Investing post mortgage?

[HardWorker]

I just made the final lump payment I'm allowed on my mortgage. That means I have about 5 months left of minimum payments, unless I decide to pay the penalty and end the mortgage. Up to now, my strategy was 100% equity (inside RRSPs), and I treated my mortgage as the bond/fixed-income portion. I know some don't agree with that strategy, and I have taken a hit on equities, but overall I'm very happy with my decision. Concentrating on my mortgage (without skimping on life) was rewarding.

Wife and I haven't started TFSAs yet, and I haven't paid much attention to them, but now I think we should. I'm planning on treating the mortgage payments as TFSA payments as soon as the mortgage is done. I'm not sure what to hold in the accounts yet. One thought is to be conservative and save the money for a possible housing crash or rainy day money, but if we lose our jobs, then the money I have in RRSPs would be better to use up because of the tax advantage, correct?

One thing I know for sure is to start an RESP for my daughter, after that I'm undecided. Your thoughts? Opinions? Advice please.

Cheers...........and btw, happy new year to everyone.

[StuBee]

One thought is to be conservative and save the money for a possible housing crash or rainy day money, but if we lose our jobs, then the money I have in RRSPs would be better to use up because of the tax advantage, correct?

Be careful with that statement. It does not take too many future years of "tax-free" growth within the RRSP to overcome the advantage of an immediate "tax-advantaged" withdrawal.

It would probably be best to set up some sort of "rainy-day" fund. However, with current interest rates being so low, this emergency fund could be in the form of an untouched margin within a bank account...

Just some thoughts...

[flywaysuzy]

It's a great feeling to get rid of the mortgage! Real estate (and a place to live!) can be a great part of a portfolio. I'm missing the part why you would count this as a fixed income portion of a portfolio. Equities are great if you are indifferent to the ups and downs of a market and a long time from needing to access the money. My late husband was a little more conservative in his choice of investments than me so his RRSP contained the bonds.

I also like to keep a reasonable amount of money that could be tapped into in case of emergency instead of thinking of RRSPs as emergency funds. If you or your wife got laid off, you would qualify for EI benifits, right? Without a mortgage, you wouldn't need as much per month as you have been spending. If you were laid off you could stop contributing to an rrsp, resp etc. until you found other work. As long as both spouses don't work at the same place, it's probably unlikely you would both be laid off at once.

[HardWorker]

Thanks for the responses so far.

Stubee, I agree with you. But I've always kept a very low amount in cash, and thought worst case scenario I'll use up the RRSPs (provided they don't take a massive hit). I've always had an unused LOC, and I guess I could setup a HELOC (but its gonna cost me setup fees).

Suzy, instead of contributing into a "conservative" account, I put that money against the mortgage (extra payments). I didn't buy the house to flip or speculate, and its ROI was fairly predictable, so the need for a fixed-income/bond portion in my portfolio seemed unnecessary. My equities are all low cost index funds, so theres a little "conservative" in there as well. Our living costs are low enough (and can be made lower) in case of job losses, and you're correct in that EI will be enough to cover us, then a HELOC or RRSP account.

I know its a very good idea to have cash savings, but I didn't feel it was necessary for me or the wife. Now with a little bundle of joy counting on us, I need to reassure myself I'm doing whats right for the whole family. I'm thinking the RESP, and TFSAs should be where I start. Maybe a little conservative inside the TFSA until a decent amount is built up?

[adrian2]

Suzy, instead of contributing into a "conservative" account, I put that money against the mortgage (extra payments). I didn't buy the house to flip or speculate, and its ROI was fairly predictable, so the need for a fixed-income/bond portion in my portfolio seemed unnecessary.

Another way of stating the above is that having a mortgage is "negative fixed income". IMHO, one is wasting money, and enriching the banks by this, having a mortgage and a typical balanced investment portfolio, including fixed income.

Put it another way, for the purposes of this discussion, a mortgage is close enough to a margin loan. One should not pay margin of 3%+ and buy investments guaranteed to pay no more than 1 or 2%.

[BRIAN5000]

I need to reassure myself I'm doing whats right for the whole family.

Wills, POA's, Guardian, Estate plan all taken care of?

If you get hit by a dump truck crossing the street today will the wife be able to carry-on and pay bills etc.. Having some amount maybe 10- $20,000 in a account which could be accessed on eithers death might be a consideration.

[HardWorker]

Wills, POA's, Guardian, Estate plan all taken care of?

Yes to all but Estate. What's needed there? And I'm thinking the LOC would be enough to carry my wife through for a brief period, but it'll probably be wise to keep a little extra in a chequing account.

To expand a little further, my wife has no RRSPs or a pension like I do. And I've tried a few different tax calculators, and it seems more tax efficient for me to earn 85-90k while she keeps hers at 17 or less. Her working only part time, after mat leave, seems to be the way to go, unless I missed something? I guess the mat leave payments for the second child will be reduced, but still worth it IMO.

[StuBee]

Now for a few more thoughts. First of all, if you already have a LOC and if you would be eligible for EI (I never think about this because I will never be eligible for EI...) then, IMO, you have already taken care of your "emergency fund". For the sake of discussion, I will presume the following: #1 You each have 4 years multiplied by 5,000$ of unused TFSA room (i.e. 20K$ each). #2 Your wife will not return to full time work in the foreseeable future. #3 your MTR right now is about 40% to 45% and your MTR at retirement (because of pension) will be about 35% to 40%. #4 That you will retire when you are eligible for your pension. #5 That you (but not your wife) have maximized your RRSP contributions. If any of these statements are wrong, it could adversely affect the following...

The question that I will attempt to respond to is "Where should the money be put? (i.e. which account type)"

The possibilities are as follows: #1 non-registered account. #2 TFSA. #3 RRSP and #4 RESP.

Obviously, as long as you have any TFSA room, it would be non-sensical to open a non-registered account (The only exception here would be if one of you had a negative MTR... highly unlikely unless that person has substantial dividend income relative to total income)

Let us now compare TFSA with RRSP. For your wife, TFSA is the way to go since "MTR in" will probably (from a long term point of view) be inferior to "MTR out". In your case, your MTR differential between "MTR in" and "MTR out" could be as low as 5%. Therefore, in your case I would suggest that a TFSA is a better vehicle than a RRSP. However, I would start by filling up your wife's TFSA before your own.

Now, I have left the best for last: #4 RESP.

In a sense, a RESP is functionally identical to a TFSA: "after-tax" dollars are put in, "tax-free" growth and no tax on withdrawals (since it is taxed in the child's income tax return... and presumably they will pay no tax). Furthermore, each contribution (up to a certain limit) will be increased by at least 20% by government grants (30% here in PQ). You can argue that all grants and gains are not for you to spend (but rather your child). To that I would answer that whatever sums that you do not have to spend on your child's education you can keep for your own retirement. Therefore, indirectly, the grants and gains are financing your retirement.

So, in conclusion: Maximize the RESP (only 2,5K$ per year) then your wife's TFSA (up to 20K$ and then 5K$ per year... It will almost certainly be 5.5K$ per year as of 2013), Then your own TFSA and then your own RRSP (i.e. future contribution room) then non-registered accounts...

I hope that I have not confused you. This is all just my opinion. Do your own due diligence. I do not work in the financial industry...

StuBee

NB. I invite all other FWFers to correct me if I have in any way been misleading (or wrong) in what I have just written.

[BRIAN5000]

Then your own TFSA and then your own RRSP

Then your TFSA, then her RRSP then your RRSP ? Try to save her money and spend yours so your income will be about even.

[HardWorker]

Thanks for taking the time out for that response StuBee. Your assumptions are correct, except for #5. I'll have to double check the amount, but I definitely have room in my RRSP. I always tried to bring my income down one bracket, but not over fund my RRSPs. And a few years ago I didn't make as much.

I'm curious why my wife's TFSA then mine? And is there anything else we can do to lower our taxes/income split since we have such a large gap?

[StuBee]

I'm curious why my wife's TFSA then mine? And is there anything else we can do to lower our taxes/income split since we have such a large gap?

That was in the paragraph where I was comparing TFSA's to RRSP's. I was wrong to repeat that exact recommendation a few paragraphs later (i.e. outside of the original context). It does not matter where tax-free assets are (at least from a tax perspective). However, I would argue that the more evenly you spread your assets between the two spouses, the better it is... We cannot know how the rules may be changed in future years. Since you are the higher earner, use whatever legal way you have at your disposal to move assets into your wife's name. For instance, do not spend her income, invest it instead (in her name). That would be why I would tend to favor her TFSA over your own. (obviously, if she has more assets than you, I would reverse this opinion).

In your personal case, RRSP vs TFSA is almost a toss-up. There is a potential (albeit small) MTR differential which favors the RRSP as your preferred investment vehicle. However, RRSP withdrawals are included in income (as you are well aware) and therefore affect income dependent entitlements (most especially OAS). TFSA withdrawals do not. But, if you retire early (before DB) the MTR differential could be much higher and withdrawals will have no effect on entitlements (either because it will be before you are entitled to them or your overall income will be below key thresholds)... I thought I would throw this in just to confuse you a bit more since looking at it this way, your own RRSP would be better than both your own and your wife's TFSA.

Concerning the "income gap" you are in a situation similar to my own. As I (and others) have said, invest all of her earnings. Pay her a salary if you can. (To do this, you must be self-employed). Other than that, I cannot think of anything else... However, I am not a tax expert either.

Good luck!

StuBee

[HardWorker]

A fair bit to think about, thanks StuBee.

Now what about the present tax situation? I have a decent amount of leeway on how much extra work I want to do, and hence earn. Both of my wife's part time employers would really like her back, but she only wants to go back to one, which she has a little flexibility on shifts. With the calculators I used, the combined tax burden was better if I worked more, and her less (under 17k). I know you don't have all the details infront of you, but is keeping her bellow a certain tax bracket better for us both? Or did I miss something? Obviously it's much better not to have daycare and commuting costs for her, and more importantly we take care for our kid.

And one last question, my wife turns 30 in April, so I teased her and said I'll make the final mortgage payment on her birthday. That way she'll be the only 30 year old mortgage free homeowner amongst her friends. She smiled and said sure. Who wants to start a pool on the outcome if thats the only gift I get her

[StuBee]

With the calculators I used, the combined tax burden was better if I worked more, and her less (under 17k). I know you don't have all the details in front of you, but is keeping her below a certain tax bracket better for us both? Or did I miss something?

I am not sure who is missing something Our income tax system (in Canada... and southern Ontario) is progressive meaning that the higher the income the higher the marginal tax rate. Another way of looking at your statement would be: If we had the choice as to who should earn another 1000$, should it be the higher earner (yourself) or the lower owner (your wife)? I am looking at this from a purely tax perspective (personal reasons could trump tax reasons...).

If your MTR is around 45% and hers is around 30%, I have a great deal of difficulty understanding the "tax calculators" outcome. It ought to be better if she earns the next 1000$ rather than you. Is your additional 1K$ tax advantaged (and hers is not)? Does an additional 1K$ in her hands cause her to lose an entitlement (I cannot imagine what...)? Generally, "aberrations" in the tax code tend to occur in the 30K$ to 40K$ range in your age group (and also tend to be dependent on "family income") so that I doubt that these sudden very high "effective MTR's" apply to you (I also doubt that "on-line tax calculators" consider them...).

So... Either you are missing something or I am missing something... I am curious to know who is missing something . Perhaps something exceptional applies to your situation.

StuBee

[newguy]

I am not sure who is missing something Our income tax system (in Canada... and southern Ontario) is progressive meaning that the higher the income the higher the marginal tax rate.

There's kids involved and the marginal rate is very high until the clawbacks of cctb and gst etc. have been taken into account. I haven't checked the specifics of HW's situation so not sure if that is it but I would use a package like ufile and do a few different scenarios and see what the difference is.

newguy

[StuBee]

I am not sure who is missing something Our income tax system (in Canada... and southern Ontario) is progressive meaning that the higher the income the higher the marginal tax rate.

There's kids involved and the marginal rate is very high until the clawbacks of cctb and gst etc. have been taken into account. I haven't checked the specifics of HW's situation so not sure if that is it but I would use a package like ufile and do a few different scenarios and see what the difference is.

newguy

I fully agree. However, these clawback's are they not all dependent on "family income" (i.e. not individual income)?. The OP appears to be discussing how income would best be distributed between the spouses. (i.e. Is it best that she earn more and he less? versus Should he earn more and her less?). So, if he earns more (and he ought to be taxed more) or she earns more (and she ought to be taxed less), total "family" income will not change. Since the entitlements that you are referring to are family income dependent, they will not be affected by his discussion.

[newguy]

I fully agree. However, these clawback's are they not all dependent on "family income" (i.e. not individual income)?.

That's right. I was just adding that and wanted to mention the ufile type programs are better than online calculators.

The OP appears to be discussing how income would best be distributed between the spouses.

I didn't see spousal RRSPs mentioned. You can also loan her money to invest but that has to be done outside registered accounts. You can just give her money for TFSAs. You can stay at home more and let her work more if possible. Most of this will only really help in evening out the investment sizes, they're talking in another thread about how the government only allows income splitting for old people because they vote more often. So you can try and start a movement to allow young people to income split.

newguy

[HardWorker]

I know about our progressive tax system and the MTRs, but I've always read that it's better for a couple to be make equal amounts, instead of being overly skewed to one side. It seems in our case theres an advantage to my wife making so little. I fully exepected a $1,000 taxed in her hands would be better, but it doesn't seem that way, and was wondering what I missed.

Newguy, the calculator at TaxTips is detailed enough, but the UFile suggestion is good. I don't think the 2011 version is out yet, but I'll make up a mock profile online and play with the numbers.

[StuBee]

The OP appears to be discussing how income would best be distributed between the spouses.

Newguy,

I should have been more specific: The OP appears to be discussing how employment income would best be distributed between the spouses.

I didn't see spousal RRSPs mentioned.

Yikes, I totally forgot about the "Spousal RRSP"!! Sorry Hardworker...

For the Spousal RRSP, you are doing the contributing and the "MTR in" is your MTR. At withdrawal time, the "MTR out" is her MTR. It is quite likely that her "MTR out" will be less than your "MTR out". From this perspective, a "spousal RRSP" trumps both TFSA's (yours and your wife's) and your RRSP and your wife's RRSP. In addition, it is an excellent tool for the transfer of wealth (as Newguy very clearly pointed out) from the higher earner to the lower earner. Only you can estimate how different your "MTR outs" may eventually be and only you can know just how significant your future RRSP contributions may be (i.e. they are reduced by an amount equivalent to your and your employer's contributions to your DB plan).

[StuBee]

I know about our progressive tax system and the MTRs, but I've always read that it's better for a couple to be make equal amounts, instead of being overly skewed to one side. It seems in our case theres an advantage to my wife making so little. I fully exepected a $1,000 taxed in her hands would be better, but it doesn't seem that way, and was wondering what I missed.

Newguy, the calculator at TaxTips is detailed enough, but the UFile suggestion is good. I don't think the 2011 version is out yet, but I'll make up a mock profile online and play with the numbers.

It would be to your advantage to know exactly why the "Tax Tips" calculator has given you the unexpected result. Intuitively, I am inclined to disagree with what the calculator appears to be saying... You need to see all of the results line by line to get a good grasp as to why "such and such" a result. ISTM that detailed tax software (or if you want to be masochistic, a homemade spreadsheet such as Excel...) will provide ample detail...

Now, I will leave before I make anymore blunders

StuBee

[Peculiar_Investor]

I don't think the 2011 version is out yet, but I'll make up a mock profile online and play with the numbers.

See Financial Webring Forum • View topic - UFile 2011. I purchased and downloaded it this week for $19.99.

[newguy]

Newguy, the calculator at TaxTips is detailed enough, but the UFile suggestion is good. I don't think the 2011 version is out yet, but I'll make up a mock profile online and play with the numbers.

I just downloaded it a week ago.

newguy

[HardWorker]

StuBee, I knew about spousal RRSPs, and I assumed thats what you meant by topping up her RRSPs first. I'm not totally sold on maximizing RRSPs for either of us. But starting from 2012, our income gap is much bigger so I might change my thinking on spousal RRSPs.

Thanks NG and PI, I didn't know UFile comes out this early. I usually go to FutureShop in February and buy it. I've reduced our withholding at source, so we always owe the tax man, and I don't file until April.

[StuBee]

Ah, HardWorker, you give me more credit than I deserve... I rather consistently discouraged you from filling up your wife`s "personal RRSP" (which I continue to discourage) and completely neglected (up until Newguy woke me up) the "spousal RRSP". I personally ceased almost 10 years ago contributing to my own RRSP in favour of a spousal plan. (I earn (self employed) more than 100K$ per year and my wife less than 15K$...).

[newguy]

(I earn (self employed) more than 100K$ per year and my wife less than 15K$...).

Can't you have a professional corp and hire your wife or at least pay her dividends. I was under the impression most docs did something like that.

newguy

ps Just interested, not to take it thread too far OT.

[HardWorker]

Ah, HardWorker, you give me more credit than I deserve... I rather consistently discouraged you from filling up your wife`s "personal RRSP" (which I continue to discourage) and completely neglected (up until Newguy woke me up) the "spousal RRSP". I personally ceased almost 10 years ago contributing to my own RRSP in favour of a spousal plan. (I earn (self employed) more than 100K$ per year and my wife less than 15K$...).

Wow, you're right. Somehow in the back of my head, on the discussion of her RRSPs, I just automatically pictured spousal RRSPs. I pictured it (literally) because I know the exact form I need to fill out at work. To this point I haven't made any spousal contributions because my company doesn't match it, and I used the extra money against the mortgage instead of her RRSPs. That'll change obviously.

So StuBee, are you in the same situation as I? Wife works only part time because of the kid(s)? Is it better that you're self employed? Control your hours to help at home more? For us having my wife stay at home is a very comforting thought, and the apparent tax advantage so far is a bonus. The one down side I see, is that for the next period of mat leave, she'll earn less because her income was considerably less than normal, but that a price we both will gladly pay for the sake of the kids.