation and seniority during periods of maternity and paternity leave.

When it comes to buying baby furniture, strollers, clothes and toys, take a deep breath and don’t rush. You will get generous unexpected gifts from everyone including the gang at the office. Also, babies outgrow things very quickly and their parents are usually thrilled to pass on gently used items to the next family who needs them.

Before our granddaughter was born, a friend of a friend brought over a huge box of sleepers and adorable outfits that allowed multiple changes a day for the first six months. At one point my daughter lulled the baby to sleep in an old fashioned wind up swing that had been making the rounds from family to family since the 1980s.

The only items you will probably need to buy are car seats of various sizes as the safety rules are constantly evolving. All car seats sold have an expiry or useful date on them and Transport Canada says they must be discarded after that date. Also, a car seat or booster seat made before January 1, 2012 may not meet the current standards set out by Health Canada.

Finally, ask other new parents for a list of things they actually found useful. While every baby is different, my daughter discovered that when all else failed, “baby wearing” was a foolproof way of getting the baby to sleep. She used various wraps and front/back carriers that changed with the age and size of the baby.

She also swears by a white noise machine that drowns out street sounds in their urban Ottawa neighbourhood.

No matter how well you plan, nothing can prepare you for the joy and the sheer terror of becoming a parent. But if you put some thought into how you will manage financially when your family grows, hopefully the only thing that will keep you up at night is the 2 AM feeding.

How did you plan financially for a new addition to your family? Send an email to socialmedia@saskpension.com and share your ideas with us. If your story is posted, your name will be entered in a quarterly draw for a gift card. And remember to put a dollar in the retirement savings jar every time you use one of our money-saving ideas.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

13-Jun	Father’s Day	Frugal gifts your father will love
20-Jun	Graduation	How to use social media to find a job
27-Jun	Summer activities	Inexpensive summer activities for kids

Money saving tips

Retirement savings alphabet soup

February 14, 2013 saskpension Leave a comment

By Sheryl Smolkin

SPP, RRSP, Group RRSP, TFSA. This alphabet soup of acronyms represents only a few of the most common retirement savings options available to Canadians.

Other important retirement savings vehicles beyond the scope of this blog include employer-sponsored defined benefit pension plans, defined contribution pension plans and hybrid registered pension plan designs.

Where you chose to save your money and how much you save each year is an individual decision based on your disposable income and your longer-term financial goals. Because each type of plan has different contribution levels, tax consequences and withdrawal rules, it often makes sense to contribute to more than one kind of savings vehicle.

For example, you might decide to:

Contribute to the Saskatchewan Pension Plan to ensure you have a stream of income at retirement.
Participate in the Group Registered Retirement Savings Plan sponsored by your employer to get the benefit of employer matching of your contributions.
Save your “emergency” or “rainy day” fund in a TFSA.

To help you understand and prioritize your retirement savings, here are some key features of each of these program. SPP and RRSP contributions for 2012 must be made by March 1, 2013 to be eligible for a tax deduction.

In all cases, you should consult your financial advisor and obtain more detailed information about each type of program before making savings and investment decisions.

Saskatchewan Pension Plan

SPP is the only pension plan of its kind in Canada. It is a voluntary defined contribution plan open to anyone between the ages of 18 and 71. Employers who wish to make SPP available as an employee benefit can set up a group plan. Often employers with group plans match employee contributions up to a specified amount selected by the company.

SPP Key Features

Savings objectives:	Retirement savings.
Contributions:	Maximum contributions of up to $2,500/year if RRSP contribution room is available. Up to $10,000/year can be transferred in from another RRSP. No minimum payment. Contribution schedule and payment method at the member’s option.
Tax treatment:	Contributions are tax deductible. Tax is paid on benefit payments after retirement.
Investments:	Active members can invest in a professionally-managed balanced portfolio intended to maximize earnings and minimize risk or a short-term fund geared to capital preservation. Investment returns in the balanced fund have averaged 8% over the last 26 years and annual fees have been around 1%.
Withdrawals:	SPP contributions are locked-in within 6 months of joining and earn interest until the member retires.
Portability:	Membership in SPP can continue regardless of where the member resides or works throughout his career.
Retirement:	SPP members can elect to retire (start receiving benefits) as early as age 55 and no later than the end of the year they reach age 71. Members can elect to receive a pension from the fund, transfer the lump sum in their account to another locked-in account with a financial institution or a combination of both.

Registered Retirement Savings Plan

Any person currently working in Canada is eligible to open and contribute to an RRSP until the year he/she turns 71 providing the individual has contribution room and files Canadian taxes. An RRSP account can be opened at any financial institution such as a bank, credit union and most investment houses.

RRSP Key Features

Savings objectives:	Retirement savings. Home purchase, education (see “withdrawals” below)
Contributions:	Until the year the taxpayer turns 71, contributions of up to 18% of earned income from the previous year can be made up to $22,970 in 2012 ($23,820 in 2013.) RRSP contribution room can be found on line (A) of the RRSP Deduction Limit Statement, on taxpayer’s latest income tax notice of assessment or notice of reassessment.
Tax treatment:	Contributions are tax deductible. Tax is paid on the full amount of withdrawals before or after retirement.
Investments:	RRSPs can be self-directed, or administered by a bank or financial institution. Generally, the types of investments permitted in a in a RRSP include: Cash Mutual funds Securities listed on a designated stock exchange Guaranteed investment certificates (GICs); Bonds; and Certain shares of small business corporations. The earnings record and investment fees charged will vary and investors must do their own due diligence.
Withdrawals:	RRSP contributions are not locked in. However, when funds are withdrawn from an RRSP, the contribution room is lost. The Homebuyer’s Plan and Lifelong Learning Plan allow RRSP withdrawals and repayment in specified circumstances.
Portability:	Membership in an RRSP can continue regardless of where the member resides or works throughout his career.
Retirement:	Funds in an RRSP can be withdrawn at any time and tax is payable on the full lump sum. Funds that are not withdrawn by the end of the member’s 71st year can be used to purchase an annuity or transferred into a registered retirement income fund. There are provincial pension and federal income tax rules about the maximum/minimum amounts that must be withdrawn each year.

Group RRSPs

Some employers establish Group RRSPs as an employee benefit. Often employers with Group RRSPs match employee contributions up to a specified amount selected by the company. They also may be able to negotiate lower fees for similar investments than fees charged to individuals by retail financial institutions.

Employers may restrict withdrawal of RRSP contributions by active employees except in extenuating circumstances, by withholding employer contributions for some period of time after a withdrawal is made.

An employee who changes jobs will not be able to continue in the group plan but the funds can be transferred to an individual RRSP with no tax consequences. However, the available investment options and the investment fees may not be as attractive as in the Group RRSP.

Tax-Free Savings Account

TFSA stands for Tax-Free Savings Account. Like an RRSP, a TFSA can be set up at a financial institution such as a bank, credit union, trust or insurance company.

TFSA Key Features

Savings objectives:	Saving for any short or long term objective including retirement.
Contributions:	Up to $5,500/year beginning in 2013. Previously, $5000/yr
Tax treatment:	Contributions are not tax deductible but investment earnings accumulate tax free. Any funds withdrawn are also tax free.
Investments:	Generally, the types of investments that will be permitted in a TFSA are the same as those permitted in a RRSP. This would include: Cash Mutual funds Securities listed on a designated stock exchange Guaranteed investment certificates (GICs); Bonds; and Certain shares of small business corporations. The earnings record and investment fees charged will vary and investors must do their own due diligence.
Withdrawals:	Funds can be withdrawn at any time. Withdrawals will be added to the member’s TFSA contribution room at the beginning of the following year.
Portability:	Membership in a TFSA can continue regardless of where the member resides or works throughout his career.
Retirement:	Federal income-tested benefits and credits such as: Old Age Security (OAS) benefits, Guaranteed Income Supplement (GIS), or Employment Insurance (EI) benefits will not be reduced as a result of the income earned in a TFSA or amounts withdrawn from a TFSA.

Have you made your 2012 SPP contribution yet? Are you also contributing to an RRSP or a TFSA? Send us an email to socialmedia@saskpension.com and tell us about how you are saving for retirement and your name will be entered in a quarterly draw for a gift card.

If you would like to send us other money saving ideas, here are the themes for the next three weeks:

21-Feb	RRSP/SPP deadline	How should you invest your retirement savings?
28-Feb	Debt Reduction	How to eliminate debt
7-Mar	Airline points	Which kind of airline points are better?

Also see:
SPP vs. TFSA
Understanding SPP annuities
The Wealthy Barber explains: TFSA or RRSP?
RRSP vs. TFSA: Tim Cestnick on where to put spare dollars
To TFSA or to RRSP?
TFSA vs. RRSP – Clawbacks & income tax on seniors
TFSA vs. RRSP – Best Retirement Vehicle?