Sometimes, you CAN take money out of your RRSP without penalty. But you have to pay your RRSP back – or pay the tax.
This post is a sponsored post written by Sun Life Financial. See my disclosure policy here.
Are you looking at a major expense you didn’t see coming?
Short of available cash? Perhaps you’re thinking about tapping your registered
retirement savings plan (RRSP). It’s your money, after all, so why not?
Here are three good reasons why not.
1. You’ll owe tax
The first is the tax bill. Since you used
pre-tax income when you put money in your RRSP, you’ll have to pay tax when you
take it out. And while there’s no tax on investment growth inside your RRSP,
you’re taxed when it comes out. RRSPs make sense because you’ll typically cash
them in after you retire. That’s when your income and your tax bracket will
likely be lower. You’ll still pay tax, but you’ll pay less. If you take the
money now, while you’re working, you’ll face more in taxes.
2. You’ll miss out on investment growth
The second reason is lost investment
growth. Every dollar you take from your RRSP is a dollar less to build up
through compounding. So that little nibble from your plan today could mean a
big bite missing from your savings come retirement.
3. You’ll use up contribution room
And the third reason: When you take money
from your RRSP, putting it back generally uses up your contribution room.
What’s contribution room? Each year you can put as much as 18% of your
earned income from the previous year into
your RRSP, up to an annual
maximum. The difference between your limit and what you actually put in
your RRSP is the unused contribution room. You can carry that forward to use
another year. Unused contribution room plus your annual maximum becomes your total
contribution room. But whatever you put in your RRSP – replacing a temporary
withdrawal or making a brand-new contribution – can use up contribution room. Let’s
say you take $5,000 out of your RRSP this year and plan to pay your RRSP back
next year. That repayment will reduce your contribution room by $5,000.
There are two ways to avoid paying tax on RRSP withdrawals,
without using up contribution room:
Use your RRSP to help buy your first home, or
Use it to go back to school.
What’s the RRSP Home Buyers’ Plan (HBP)?
Are you a first-time homebuyer living in Canada? If so, you
can borrow up to $35,000 from your RRSP to put towards a down payment. If you
and your spouse are buying together, that’s $70,000 you could use for your
home.
The HBP lets you take out the money tax-free. But there’s a
catch: You have to pay it back in equal installments over 15 years. Any year
you don’t pay the full installment, you have to pay income tax on the
outstanding balance. You’ll also lose the chance for that money to grow within
your RRSP.
Thinking of using the HBP? When you’re crunching the
numbers, be sure to include the RRSP repayments along with your mortgage
payments.
What’s the Lifelong Learning Plan (LLP)?
This is another way to take tax-free money from your RRSP:
Take out up to $10,000 a year, for a total of $20,000.
You can spread those withdrawals over a maximum of four years.
Use that money for full-time education or training for yourself, your spouse or partner.
As with the HBP, you need to repay your RRSP or pay income tax on your withdrawal.
With the LLP, you have 10 years to repay your RRSP in equal installments.
What about the tax-free savings account (TFSA)?
You might need money for anything at all – not only buying a
home or going to school. An option is your TFSA. You don’t pay tax on TFSA
withdrawals for any purpose. You’ll still lose potential investment growth
while your money is out of the account. But your contribution limit will grow
back. Whatever you take out gets added to what you can put in the following
year. You can pay your TFSA back according to your own schedule.
Today, I'm going to start out with a few points about the benefits of budgeting. For those of you that already have a budget set up, this may be confirmation that it is a good thing, but for those of you that don't have a budget, it may present some points that will give you the push to get started.
A Budget Will Help Identify Where your Money is Going
First and foremost, a budget will allow you to identify where exactly your money is going. You'll see just how much is going towards bills, clothing, entertainment and everything else you spend your money on. This is important to know if you want to gain any sense of control over your finances.
A Budget Will Help you to Control Your Money
Once you have identified where your money is going and you make a budget, you may be some hard choices to make at first. Maybe you realize you need to move to a more affordable house. Or maybe you discover that drinking a Starbucks latte everyday is keeping you from taking your dream vacation. It can be hard to accept that you can’t have it all. But once you get past that point and realize that by cutting a few expenses here, can allow you to spend more over there, budgeting doesn't seem so bad. It allows you to prioritize what is important to you, and then live by those priorities.
A Budget Will Help Guide you in Planning Financial Goals
A budget is a plan. A plan for where you want your money to go. Say you want to do a bathroom renovation next winter. Unless you plan to set aside money every month, you won't be doing that renovation. (Unless of course, you take on debt.) Without a plan, the money can too easily be spent on $100 trips to the mall. Having a budget helps you to plan and stick to your financial goals you hope to achieve.
A Budget Will Help you Prepare for Emergency Expenses
Having a budget will allow you to allocate money to an emergency fund for those unexpected situations that are bound to arise in your lifetime. A broken furnace, vehicle repairs, or an unexpected trip to visit an ill relative, to name a few. When you don't have a budget, it's easy to forget about those extra expenses that will most likely arise at some point in the year.
A Budget Will Help Give you Peace of Mind
Having a budget is what ensures you'll have enough to pay your expenses. Since you've set aside money for your day to day expenses, annual property taxes, income tax, emergencies and what ever else you know is necessary in your life, there's no need to stress or loose sleep.
A Budget Will Help you Feel Less Guilty about Spending Money
Once you start budgeting and tracking your finances you might find that you feel less guilty about spending money. Knowing that you have set aside $75 a month for clothing, for example, you don't have to feel badly about spending it all or a portion on a pair of shoes that you fell in love with. When every dollar has a purpose, you can feel much better about spending in general.
Having a budget is freeing, because you make the plan. It’s customized to your needs and wants. It’s also not set in stone. If you find that you miscalculated when you set the food budget, readjust. That’s the beauty of it. It’s your budget. Your money, working for you!
What are some other benefits of budgeting? Do you have any stories to share about how budgeting "saved" you?
This post is a sponsored post by Sun Life Financial written By Brenda Spiering. See my disclosure policy here.
Saving for retirement is likely one of your top financial priorities. But did you know that how you save can be nearly as important as how much you save? Choosing the right retirement savings account can have a huge impact both on how much money you save and how much tax you pay. So, how do you choose the best type of account?
How to choose the right retirement savings account
When to choose an RRSP
When it comes to saving for retirement, RRSPs (Registered Retirement Savings Plans) are pretty hard to beat. Contributions are tax-deductible, investments grow on a tax-free basis within the plan, and RRSP funds aren’t subject to tax till they’re withdrawn from the plan.
If you expect your current income is going to be greater than your income in retirement, an RRSP is a great option. It will provide you with a tax deduction that can help reduce your current income taxes. Plus, if you’re in a lower tax bracket when you draw the money out, it can help reduce the overall amount of income tax you pay.
When to choose a TFSA
TFSAs (Tax-Free Savings Accounts) are a great retirement savings account option if you’ve maxed out your RRSP. While you won’t get to claim your contributions as a tax deduction, the investment growth is tax-sheltered and there’s no tax payable on withdrawals.
The fact that withdrawals from a TFSA are not subject to income tax also provides an advantage if you expect your income in retirement to be greater than your current income, since TFSA withdrawals do not reduce income-tested benefits like old age security benefits. Also, unlike RRSPs that you can no longer contribute to after Dec. 31 of the year in which you turn age 71 (or, in the case of a spousal RRSP, the year in which your spouse turns age 71), you can continue to contribute to a TFSA as long as you wish.
How much can you contribute?
Both RRSPs and TFSAs have contribution limits. In the case of RRSPs, you can contribute up to 18% of your previous year’s earned income up to the maximum limit set each year by the Canada Revenue Agency (CRA) ($26,230 for 2018), plus any unused contribution room carried forward from prior years.
Since 2016, the annual maximum contribution limit for TFSAs has been $5,500, however, you can also contribute for any past years in which you didn’t contribute, back to 2009 when TFSAs were first introduced. If you’ve never contributed before, you’re currently eligible to contribute a maximum of $57,500.
A great way to determine how much you need to save for retirement is to use a Retirement Savings Calculator. It can help you set an annual savings goal based on your current age, expected retirement age and desired income in retirement. Plus, it can show you the impact of contributing to different types of retirement savings accounts.
Kids are not immune to money talks and they can understand finances and the value of money at a much younger age than many parents realize. Some experts even think that a child’s views on money is set by the time they are 10 years old, some as young as five or six. How you talk about money in front of them, and how you set the example for budgeting and saving is very important to how your child will form their own opinions about money.
This means if you want to start teaching your kids to budget and save, it’s never too early. There are some steps you can take when they are still very small, and then the money lessons can grow with them as they get older. We’re going to look at a few ways to help kids understand budgeting and saving.
Here are some ways you can teach kids to budget and save
Use a Piggy Bank
For younger children, use a money jar or piggy bank. Let them see the money they are saving and have a visual of it as it's growing. Since many people do nearly all their finances digitally now, it may be difficult for a child growing up in this generation to really understand money that they never see.
Set an Example
You know those little eyes are always watching so show them how you budget and save. If you’re not already doing it, create a plan and get started. If you’re already doing it, but they just don’t see it, let them be involved in the process. Talk to them about the household budget. Explain what you’re doing when you go shopping together for groceries. Make talking about money, budgets and saving with your children an ongoing conversation in your household. This is how they learn.
Show Comparison Costs
For older kids, you can start showing comparison costs. “That video game costs as much as a new pair of sneakers”, for example. Or you can give them a commission, rather than a typical allowance. Pay them based on chores they do around the house and increase it based on the number and complexity of the chores they do. This will also teach the value of a dollar, the importance of working for and saving for what they want.
Teach them about Credit Cards
Explain how credit cards work. In addition to explaining that credit cards aren’t just “free money”, you also need to explain how easy it is to get in debt and why credit cards are dangerous. Explain what responsible use is long before they are old enough to have their own. Also, show by example.
Now that you have these ideas on how to teach kids to budget and save, you’re ready to start applying them. If some or all of them don’t work for your family or your kids, that’s okay. Just use the ones that do work, or make modifications to these suggestions so that they do work for you! If you're looking for even more tips and advice, check out Money Smart Kids by Gail Vaz-Oxlade or Smart Money, Smart Kids by Dave Ramsey. Both books are highly rated!
What are some ideas that you have successfully used with your kids? Let us know in the comments below!
The following is a Financial success testimonial from Alison! Enjoy!
This year I had a goal of depositing two full paychecks directly into my savings account on top of my regular monthly 10% savings. I was discussing my budgeting and savings plans with a credit counselor and she told me she had never known someone to be successful at what I was planning…challenge accepted! This past month I was able to successfully do this and wanted to share with other frugal minded individuals how I did it so you can too.
My employer pays me bi-weekly, which means I receive two paychecks every month except for two wonderful months of the year when I receive three paychecks. At first this provided an interesting budgeting challenge because there are a few ways to calculate a monthly salary:
1. Take the overall yearly salary and divide it by 12 months.
For example, if I made $39,000 per year and divided that by 12 months, I would get a monthly salary of $3,250. This number is valuable for certain financial situations, but unrealistic for my monthly budgeting.
2. Add up the paychecks received in a month.
In this scenario, if I made $39,000/year, 10 months of the year I would be paid $3,000 and the other two months of the year I would be paid $4,500.
When creating a budget, what was I supposed to do with these three different amounts: $3250, $3000, and $4500? I started by making a decision: I do not want to live paycheck to paycheck. I wanted to create a system that always had me ahead of the game. I also decided to live off the amount of money I am paid for those 10 months of the year involving two paychecks and was determined to put those additional two paychecks, in their entirety, directly into my savings account. Saving 10% of my regular monthly salary is great, but I wanted a better security net.
Here’s what I did:
Took my lowest monthly income number to create a realistic budget.
Used helpful tools such as "Budgeting Basics – How to Get Started" found on Simply Frugal and tracked my expenses to determine what was sustainable.
Created an overall budget that allotted every dollar of my two paychecks per month.
Determined what money I would need as cash on hand during a month and what I could leave in a separate bank account. For example, grocery money is cash I need to take out of the bank. (I love these cash envelopes to organize the cash I need each month!) Gift purchases or dental appointments, while budgeted for, are not necessarily money spent every month. I'll call these my "planning ahead expenses."
Once the budget was nailed down, I totaled all my "planning ahead expenses" and my savings, then divided those numbers in half. This is what I transfer out of my main chequing account every paycheck into sub-accounts. For example, $20 per month is budgeted for gifts, of which $10 is transferred every paycheck to a “Gifts Account.”
Leave the rest of the money needed for cash on hand or for bills directly debited out of my chequing account to build up my monthly float. My monthly float is every dollar that I will spend during the next month.
Through the month as I deposit each paycheck, I transfer out all of my "planning ahead expenses" and let the rest remain to build up for the next month. Because each paycheck that I deposit into my account is not needed for any immediate expenses, I am released from my dependence on it. When I deposit a paycheck, I have no thought of spending it because I know I do not need it for the current month. This freedom is essential because when one of those three paycheck months comes along, I treat the first two checks just like any other normal month by transferring out my “plan aheads” and building up my float. Those two checks set me up for the next month and that third one can go straight into my savings account without a second thought.
Using this system of building up a float is how I stay away from living paycheck to paycheck. I did sacrifice a bit of savings to set myself up in this way, but the benefits are worth it:
Eliminated the stress of relying on my next immediate paycheck.
An extra month’s cushion of money if I lost my job, in addition to my emergency fund.
At the end of every month, I have exactly the amount of money I need in my account to pay my bills and variable expenses for the coming month.
Sticking to this takes planning and discipline, but it is worth it when I see the big jump in savings a couple times a year! It is also worth it to know that being frugal and wise with my money allows me to do something that someone in the financial world thought wasn't possible.
Do you have a lot of debt? Want to get it paid off? You can get serious about paying off debt. In fact, you can pay as much off as you want. Starting with $1,000 in just one month. It may sound crazy, but lots of people have done this and so can you.
How to Pay off $1,000 of Debt in One Month
Only Keep $1,000 in Savings, Use the Rest
Unless you are planning a big purchase, where you will need a hefty down payment, there is no reason to leave thousands of dollars sitting in a savings account. The average savings account yields very little interest. One $1,000 creates a pretty comfortable safety net in case of emergencies. Any extra money that remains would be best spent chipping away at your debt.
Sell Expensive Items in Your Home
How many TVs do you have in your household? Two, three, or even four? Chances are that they don’t all get used, frequently, if at all. So, why hang onto all of them? Sell the ones that don’t get much use and put the profit towards one of your bills. Do you have a piano or organ collecting dust in the spare room?
The money you could make from selling it will get more use by hacking away at your bills, than if you were to keep it. Look around. We all have items sitting in our homes that are used so rarely, they are often forgotten about. If it doesn’t have much value to you, list it for sale and see what you can get out of it.
Stop Using Credit Cards
Credit cards can be useful in an emergency. However, if you are using them for everyday groceries and shopping sprees at your local mall, then you will likely be finding yourself getting deeper in the hole. Credit cards are borrowed money. Generally, borrowed money doesn’t come free. When it comes to credit card companies, they intend on you paying just the minimum amount back, so they can hit you with interest.
This is how they make their money. Just remember that each time you use your credit card, you are really paying more than the retail price of your purchases, by the time you add in the interest. Even when used in an emergency, you are still going to be paying interest. It is best to build up your savings, so that you don’t have to pay more than asking price for anything.
Make as Many Payments as You can in One Month
Credit reports don’t show how many payments you make in one month, but they do note how much you have paid, total. If you find yourself having leftover money at the end of the week, make a payment. These payments will accumulate throughout the month, bringing down your total debt faster. Doing so, will also make sure that your money goes somewhere important and doesn’t accidentally get spent on a random purchase.
Tighten Up Your Budget in Every Other Area
Cable is one of the most common cuts that people make in their budget. Many people replace cable or satellite tv with much cheaper options, such as Netflix. Eight to ten dollars for either really doesn’t sound like much, but it adds up. Every little bit counts and by getting rid of Netflix, you will also have more time to focus on more important things in your life. It’s not just TV though. What about the fast food that you may be eating frequently? Meal prepping has become quite popular.
Using these tips are great ways to pay off $1,000 of debt in one month. When you really look into your budget, you may be surprised at how much money you’re really spending.
