Wednesday, 26 April 2017

Fixing an RRSP Over-Contribution

What to do about an RRSP Over-Contribution

RRSP's can be a valuable tool when saving for retirement, not only do they give you a tax refund when you contribute, they also allow your money to grow tax-free until you withdraw it. I've talked more about the details of RRSP's both here and here

As a quick recap, every year that you work you earn contribution room. The amount works out to 18% of your annual income up to a maximum amount set by the government; for 2017 it is $26,010. If you don't use your room, it does carry-over for future use. To figure out how much room you have you can look to your most recent notice of assessment, it will be listed on there, or you can log in to your CRA online access. You might think you have tons of room available but keep in mind that if you are contributing to a pension plan through your employer that also counts towards your limit. 

CRA gives you a cushion of $2,000 (lifetime) in case you do exceed your contribution room. If you do use that amount you won't have to pay any penalties but you won't get the tax refund on that excess. It will still grow tax-free in your RRSP though. The problems arise if you go over and above that $2,000 cushion. The CRA is really punitive in their penalties, and you will be looking at a 1% charge PER MONTH, which can add up real fast. That means you will want to get on top of the issue and fix it ASAP. This is the same penalty you have to pay if you go over your TFSA contribution limit, but there isn't even a cushion for that. 

If you do find yourself in the situation of putting too much into your RRSP, then you will want to work fast. There's a chance you'll figure out your mistake yourself before CRA even knows about it. Usually, it would come up when you're doing your taxes. If not then you'll end up getting a letter in the mail from CRA informing you of your screw-up. Isn't mail from CRA the worst? Even when you're pretty sure it's just your notice of assessment there's always that moment of dread when you tear open the envelope! Whenever you do learn about the over contribution, you will want to act fast to fix it and avoid any unnecessary penalties. So how exactly do you do that? Well, you have two options...

1. Pay the Penalty
You can choose to leave the excess contribution in your RRSP and pay the penalty. This might be an option to look at if you hold an investment that has been doing really well or if the amount owing isn't that substantial. 
If you are choosing this route, you will need to fill out and submit form T1-OVP which will determine how much you owe. Try and do this within 90 days of the year after the over-contribution was made otherwise you may have to pay interest and a late-filing fee. That means that if you contributed too much in 2016, you would want to make the payment within the first 90 days of 2017. 

2. Withdraw the excess and beg for forgiveness
The second option, and likely the one you will go with, is to pull out the excess amount from your RRSP and then write a letter to CRA indicating why the over-contribution happened in the first place and provide proof that you have corrected the situation. The sooner you can make this happen the better. Now, to make things even more confusing, you have two options when it comes to withdrawing the funds.
  • Pay the tax: The easiest and fastest option is to contact your financial institution and have them pull out the amount you are over-contributed by. In this scenario, they will need to withhold tax based on the size of the withdrawal. If the withdrawal is under $5,000 it will only be 10% tax, if it's between $5,000 and $15,000 it is 20% and anything over $15,000 is 30%. If you need to withdraw more than $5,000 you can request that it be broken down into multiple transactions to keep the tax at 10%. The tax paid will count towards your next tax return, so you will get the money back at that point. 
  • Complete a T3012A to avoid the tax on the withdrawal: Your other option is to complete the tax deduction waiver form, and your financial institution will not have to withhold any tax on the withdrawal. Honestly, the form is a bit of a pain. You need to fill it out (potentially with the help of your accountant for a fee), send it to CRA for approval, receive it back and then forward it to your financial institution for processing. 
Whether you choose to pay the tax or get permission to skip it, you will need to submit proof of the withdrawal (account statement) along with form RC4288 to CRA to see if you can get the over-contribution penalty waived. Make sure you provide a detailed summary of what happened and why the over-contribution was an honest mistake. Hopefully, they will accept your explanation and see that you corrected it as soon as possible and will waive the penalty. 

Obviously, whatever option you choose, the whole process is a complete pain so avoiding an over-contribution is always the best option. Pay attention to your notice of assessment and ensure you aren't going over your contribution room at any time during the year. If you are making automatic payments to your RRSP every month (yay for you!) make sure they still make sense and don't need to be lowered because you are suddenly contributing to a pension plan or your income has changed. Most financial institutions only submit information to CRA early in January, so if you catch a mistake early enough they might be able to correct it internally, and CRA will never even know. 

What to do about an RRSP Over-Contribution

Wednesday, 19 April 2017

My Travel Bucket List

Today I'm taking a little break from talking about money and am instead going to daydream about my travel bucket list (you know, where I would go if I had ALL the money). Lately, I've been feeling plagued by the travel bug and have been dreaming up all sorts of places I would like to plan a trip to. We were in Barcelona last November, and I fell in love with the city, and it made a short trip to Europe seem completely doable. Before we went, I was a little hesitant because I didn't know if it was worth it to go all that way just for a week, but let me tell sooooo was! The one downside though was that a big trip in November meant we were stuck in Edmonton for the whole winter. And by whole winter I am including the April snowstorms that have been happening this past week...seriously, shoot me. It's halfway through April and we have more snow than at Christmas! So yes, I have a major urge to get the heck out of here.

Unfortunately for me, it's just not in the cards right now. We are going on a road-trip out to Vancouver Island in June, but that will mostly be to visit family and friends, and while that's great and all, it's not the splurgy kind of vacation I'm dreaming about! Hopefully, we'll get away to somewhere hot early next year, but I think we've got a pretty lame year of vacation on our hands for 2017.

So, if I did have the time and money to travel where would I go? Obviously, there are endless places I'd love to visit but today I'm keeping things semi-reasonable. This is more of a 'drink my way through Italy' as opposed to a 'climb Everest' kind of bucket list ;)

Prague, Czech Republic
I've heard wonderful things about Prague and how beautiful it is, so I've got it on our radar for 2020. Why 2020? Well, the World Juniors! That's a big hockey tournament for all you non-fans out there. Sounds fun right? I've never travelled anywhere specifically for a sports event but watching the juniors is a Christmas tradition (it starts on Boxing Day every year) for many Canadian families, mine included, so I think it would be an amazing experience. Nothing is set in stone right now, but I'm hoping we can make it happen. The one issue is the timing. Travelling during the holiday season is always pricier and busier, and Prague won't exactly be warm. How do you even pack for somewhere cold?!

The Maritimes
I feel like a bad Canadian for admitting that I've never travelled anywhere further East (in Canada) than Ottawa, not even Montreal. I'd say it's time to fix that and I would love to road trip around the Maritimes. I think my plan would be to rent a car in Montreal and head East all the way to St. John's. That way I could stop off at all the highlights along the way and get more out of the experience. Fall seems to be the best time to make that trip as you'd get to see all the Fall colours along the way. How do you guys feel about road trips? I think they are fun, as long as you can make frequent stops and not have crazy long driving days. Basically, I'm a child and will throw a tantrum after 8 hours of driving. 

New York, New York
I don't have much desire to travel to the States right this second because of all the ridiculousness down there, but at some point, I have to make it to New York. I spent one year living in Southern Ontario and still regret not taking a weekend trip to the Big Apple. A Broadway show, Yankees game, an overload of amazing restaurants, and endless shopping...pretty much a dream come true for this girl.

This will likely have to wait a few years before it's an attainable dream (unless I win the lottery) because of the expense and the number of vacation days I'd need. There is just so much to see! Really though, who doesn't want to go to Italy; the food, the culture, the vino {insert heart face emoji}. Sidenote: I did a jigsaw puzzle with a very similar image of Cinque Terre on it like the one above and have dreamt of going there ever since.

I think Cuba will likely be our next winter getaway. We've done Mexico a few times now but it's time for a change, and the bf's family highly recommends Cuba. When I'm looking for an all-inclusive vacation, all I really want is hot weather, a decent hotel and a beautiful beach, so I think Cuba would work just fine. It's also fairly reasonable price-wise, and you can get a direct flight from Edmonton. The one complaint people seem to consistently have about Cuba is the food, but I'm not too worried about that...maybe it will be the one vacation I don't gain weight on ;) Plus, Havana looks beautiful with its vintage charm so I would like to spend a day exploring the city.

Wednesday, 12 April 2017

Treat Hiring a Financial Advisor Like Buying a House

How to Find a Financial Advisor

Many people have a negative impression of the financial industry, and of financial advisors in particular, but how bad is the situation? There have been numerous reports circulating recently (examples can be found here and here) about people getting scammed by high fees and improper sales tactics at their financial institutions, but there are things you can do to help protect your assets. 

You might be thinking that you are better off just going it on your own, and with the uptick in robo-advisors and discount brokerages, this is easier (and cheaper) than ever before. I'm not here to dissuade you from doing that, but make sure you are willing to put in the time and do your research before building your own investment portfolio. Yes, it will be cheaper, but if you don't really know what you're doing, then it could cost you in the long run. Some people love being in control of their investments, but others want nothing to do with it, and for them, having the right person on their side can make all the difference. If you want to take the DIY approach, then it's not a bad idea to seek out a fee-for-service planner in your area that can help you with more detailed planning when you need it. This way you can manage your own investments but still receive the expert advice and planning skills of someone but only when you need it. Most fee for service planners will charge an hourly rate or have a flat rate for the preparation of a plan. 

How do you know if you have a good advisor? 
There's no perfect answer to that question, and an advisor who might be the best fit for one person might not be the best fit for another. A lot of advisors have a particular focus and have more knowledge in some areas than others. For example, if you are planning to retire in the next year your needs will be very different from someone who is just starting to invest and wants to take more risk. There's also no magic number to look for when it comes to how much an advisor should charge or how high your rate of return should be. If you are meeting your goals and are happy with the service you are receiving, then you're likely in the right place.

What you really want is to be comfortable with whoever is running your investments. This is your life savings after all, so having someone you trust in charge is essential. And by this I don't mean your closest friend or family member who happens to work in finance...don't go that route, it can get messy. The financial industry is sort of an 'old boys club' (shocking right?), and this can make finding someone to manage your finances daunting, especially for young investors and us ladies. If you feel like you are getting forced into something then let the person know you need some time to think and continue the search somewhere else. I promise there are great advisors out there, you might just need to kiss a few frogs along the way. 

If you are in need of an advisor or looking to make a change, there are some tips you should follow when seeking someone out. Think of the process like buying a house; you wouldn't walk into the first place you see and throw all your money at it right? Not a chance! You would look at lots of different options, get the place inspected, do some research on the neighbourhood, and figure out how much it's going to cost you both short and long term. Choosing who is going to be in control of your life savings is an equally important decision, and you should take it seriously.

You have options! 
Just because you do all your banking and maybe have your mortgage at your bank it does NOT mean you need to have your investments there as well, no matter how much they pressure you. If you are new to investing and are just starting to build your assets it can be a challenge to find a more experienced advisor to work with. One way around this would be to contact your parent's advisor, often they will be more willing to help because of the family connection. 

Ask your family and friends
Getting a referral from a trusted friend or family member is often the best way to find someone and many advisors will take on referrals even if they aren't technically accepting new clients. Money can be such a taboo subject to talk about but if you are working with someone you think is amazing then share that info! You can also ask other professionals you use; accountants, lawyers, mortgage brokers, etc. often have relationships with advisors and can provide a referral. 

Interview more than one person
Take the process seriously and line up meet and greets with at least a couple of different advisors before making your ultimate decision. Be prepared with some general questions but also questions that relate to your specific situation. For example: 
  • What is your investment philosophy? And can you show me a mock portfolio? 
  • What is your fee structure and how do you get paid? 
  • What do you know about my specific pension plan?
  • What demographic are most of your clients? 
Ask for references
Yes for real! A potential advisor should be able to give you the names and contact information for a few clients who you can get in touch with and see how happy they are with the service. If they're not willing to do this, then there's probably a good reason for it. Obviously, only people with positive things to say will be asked to be references, but it can still provide some degree of comfort knowing that other people out there are happy. 

What services do they provide?
How much an advisor charges isn't the only thing to focus on and going with the cheapest option might not actually give you the best value. Think (and ask) what other services might be provided. Not only can your financial advisor give you guidance on which investments are right for you, but many also offer comprehensive plans and advice on such topics as tax planning, debt repayment, pension plans, budgeting, and buying a home. A detailed financial plan can cost you hundreds of dollars so if your advisor is willing to do that at no charge and keep it updated you should factor that in when it comes to fees.

Bad advice is out there, both floating around the internet and coming from so-called professionals, so you need to prepared to deal with that. Remember, it's your money, and that means you have a certain responsibility to do your homework and make sure you are only taking advice from someone you trust and who knows what they're talking about. You wouldn't buy a house just because somebody told you it was a great deal, so don't make the same mistake with your money!

How to Find a Financial Advisor

Wednesday, 5 April 2017

That Time I Ran into a Parked Car

The Importance of an Emergency Fund

Shit happens...everyone has that mortifying story that they'd rather keep under wraps, right? Feel free to share yours in the comments (anonymously if you prefer) and make us all feel a little better about ourselves. Anyways, last month I was in a minor car accident and not only is that bad enough, but my accident involved me running into a parked car. You might be thinking, how does that even happen? Very good question, but unfortunately I don't have a good answer. I'm not actually a horrible driver, but that doesn't mean I wasn't still (at least partially) to blame. Up here in freezing cold Edmonton, we can find ourselves dealing with some pretty treacherous winter driving conditions, and this was one of those days...

I am a five-minute drive from work, practically nothing, and that fine morning I woke up to a dump of snow and the roads were complete crap (there was something like 180+ accidents just that day in Edmonton). I decided to avoid what I could of the main roads and drive through our neighbourhood, thinking it would be better with less traffic. Oh, how wrong I was! Only a couple of blocks from my house, I was in a single lane going in between parked cars on either side, my car hit a patch of ice and went sideways right into one of those parked cars. I was shocked and felt completely helpless, I've never been in a car that has just lost control like that. Luckily I was going really slow (like 20km/h...seriously!) but it's amazing how much damage can be caused even in a small accident like that. My front bumper had a chunk taken out of it, and the SUV that I hit had a cracked back bumper. It was also a Mercedes (of course) so that wracked up the bill higher than it likely would have been (i.e., my car looked way worse and yet cost less than half to fix). I promise you, there is nothing worse than having to knock on someone's door at 8:30 in the morning and telling them you just ran into their car. Thank goodness the lady was way more understanding than I likely would have been and didn't make me feel any more horrible than I already did. 

Now, time for a confession; I didn't have winter tires. I know, I know...who lives in Edmonton with our awful winters and doesn't have winter tires. This girl. In all my 15 years of driving, I have never had them and stubbornly refused to bite the bullet on the expense because I drive so little. The bf has a much better-equipped Jeep, and when the weather is bad, we use that almost exclusively. The only exception is my short drive to work. You are right, though, no excuses. 

I promise, I've learnt my lesson though and have already bought winter rims (yay for Kijiji deals) and will 100% have winter tires before the snow flies in the Fall. Any recommendations? Costco seems to be the way to go, but I've heard horror stories about trying to get in to get them put on or taken off. We are also in the early stages of becoming a one-vehicle family, and it would be the winter-hardy Jeep that got the boot. That would mean my car would need to be decked out as it would get significantly more use. More on that in a later post :) 

Back to my accident, I knew I didn't want to cover the cost of the accident out of pocket and my auto insurance included accident forgiveness so putting through a claim would not raise my rates. I had made it this long without having to put in an insurance claim so here's hoping I can make it another 15 years with no issues! I did, however, have a $1,000 deductible on my coverage, so I had to come up with that money. Here's where my 'Shit Happens' (aka emergency fund) came into play. Not having to reach for my credit card (ok I did, but only for the points) to cover the cost of the accident was a huge relief and made a terrible situation a little less stressful. Going through insurance also made things easier from a logistical perspective. After just one quick phone call to them, they had me booked into a body shop to get the repair dealt with and set-up with a rental car, so I wasn't left car-less. It took a couple of weeks to get my car back, that's what 180+ accidents in a city will do, but I didn't have to worry about not having wheels. 

I can't even imagine how much more stressed out I would have been if I didn't have easy access to that $1,000. Even having to run that balance on my credit card for a few months would have meant additional costs to cover the interest charges. It is shocking to me how many people are in this situation, though. The Federal Reserve Bank of New York recently released the results of a study they completed in February and the most startling stat to me was that 32.8% of Americans couldn't come up with $2,000 if an unexpected expense arose. I realise this is based on data from the US, but I doubt Canadians are doing that much better. Consumer debt is extremely high on both sides of the border, and this is a big reason why people aren't able to save and prepare for the worst. It also explains my constant need to nag you about paying off debt and building your emergency fund ;)

The Importance of an Emergency Fund