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5 Signs of Investment Fraud

If it sounds too good to be true, it probably is. Most of us know and swear by this saying, but when it comes to financial investments, we toss the sentiment out the window. When money is involved, we tend to throw caution to the wind and sometimes forget to use common sense.

It’s easy to fall victim to investment scams, especially those that sound legitimate and offer attractive returns. How can you tell if you’re being played? Be on the lookout for these five signs.

1. They’re Unregistered

Before making any type of investment, check the Canadian Securities Administrators’ (CSA) National Registration Search to see if they’re registered.

While you’re at it, check the CSA’s Disciplined Persons List to see if they’ve been in trouble with a securities regulator.

Anyone offering investment advice or selling securities must be registered with their provincial securities regulator.

2. You Feel Pressured to Make an Investment

According to the Meyer Wilson law firm, one of the earliest signs of investment fraud is an aggressive promoter who says the investment is only available for a limited time. It’s common for scammers to use high-pressure sales tactics to get their victims to take the bait and hand over their money.

If you’re being pressured to make a decision right away or you’re presented with a “limited time offer,” the promoter is probably not acting in your best interests.

Scammers know that they’ll be caught if you have time to look into their offer.

3. It’s a No Risk, High Reward Investment

High-risk investments have the potential to offer higher returns, and low-risk investments have the potential to offer lower returns. A low-risk, high-reward investment is rare – and there are never any guarantees.

In fact, it’s impossible to guarantee a return when it comes to investing.

If you’re being told that you’ll see tremendous returns with little-to-no risk, run the other way.

4. You’re Told to Keep it a Secret

If someone presents an investment opportunity they claim is a secret, think twice about moving forward. Scam artists know that if they ask you to keep the opportunity to yourself, your friends, family and financial advisers cannot see through the scam.

This is a common tactic used in offshore investing scams that are touted as being tax-free. Remember that you may be able to defer taxes, but you can never avoid them. And if you send your money overseas, there is no guarantee that you will get it back.

5. All of Your Friends are Doing It

Scam artists will commonly target tight-knit groups of people, like religious and ethnic groups. They work their way into the group and befriend members in order to defraud them.

The tactic plays on our instincts to trust our friends and family, and taps into our fear of missing out on an opportunity. With these types of scams, victims are often introduced to the investment through friends and family members – people they trust.

Anyone can become a victim of investment fraud. Look for these five red flags if you’re being introduced to a new investment, and always check to make sure the person or organization is registered before investing.


The Ins and Outs of Invoice Factoring for Business Financing

When most businesses need capital to finance expansion or a new product launch, they first turn to banks for help. But what if you just need to cover gaps in your cash flow and don’t want to commit to a long-term loan? That’s where alternative forms of financing, like invoice factoring come in.

How Does Invoice Factoring Work?

Also known as invoice financing, invoice factoring allows you to sell your invoices to a third party, known as a factor, at a discount.

Invoice factoring differs from a conventional loan in that you are selling your invoices rather than offering them as collateral. Consider it an advance on your invoices.

Once the invoice has been sold, the collection becomes the responsibility of the factoring company. The client or customer pays the factoring company within the deadline outlined by the terms of the invoice.

Once the invoice has been paid, you receive the remaining balance of the invoice, known as the reserve amount, minus the factoring company’s fees.

Invoice factoring allows businesses to obtain much-needed cash immediately instead of waiting 30, 60 or 90 days for clients to pay invoices. The funds can be used to cover gaps in cash flow and cover cash flow emergencies with minimal risk.

Who Uses Invoice Factoring?

Invoice factoring is used by entrepreneurs and businesses of all sizes, as it allows for flexible financing. Invoice funding can be used to generate financing and cover gaps in a business’ cash flow without having to make a big commitment.

About 50% of small business owners applied for financing in 2017, including invoice factoring. Invoice funding can be used by businesses of all sizes and in virtually every industry.

Types of Invoice Factoring

There are a few different classifications for invoice factoring as well as structures.

Invoice funding can be:

  • Selective: Allows you to choose which invoices to finance and when
  • Whole turnover: A business sells its invoices to a factoring company that advances at a percentage, typically 70-80%, and pays the rest (minus their service charge) when the invoice has been paid by the client.
  • Spot factoring: Used for cash flow emergencies. Used infrequently, but provides quick cash.

Invoice funding can also be structured in three different ways:

  • Factoring without recourse: With non-recourse invoice factoring, the liability of unpaid invoices falls on the factoring company. Business owners are not responsible for invoices that are not paid.
  • Factoring with recourse: With recourse factoring, the business is responsible for unpaid invoices.
  • Maturity factoring: With maturity factoring, the factoring company pays the invoiced amount (minus the financing fee) on the due date of the invoice.

Is Invoice Factoring a Good Idea?

Every business has its own unique needs. Invoice factoring may be a smart option for one business and not another.

Some businesses find the complexity and risks of taking out a bank loan to be more cost prohibitive than invoice factoring. Invoice funding is also a simple, straightforward way for businesses to obtain the capital they need. Many factoring companies are now offering more attractive fees than in the past, so costs aren’t as high as they once were.

Financial planning for a home renovation that doesn’t wreck your budget

Creating a budget for renovation purposes is not easy when you are trying to respect a strict budget. Going over a previously set budget could lead to serious consequences that will be felt in the long run. Most people spend more than they initially planned to on home reno plans, which is not the desired result. In most cases, unexpected problems come up with the renovation itself, but you should be capable of planning a budget for unplanned situations besides the principal renovation budget.

This way, you’ll avoid reaching bankruptcy because of an issue that suddenly occurred. In other cases, the persons who run the home renovation decide during the process that they want some additional things changed around the house, which will require an extra amount of money to invest. This last case is not reasonable because when you engage in financial planning you’ll know for sure what you need to spend money on during the renovation. Not respecting what you planned won’t help with achieving the expected outcome and all the efforts will be in vain. Here are some tips that should guide you through the process:

Saving or borrowing?

The first dilemma of all people who want to renovate their home soon is whether to start saving money for the whole process or borrowing them. This is a sensitive topic since not everyone affords to save as much money as they would need for a complete home reno. If that’s your case, applying for a loan that’s especially purposed for this kind of activity should be just fine. On the other hand, if you feel like you could save enough money to start the renovation without additional funding, then go ahead and do so. In this situation, financial planning is even more important, as you may need to restrict your monthly spending in order to put aside a considerable amount of your income to start the home reno as soon as possible. Before making any decision, is important to understand how much a house renovation would cost you and what your desired outcome is.

After you decided, start putting your budget together. Any home renovation takes a while to complete, and if you are not paying attention to all the details involved you might have the surprise to spend more than you initially planned. This is the reason why you have to invest enough time and resources in planning your time wisely.  

Absolute requirements

The next step you should deal with has to do with the requirements that are absolutely paramount for the renovation. These are usually the priorities of the whole project. One of the requirements on this list should be the triggering factor of the whole renovation plan. Redecorating a house is not the same as renovating it. Renovations involve fixing issues that have to do with the quality of the house: changing flooring, repainting, upgrading etc. This is why you should start with creating a list with the absolute requirements that you need to consider for your renovation and decide how much money you want to invest in these. The rest of the things that need to be changed are less important and the budget allocated for them can be smaller. It’s important to establish a healthy contingency. Depending on the condition of your house, the contingency can be anywhere between 10% and 25%.

The lucky part is that you can opt for a home reno rebate program and get some of your money back. When dealing with major changes such as insulating your whole house, the investment is quite big and you might need to focus on saving as much money as possible. Rebate programs will help you get back a part of the money, which can be very useful for investing in something else that could make a difference. Every single penny that you save could help you change something, but bad decisions about how much money you spend could lead to going over your budget.


There are modifications that you will want to do only because you consider them relevant to improve the ambiance of your house. These are not absolute musts, but they represent changes that you want to make. You should think about whether you afford the changes you desire or not. In most cases, these changes can be done with less money than you think, if you have the time to look in the right places. Many sales and offers happen during the year, and if you know exactly what outcome you want to obtain, you’ll find cheaper replacements for the items you want to include in your house decor. All these modifications should be done in the form of a wishlist and you need to keep yourself flexible if you can’t afford to do one of them right now. There is plenty of time to add new upgrades to your house without going over the budget you have at the moment. Only make expensive changes when you are entirely sure you won’t have to go over your budget for them.


You should also keep in mind the size of your home, which can influence both the amount of money you will spend on your renovation and the time it will require to be completed. The size of your house and the paperwork for the renovation go hand in hand as well. For making major modifications to your house’s structure, you should keep in mind that you will need to obtain permits for excavations, demolitions, framing, plumbing and so on. For insulation or interior trimming, it’s easier to obtain the necessary documents, but it all depends on the plan of your house and its size. The size also influences how many materials you’ll need for the renovation. For a bigger house, the budget that goes into materials might be double. You should carefully calculate the number of materials needed, so you don’t buy more than you will consume for the home reno.

Financial planning step by step – how to secure your future

Tough times can come when you least expect them, so being prepared and having an already developed plan in mind will prevent you from putting the life quality you have been used to at risk. Financial security is one of the things any individual should focus on from an early point, and while you might not be able to control everything, there are a few steps that will allow you to ensure the financial stability of your future. Because information is key in this department, getting some pointers on the topic will simplify things for your considerably. Here are the tips you should make sure you don’t overlook when trying to handle financial planning demands by the book:

Reduce expenses

While it’s perfectly normal for you to indulge in the occasional personal treats, whether it’s a vacation or a brand new electronic, you should start analyzing your regular expenses, and reduce them wherever is possible. The best way to do that is by determining your wants and your needs, and reassessing the money you are currently spending on your “wants”. Get rid of everything that is wasteful or unnecessary, any purchase that can easily be cut down needs to go immediately. A gym membership that you never use, a mobile plan that includes more perks than you would actually need, magazine subscription, TV channels you don’t watch are only a few examples of things you can eliminate. The amount you will be saving at the end of each month will surprise you. Also, try to avoid dining out that often, or shopping for items that you can easily live without. Whenever you are on the point of purchasing something, ask yourself this question: Do I really need this?

Set smart short-term goals

Instead of trying to take care of a large financial issue, and thus stressing over it without any clear power of solving the matter anytime soon, set short-term, manageable goals instead. Paying off your credit card debt, contributing to your insurance plan, covering a part of your mortgage – these are the types of things you should focus on rather than trying to find miracle solution on boosting the amount you have in your bank account. Also, try to establish if your saving goals as smart ones, by keeping them realistic and trackable – this is the only way you will be able to actually achieve them.

Acquire various insurance plans

Spending your excess income insurance can save you from potential future inconveniences. Whether you face an incident that leaves you unable to work, something happens to your property or your lifestyle brings you into bankruptcy, having a backup plan that you can resort to will prevent you from facing a major lifestyle downgrade. Nowadays, companies are able to offer you a wide range of insurance plans that can suit your specific needs and requirements, customization possibilities being available. If you don’t already have an advantageous policy in check, this is the time to pursue one. However, you should collaborate with an expert that can advise you on a policy plan that would fit your particular situation best. If you are worried you might be dealing with an insurer that doesn’t take your own interest into account, you can always resort to a people search tool on a lookup website to ensure yourself that you are not putting your future financial security in the hands of an unreliable person, or are not dealing with a potential scam.

When financially sound – consider taking a small risk.

While keeping all the money you manage to save in the bank might be a safe choice to make, if you want your future to be abundant in wealth, pursuing one or several investment opportunities is the wise thing to do. After you have already reached a place where you can call yourself financially sound, and there, and have a bit of money to spare, looking for ways to generate more income from the money that you have managed putting aside could mean a far brighter monetary future for you. Multiplying your current financial holding is possible if you go ahead with a smart investment. Whether it’s buying stocks, trading cryptocurrency or investing in a friend’s business, the right choices in this department could mean a wealthy and prosperous time to come. However, never invest amounts that you could afford losing, all the risk you will be taken should be wise and well-documented ones – there are many appealing investment trends circulating at the moment, you just have to discover what these are and seize the opportunities that arise.  

Become financially literate

Saving and making the number in your bank account grow doesn’t have to involve hard work, sometimes, you just need a different perspective on things. Financial investment as well as management are long-term endeavors, and that means that the most important thing is to get into the subject of personal finance a bit deeper and thus increase your odds of meeting your goals both in the present and in the long future. If you have always had problems in this department you should consider following a course on the matter, or attending a few seminars. Books and articles are also being written on the topic regularly, so you simply need to educate yourself in this department properly. Whenever you have the opportunity of acquiring some new insights on the matter, don’t hesitate to do so. Becoming financial literate can be easier than you have thought, just make this a priority as soon as possible.

Proper financial planning can prevent you from dealing with monetary challenges in the future, which may affect your quality of life. Don’t take any changes, can be prepared with more than enough time in advance by using the right strategies to your advantage. These are the steps that you should consider takin, so analyze each one with precise care, and try to make the most out of the information. Financial freedom is possible is you pursue the right choices in this direction.

Preparing Your Family Finances for an Unexpected Death

Inheritance is hard. It’s even harder when it’s unexpected. Wrapping up a person’s entire life always uncovers tangles of loose ends. The more sudden the death, the more unlikely it will be that the deceased had all of their affairs in order. What should you do to financially prepare for an unexpected death?

First, it is important to educate yourself as much as possible. Even the experts, the people you trust to take care of things at the end of life  — bankers, lawyers, morticians — don’t have all the answers. A recent viral story by the Canadian Broadcasting Corporation illustrates how unexpected problems can pop even up even with the best of advice. An Ottawa man, acting as executor of a relative’s estate, mailed $500,000 in bank drafts to relatives living in the United States on the advice of his bank. US Customs and Border Protection seized the bank drafts, citing a law against shipping more than $10,000 across the border without first notifying CBP.

US CBP recently released the money after a year of wrangling, so his story has a happy ending, but it still demonstrates how easy it can be to get caught in a bind when settling somebody’s estate, even when you have the best advice. To avoid problems like this, it is best to stay in regular touch with your close family members so that you know their financial plans in the event of a sudden disaster. If they want to sell their stocks and wire it to their nieces in Fiji, it’s best to be prepared for that so that you can anticipate the associated headaches. Talking about has the additional advantage of getting you to plan for the worst, and, let’s be honest, when was the last time you thought about what would happen to your assets if you were to pass away? It’s an unpleasant thought, but one that can save your loved ones from additional pain if the worst comes to pass.

With these money matters in mind, this is a good time to mention that there is no inheritance tax in Canada. Instead, the estate itself has to pay the taxes owed to the government. A legal representative for the estate has to file a deceased tax return. After that is done and the taxes are paid, the Canadian Revenue Agency will issue a clearance certificate, and the representative can distribute the remaining property. Assets like investments, small businesses, and real estate are furthermore taxed at different rates, as the Financial Post explains. You should have a plan for how you are going to operate the financial life of your family’s assets if they aren’t around. The more you know about what their assets and liabilities are, the better prepared you will be to care for it.

Finally, we should mention a topic that is often brought up in the event of a sudden passing: that of wrongful death. Unexpected death is sometimes the result of negligence or wrongdoing, in which case it can lead to the surviving parties initiating wrongful death claims. Wrongful death cases can include car accidents, manufacturing accidents, or the use of defective products. According to Preszler Law in Nova Scotia, one of the Halifax law firms that handling wrongful death cases, “surviving family members have a prescribed time frame from the date of death to file a wrongful death claim.” In most cases, the only people who can file a wrongful death suit are dependents and beneficiaries of the deceased. The process can be long and arduous. According to Brickell Key Court Reporting, a company providing West Palm Beach court reporters, it can include interrogations and depositions under oath, if both of the parties agree to cooperate. Most wrongful death suits are negotiated out of court, rather than going to trial. Like everything else we’ve discussed here, though, it is best to have a plan to take care of the worst before it happens, rather than hoping for a hail-Mary if you don’t have a plan.

The Three Most Common Financial Mistakes Made by Young People

NerdWallet’s CEO and Founder, Tim Chen, recently told reporters that his personal finance website sees several serious financial mistakes that young people are consistently making today. He says that if these problems are recognized and corrected early in a young person’s life they will can find peace of mind while building a secure financial future for themselves and those they may be taking care of.

Chen is quick to add that most young people are not well-grounded in financial planning, that it is rarely  spoken about at home when they are growing up or offered as a class at many institutions of higher learning. But in these uncertain times, when inflation threatens and financial institutions are being freed from many previous restrictions and guidelines that are meant to protect consumers, becoming something of a financial planner is going to become a necessary skill set for survival. Yet very few young people in the United States take the time or trouble to think deeply about their personal finances or consult with financial planning experts, especially since many of them unfortunately are just coming out of a drug detox as well. Chen suggests that young adults concentrate on these three areas of their financial lives:

How to handle a 401(k) account

Retirement funds from a job are most commonly packaged as 401(k) accounts. These accounts are an excellent way to begin saving up for retirement, and most major and middling companies now offer their employees a 401(k) account as one of the main benefits of employment. Yet because young people so often change companies in America’s so-called gig economy, they can easily neglect, or completely forget, to rollover their accounts from their old job to their new job. Chen says that doing this is not rocket science, but just common sense. New federal regulations make it relatively easy for account owners to initiate the rollover within sixty days of starting a new job. Chen notes that usually after sixty days the companies that manage a 401(k) account will begin charging up to two percent for managing fees if the account is no longer active. This can add up to a significant loss if the account is neglected for years on end. Keeping the account active at a new place of employment prevents that from happening.

Refinancing loans to reduce interest payments

Many young people are under the impression their student loans, car loans, and first mortgages are locked in at a particular interest rate that can never be changed. But this is not the case. Most young people don’t take the time to check to see if they can get a better finance rate on a loan as their credit score improves over the years, or as interest rates themselves fluctuate. Chen suggests that young people reassess their loan payments every six months to see if they can find a better rate.

Too much month at the end of the money

Many young people, says Chen, make the mistake of letting their spending control them, instead of controlling their money with a simple budget plan. It all boils down to spending less than is earned. One example is to budget for eating out — once the limit is reached each month, the discipline of a budget kicks in and no more drive through meals or takeout happens. It’s an easy skill to learn. Keep credit cards for emergencies only.


3 Tips for Balancing Your Savings and Paying Down Debt

Choosing whether to save or pay off debts can be a difficult decision. Saving money for a rainy day or retirement seems like a top priority, but will your debts linger on for years to come? 

Managing debt and maintaining savings is tailored to each individual, and different strategies can be implemented in helping to achieve your goals. Here are three tips on how to maintain a balance between paying down debt and saving.

Learn to Budget

The first step to managing your finances better is learning how to budget. Knowing your expenditure can seem like a scary thought at first, but creating a budget helps to prioritize financial obligations.

Start with your monthly income after tax, and then list your expenses. According to Certified Financial Planner, Jeff Rose, it’s best to separate your expenses into three categories.

  • Fixed: rent and debt repayments (these expenses are necessities).
  • Variable: groceries, travel expenses and utility bills (expenses that can be adjusted).
  • Optional: expenses that aren’t necessary, such as going to the movies, out to restaurants or on vacation (expenses that you can live without).

Breaking down expenses into categories helps identify optional expenses. By reducing them, you’re saving money.

Refinancing Debt

Gather information and find out the total amount owed, the interest charges, and the terms of the loans like how long you have to pay. 

Student loan refinancing can be one of the most effective ways to lower your monthly outgoings and help make your finances more manageable. Refinancing is essentially applying for a private loan at a much lower interest rate, and that could potentially save you thousands of dollars. Refinancing companies tend to be strict in terms of eligibility. Most lenders will want to see a steady stream of income, ability to manage finances, and good credit history.

Paying Down Debt First

Now that you have an idea of where you can free up some cash, it’s time to prioritize paying down larger debts first and paying the minimum towards debts with lower interest rates.

Donald Hammond, MBA, CFP, and executive vice president at Maritime Financial Group suggests:

“List your debt from the highest interest rate to the lowest. Pay off the highest-interest cards and loans first, paying more than the minimum each month. Continue to at least make minimum payments on the rest. Work your way down until everything is paid off.”

With this method, Hammond suggests to get more aggressive on larger debts with higher interest rates. For example, paying $400 towards a credit card with an interest rate of 17 percent is going to be more effective than paying down a credit card with an interest rate of 7 percent. 

You Can Do It

Saving for the future and paying down debt doesn’t have to be mutually exclusive. Establish a budget, and you’ll get a clear picture of which outgoings can be tweaked to save money. The methods listed above are a strategy to chip away at your debts, maintain savings, and bring you one step closer to becoming debt-free. 

Brushing Up on Knowledge of the Stock Market

It takes some knowledge and some practice, but if you work your way through the ups and downs of the stock market, you can make enough money to be reasonably secure about your future finances. And that’s a big deal these days, when people are scared about future solvency. So if you have enough money to put in, then learn about using the stock market as a way to help out your retirement possibilities.

If you do things like look into trading trends, install mobile apps, understand the difference between small and big trading goals, and read the daily stock market news, you should be well on your way to being able to make the decisions about where your money goes and when.

Trading Trends

Effectively making money in the stock market means paying attention to trading trends. Without knowledge of these trends, and without comprehension of what they mean to you as a buyer and seller, you’re going to the putting your money and blind to a gamble that you don’t understand. To avoid potentially catastrophic losses, you can use visualized trends to make educated guesses about the direction of various stocks.

Mobile Apps

You can install stock market apps on your mobile devices to help your cause as well. Some of these are just for seeing what the stock market is doing. Others of them give you control about what you’re doing with your stocks. And further others have even automated processes built in where under certain circumstances your applications can buy and sell shares for you to make the most money possible. This sort of automated trading can be perfect for people who know in advance what kind of trends they want to follow.

Small Vs. Big Trading Goals

When you put money in the stock market, there are two essential goals that you can follow. One is to make significant gains quickly. The other is to make sustainable goals in the long-term. You always want to balance these two concepts out when you’re putting money in taking money out. The worst thing that can happen is that you take money out too soon and lose out financially because you weren’t patient.

Reading the Daily News

When you read the daily stock market news, that adds to your knowledge base about the topic as well. There are so many things going on all around the world that affect the value of stocks, the more situational awareness you have, the better you can move your money around. It does take some time to learn the lingo, but once you have those basics down, you can talk to anyone in the industry and get some advice from them face-to-face as well.

Why More Canadians Are Retiring With Debt and What It Means

As Canadians, we live in a country where certain rights and freedoms are expected, hoped for and, some might say, taken for granted. The freedom to retire early is one many of us begin grappling with as we approach middle age. Ironically, many Canadians won’t be ready to retire until they are significantly older.

The reason? Debt.

Unfortunately, too many retired people – 34% — over 55 years old still carry consumer debt, according to Statistics Canada. In fact, a recent Equifax Canada report found that the debt load of seniors is outpacing that of their younger counterparts.

It’s not as though Canadians have always carried a heavy debt burden. In 2012, 42.5% of people over 65 still had debt, a jump of 55% when compared to seniors in 1999.

A number of economic, social and cultural factors are to blame, say experts. They point to divorce, illness and large mortgages as some of the culprits. Experts also explain that children, grandchildren and other family members may also be at fault, as they often look to their parents and grandparents to lend them hand. In fact, a 2015 survey showed that 18% of first-time home buyers are gifted their down payments thanks to relatives, typically parents.

But, children can’t shoulder all of the blame.

Low interest rates have made debt much more attractive. Further, cottages, pricey vacations, fancy cars and other expensive toys may be out of reach for the average pensioner. Paring down and cutting back in your sixties may not seem fair. After all, you’ve worked decades, aren’t you entitled to a little luxury? Your fixed retirement income simply may not support your lifestyle any more. Perhaps it’s time to downsize and sell your 3,000 square-foot home?

If selling isn’t an option, many house-rich, cash-poor seniors can look to their houses for equity. Often by the time a person retires, he or she has either paid off their mortgage or is only owing a small amount. Because house values have increased in recent years, in some markets quite significantly, tapping into a home’s equity may be something to consider.

Still, as a borrower, you need to be aware of how you are intending to pay back the loan. Is it possible to make monthly payments or would you prefer to have your estate pay off the loan after you die?

No matter how the money is borrowed, the process should be well planned out. Know what you need it for. Have a repayment plan in place. Don’t borrow more than you need – that often leads to trouble.

Dwayne Rettinger

Executive Financial Consultant

Investors Group Financial Services Inc.

Rettinger & Associates Private Wealth Management

This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Dwayne Rettinger is solely responsible for its content. For more information on this topic or any other financial matter, please contact an Investors Group Consultant.

TFSA or RRSP? Cutting through the Confusion

When it comes to choosing between a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP), there are plenty of details to keep you up at night. It’s important to look at the pros and cons of each plan, so you can develop a financial plan that’s right for you.

Your personal Financial Plan should include the income per year you will need after you retire to have the retirement lifestyle you want. Your Plan should also calculate the amount you will need to contribute to TFSA or RRSP per year to achieve this.

This will help you determine the difference between your current tax bracket and the tax bracket you will experience after you retire. It’s easy to assume your income will be less, so your tax bracket will be less, but that is not necessarily accurate. Many government income programs allow clawback provisions that put many seniors in shockingly high tax brackets!

Clawbacks are just like a tax and they can be an unexpected cost. If you look at the breakdown of the three most common clawbacks, you can see the difference between having a TFSA or an RRSP. Here’s how the three clawbacks break down:

1.      Low income (less than $20,000) – 50% clawback on GIS

2.      Middle income ($35,000-$85,000) – 15% clawback on the age credit

3.      High income ($75,000-$120,000) – 15% clawback on OAS

You can own the same investments in your TFSA as your RRSP. The main difference is that RRSP contributions and withdrawals have tax consequences, while TFSA contributions and withdrawals don’t.

Therefore, the answer to TFSA vs. RRSP is primarily based on your marginal tax bracket today compared to when you withdraw after you retire.

Rule of Thumb

RRSP is better if:

  • You will be in a lower marginal tax bracket during retirement. Example: Today you’re making $100,000 and you will receive $35,000 during retirement, you can get a tax refund of 43% on your current deposits and pay only 20% tax on your retirement withdrawals, giving you a gain on the actual value of your RRSP of 23%.

TFSA is better if:

  • You will be in a higher marginal tax bracket during retirement. Example: Today you’re making $40,000 and you will receive $20,000 during retirement, you can get a tax refund of 20% on your current deposits and pay out 70% when you make retirement withdrawals. This figure includes lost GIS from the clawback. This saves you a 50% loss on your entire RRSP.

You can choose either an RRSP or a TFSA if:

  • You will be in the same marginal tax bracket during retirement.

Other Details to Consider

If you are still unsure if an RRSP or a TFSA is right for you, answer these two important questions:

1.      How will I use my tax refund?

  • TFSA is best if you plan on spending your RRSP tax refunds. Example: if you deposit $10,000 to either a TFSA or an RRSP and then spend the refund, the TFSA will give you a higher retirement income. You need to reinvest your tax refund for RRSPs to provide you the same after-tax retirement income as TFSAs.

2.      Is the withdrawal flexibility from my TFSA a pro or a con?

  • Flexibility is good, but if you are tempted to withdraw before retirement, RRSP might be a better choice.

Sound Financial Planning

It is advisable to plan on retiring with a taxable income in the low-to-mid level tax brackets. Since the cash that you live on can vary from your taxable income, it’s important to remember that TFSA withdrawals that are non-taxable. They can give you cash income that is not taxable income. Other tax deductions must be factored in to figure out the tax bracket you will be in.

Example: Basic government pensions are $20,000. OAS is $7,000 maximum, based on your number of years residing in Canada. CPP can range from $0 to $13,000, depending on how much you’ve deposited in the past. From here, calculate your income from your RRSP and TFSA and any other investments. You can generally withdraw 3-4% (depending on how you invest) of your RRSP or TFSA each year and have it last as long as you live.

This should help you determine which plan is right for you. You can plan to be in the right tax bracket. If you currently earn $80,000 and will retire with $50,000, you may be tempted to think TFSA is best since you will get a refund of 31% today but will pay 34% at withdrawal. However, with only $5,000 per year from non-taxed TFSA, your taxable amount is down to $45,000 which puts you in the 23% category, so RRSP is actually better. In this example, you need enough TFSA for the $5,000 per year but the rest should go into RRSP.

Important Note

Don’t forget to adjust for inflation! All of your retirement calculations need to factor in inflation. It will roughly double your cost of living in 20 or 25 years.

Forgetting to include inflation is the most common error many people and advisors make in estimating retirement income and how large of a nest egg you will need.

What about non-registered investments?

In some cases, non-registered investments may actually be better. Just maximizing TFSA and RRSP is not always the best answer. If your taxable income in retirement will be in a higher tax bracket than now, non-registered investments might be a smarter choice. If using your TFSA to the maximum will still leave you in higher tax brackets, non-registered investments will give you more cash at lower tax brackets than RRSP.

Example: Currently you make $80,000 and you plan to retire with $80,000, you get a 31% refund now but will have to pay as much as 44% when you withdraw because of the OAS clawback. Upon retirement, you can only get $45,000 at lower tax bracket rates than your current tax bracket.

If you plan on getting $20,000 from government pension, then you need to plan now for enough RRSP to give you $25,000 income. The rest should be in TFSAs. However, that won’t be enough. You will still need $35,000 more. That’s when non-registered investments might pan out better for you than RRSPs.

But don’t forget the taxes. Non-registered investments are not always tax free, depending on how they are invested, and the interest is always taxable. Capital gains, however, are only half taxable. Dividends are given preferred tax rates but they also get higher clawbacks because the income for determining clawbacks is the “grossed-up dividend”, which is 38% more than the dividend.

Let’s look at a worst-case scenario for non-registered investments: a senior making $20,000 gets a dividend of $1,000 which has a clawback of $690 (50% of $1,380). In this case, there is no income tax, but you still lose $690 out of the $1,000 in reduced GIS income.

If you sell a bit of your non-registered investments each month, you can get a nice, low tax rate on the cash. My term for this is “self-made dividends.” Since your cash income is made up of your capital gains and your original investment, the tax is very low, often only 10% of your withdrawal.

Bottom Line

1.      RRSP –

  • medium working income $50-80,000 and modest retirement savings
  • high working income over $90,000

2.      TFSA –

  • low working income under $45,000
  • medium to high working income with no retirement savings
  • medium to high working income with large retirement portfolio

How much should I save?

Generally speaking, a modest savings would be $500,000-$700,000 when you retire. Factoring in inflation, this would amount to approximately $1 million to $1.4 million if you plan to retire in two decades.

Plan in Place

Now is the time to prepare a Financial Plan that will help you sift through the options while understanding all the details such as tax brackets, clawbacks and inflation. In my experience, when my retired clients have a portfolio consisting of a good RRSP or pension, a strong TFSA and some non-registered investments, we can come up with a good plan for how much they can withdraw annually while minimizing the amount of taxes that are required.

With a mix of fully-taxed, low taxed and non-taxed sources of income, we can plan effectively for you to receive the cash for the retirement you want, while remaining in lower tax brackets.

A sound financial plan that cuts through the confusion of TFSAs and RRSPs set you up for a comfortable and worry-free retirement. It will have the optimal strategies that are right for you.