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Launched in September 2014, Ask the Expert is an on-line library of information providing timely, credible and unbiased information about financial-related matters.  The goal of Ask the Expert is to provide information that ultimately improves the financial literacy of our plan members. Questions can be submitted by clicking on the “Ask a Question!” button above and answers are provided by our subject matter experts

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Questions

Tags: Benefits Budgets Debt Financial Planning Investing Life Events Retirement Saving Taxes

What is reasonable when it comes to bank fees?

Tagged: Budgets Financial Planning

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Personal bank fees can be costly depending on what services are used. Fees are charged for services such as monthly withdrawals/cheques, on-line transactions, ATM withdrawals, credit cards, and overdraft protection.

Most consumers don’t review the fees they are paying, which could result in paying more than necessary.  Take a look at what bank services you are using and the associated fees and compare these to other banks.  Some banks have a no-fee account that may meet your needs, while others have a package that covers all fees.  Be an informed consumer and check out the ideas here on how to keep bank fees to a minimum.

ATM fees run upwards of $1.50 per transaction when using your own bank and as high as $5.00 for another bank’s ATM.  By planning and budgeting your cash withdrawals and spending, you can keep these fees to a minimum.  Try using cash back at a retail store as this allows you to get cash without having to pay a withdrawal fee. You can also use your credit card for purchases; however, it’s important to have the cash available to pay the credit card bill off at the end of the month. 

Paying your bills online or via telephone banking is usually free.  But if you do have to write a cheque, then look for an account that allows a limited number each month with no fees.

Some banks may charge lower fees, or may not charge fees at all if you maintain a certain balance in your account.  If you don’t need the funds on an ongoing basis, then this can be an economical way to reduce bank fees.  It is important to understand the terms and conditions to ensure that there aren’t any surprise fees if you go below the minimum balance.

If you use a lot of bank services and frequently travel, you may want to look into bundled services that allow you to manage your fees and ensure the services and fees meet your needs and budget.

Some accounts may have special services such as bank drafts, money orders, and certified cheques, which are not used very often and can be expensive on a transaction by transaction basis.  If you need to use these services, review the fees ahead of time so that you can manage the costs.

The Financial Consumer Agency of Canada has an Account Selector Tool that allows you to compare features for different bank accounts, monthly fees, transaction fees and services.  It helps you determine what services you need and what financial institutions provide the lowest fees.  Got to http://www.fcac-acfc.gc.ca/Eng/resources/toolsCalculators/Pages/BankingT-OutilsIn.aspx.

Many consumers stay with the same bank because of the amount of work to change banks. If you find fees lower at another bank, consider discussing this with your bank to see if they will match the fees. If you do decide to change banks, then make sure you inform any organization that automatically deposits or withdraws funds from your account to ensure that all your bills are paid on a timely basis.

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What is re: Investing?

Tagged: Investing

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In late 2015, the organization behind getsmarteraboutmoney.ca (one of our favourite financial resources here at the AOMBT) launched Re: Investing, a site for specific questions and answers about investing. Similar to Get Smarter About Money, Re: Investing offers unbiased, trustworthy investment information specifically for those living in Ontario.

Recently answered questions include:

Is equity crowdfunding allowed in Ontario?

I need to learn more about investing online with a discount brokerage

Which segregated funds pose the highest risk?

If I don’t work the year before I take out my RRSPs will I pay any tax upon taking them out?

How can I determine the cost of making a mutual fund investment?

Check out Re: Investing for answers to these questions and more. If you have your own questions about financial matters, you can submit a question to the AOMBT's own roster of subject-matter experts through Ask the Expert.

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I have five children and would like to start preparing for their future, primarily their education expenses. What do you suggest as the best place for me to start?

Tagged: Life Events Saving

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The most familiar way of saving for your children’s post-secondary education is the Registered Education Savings Plan (RESP). This plan is an important component of education saving. You can learn more about the RESP program in another Ask the Expert answer here. In this article, we’ll explore other tools to save for your children’s education. These tools can also be used for most other savings goals.

You may wish to consider setting up a non-registered savings account specifically for your children’s education and contributing a monthly or yearly sum. As a non-registered account, there is no restriction on the amount you can invest, how it is invested, and how it is spent. The drawback is that the investment income earned on these funds will be taxed in the name of the person contributing the funds. Choose an investment strategy that takes into consideration your time frame and risk tolerance.

A tax-free savings account (TFSA) is another option. In a TFSA, all the growth is tax-free, but you are restricted as to how much can be invested each year. You must be at least 18 years old to set up a TFSA and the contribution limit for 2016 has been reduced to $5,500.

You may wish to consider investing in a whole life insurance policy, which allows you to accumulate excess cash in the policy that can be withdrawn to fund your children’s education. You need time to accumulate the excess cash, and once you put the money into the policy you no longer have control over or access to it, and you can only withdraw the excess cash. You should consider doing this when your children are young so there is time for the excess cash to grow. The growth is tax-deferred.

If you own a corporation (i.e. if you are an incorporated midwife), you can issue shares to your children or to a family trust. Once the children have reach 18 years of age, then you can pay dividends to them and each child can receive up to approximately $40,000 tax free. Using a discretionary family trust gives you control over the assets of your company as well as who the dividends can be paid to. This option is more expensive to set up and there are yearly costs associated with it. Issuing shares to your child also has several considerations and challenges. Both these options should be discussed with a professional advisor.

Once your child turns 15 or 16, discuss how a summer and/or part-time job can help to provide funds towards their educational expenses. Having your child involved in the savings process can help with creating a commitment to their education. You can also use these funds to teach them about budgeting and money management skills.

When your children are in their last year or two of high school, you can begin discussing and investigating the various government financial aid programs such as scholarships, bursaries, grants, and student loans. Most colleges and universities in Ontario also offer scholarships and bursaries. All are excellent sources of funding for postsecondary education. Some may be based solely on financial need, while others may be based on grades and/or community involvement and extracurricular activities. There are even private scholarships available through community organizations or corporations; it’s worth doing some research to see what may be available for your children. Scholarships Canada (www.scholarshipscanada.com) is one source of information on scholarships, bursaries and grants available to students in Canada.

Whatever strategy you choose, the most important aspects are to start early, put money aside on a regular basis using good investing strategies, and involve your children in the process when they are old enough. -JR

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What should I be looking for when comparing and assessing investment fees? Do you “get what you pay for” when it comes to these fees?

Tagged: Investing

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Fees are a hot topic since lower interest rates and volatile markets are reducing the return on investments, which means many investors are carefully reviewing the fees that they are paying.  In order to determine if you are getting good value, you first need to understand how fees are paid. The most common fee options used in investment advising and financial planning are:

  • Commissions paid based on the products sold (e.g., mutual funds)
  • Fees based on assets under management
  • Fee for service or hourly rate

In the case of commissions, investment advisors may not charge a fee for services; however, imbedded in the product they are selling are the fees paid to them. This includes the Management Expense Ratio (MER) Fees, which can range from 1% to 4%, and Trailer Fees, which are the fees paid by the mutual fund company to the investment advisor. Mutual Fund companies pay both of these fees annually. Many advisors sell mutual funds as this provides their main source of income.

Fees based on assets under management may be the best option if you have a larger portfolio, since the investment advisor charges a flat fee.  Fees range from 1% to 2.5%. As a general rule, the larger your portfolio, the lower your fee. Many times they can be negotiated downwards. As your account grows, so do their fees, so they have an incentive to grow your investments.  The flip side is that they get paid regardless of whether your investment grows or decreases. You may also want to ask if they are being paid any additional fees, such as commission or fees from mutual fund companies.

Fee for service is based on an hourly rate or set fee for the service.   A comprehensive plan takes time to develop, and the advice is independent of any investments that you may purchase. These plans can cost as little as $500 or upwards of $3,000. A good plan provides you strategy for a period of time.  These advisors are paid for their time only and do not receive any commission or other fees.  Planners do not implement your plan, but they will provide guidance for you to do so. You will need to buy and sell your own investments, which can be done through a direct trading account or through an investment account manager.

When evaluating if you are getting your money’s worth for any service and advice, know the fees upfront and what services are being provided. Evaluate the services and advice so you can monitor the value.  Ask questions and evaluate if the fee is reasonable for what you are getting. Starting in July 2016, mutual fund and investment dealers will be required to report, in writing, costs and portfolio performance each year. All fees paid are tax deductible so when evaluating the services, be sure to consider the after tax cost of the fees. 

In the end, the less you pay in fees, the more money that ends up in your pocket, so take the time to be an informed consumer.

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I know my credit score is bad. I’ve nearly finished paying everything off, now what steps can I take to make it better?

Tagged: Debt

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In Canada, credit scores range from 300 (beginner) up to 900 points (the best score). A credit report contains information on all of your credit accounts submitted to the credit bureaus including balances, limits, and payment history. Credit scores are used by lenders, insurers, landlords, employers and utility companies to assess credit worthiness. The score ranks you as follows:

  • 750 and up: very good – you will get the best interest rates on loans
  • 710-750; good – you will qualify for competitive offers
  • 650-710: fair – approval likely but not at the best rates
  • 580-650; poor – qualify for credit at subpar rates and terms
  • 580 and below: very poor – frequent denial and high rates

Before taking steps to improve your credit score, it is important to know where you stand now. You can get free credit reports once per year from Equifax and TransUnion. To be free, the request must be made by mail, fax, telephone or in person.

To improve your credit score, you can implement the following steps:

1. Use a credit card

You don't have to carry a balance, but you do need to use it. Carrying a card with you that never gets used will not help your rating.

2. Pay all bills on time

A good record of on-time payments will help boost your credit score. If you have trouble paying in a particular month, it is better to contact the lender for alternate arrangements rather than risk being sent to collections.

3. Balance the limit

Balances above 50% of the credit limits will harm your credit. It is best to aim to keep your account balances below 75% of your available credit. Lenders like to see a big gap between what is being used versus what is available.

4. Keep old cards

Having a longer history on your accounts earns you more points, so avoid closing your accounts. A good credit history is built over time.

5. Fix errors

Frequently, inaccuracies on your report are a major cause of points lost. Errors include delinquent accounts listed that do not actually belong to you (either from identity theft or just by mistake) and late payments that were not really late. Simple things such as mistakes even in address, SIN and name spelling can also cause grief.It is critical that you pull your report as least once every year and contact the credit bureaus if errors need to be fixed.

6. Limit number of inquiries

Too many inquiries into your credit rating in a short period of time may indicate financial difficulties. If you are looking for a new mortgage or car loan, rather than applying in several places, you are better to print your own credit record and ask for pre-financing based on your provided report. That way, only the final company that you decide to work with will need to actually access your credit record.

Understanding your credit score, and taking steps to improve it, can help you put the past behind you and look forward to a better financial future.

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A friend recommended a financial planner to me and I'm meeting with them next week. I feel like I have a million questions and don't know where to start. What can I expect from an initial meeting? What aspects of my financial plan should I focus on first?

Tagged: Financial Planning Investing

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A financial planner looks at all aspects of your finances and works with you to develop a roadmap based on your definition of success and your financial goals.   Before meeting with a financial planner it’s important to review your financial goals, as well as what is important to you in a business relationship, both of which will help you select the best person. 

In the initial meeting, you need to start the process of determining if the planner has the qualities necessary to help you achieve your financial goals and dreams. You should consider their qualifications, business approach, and fee structure. Most importantly, you need to consider if you can work with this person – is the chemistry of the relationship right?  Here are a few tips for you to contemplate:

 Qualifications and experience of the financial planner:

  • Review the qualifications of the financial planner. In Ontario, there are no legislated standards in place for those who offer financial planning services, but there are professional associations with which you can check if they are in good standing. Take the time to verify the planner’s credentials.
  • Knowing how long they been practicing, and the typical clients they work with will provide insight into whether they will meet your needs and goals. 
  • Do they have any specialized training?
  • Do they understand the nature of being a self-employed contractor? Have they worked with midwives or other professionals with comparable pay structures?  
  • Financial planners selling products such as mutual funds and insurance or those providing advice are regulated by provincial regulatory bodies.  Ask which bodies they are members of, and if they have ever been subject to any disciplinary action.

Financial planning approach and services:

  • The types of services vary between planners.  Do you want a plan that is all encompassing or are you focused on specific areas within your financial plan? 
  • Will the planner assist you in implementing your plan?
  • Some planners may be fee- for-service only while others may sell financial products such as insurance, mutual funds, stocks or bonds. Some planners may specialize in one area such as tax or estate planning.  You need to be clear about your needs before selecting the planner.
  • Do they work as an individual or are they part of a team or organization?  If they are associated with an organization, learn more about the organization’s mission and credo.

Compensation structure and fees:

  • Planners may be paid in various ways.  Fee- for-service is based on an hourly rate or a set fee for the service provided.  Some planners charge a percentage of the assets they are managing on your behalf.  Other planners may receive a fee for the products they are selling to you, such as insurance or mutual fund products, and so the cost of the financial plan is covered by these fees. 
  • The planner should provide you with the fee structure being charged depending on the services selected. Take time to review this information carefully.  

Documentation and evaluation

  • Ask the planner to provide you with a written agreement outlining details of services to be provided, including method of compensation and any business affiliations.

Communication skills and fit

  • As with any relationship, good communication is an important aspect to ensure your goals are met and the plan is relevant and updated as needed. Do you feel that this planner listens to you, understands your needs, and provides objective advice?

Remember though, it is ultimately your responsibility to manage your assets and important for you to remain aware of how your assets are being invested.  Choosing the right financial planner should assist you in achieving your overall financial goals and well-being. - JR

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What's the difference between a tax deduction and a tax credit?

Tagged: Taxes

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The end result of both is the same: you will owe less income tax. The simple difference between deductions and credits is:

Deductions save tax at marginal rates dependent on your income.

Credits save tax at the standard rate of 15%.

To understand the implication of this, it is useful to have a grasp of how the Canadian tax system works.

Under a marginal tax rate system, incremental increases in income are taxed at progressively higher rates.  A simplified example follows for income of $100,000, deductions of $15,000 and credits of $15,000;

Gross income $100,000
Deductions ($15,000)
Taxable income $85,000
                                 X marginal tax rates i.e. $20,000
Credits $15,000
                                X standard tax rates 20% ($3,000)
Net tax owing $17,000

 

The more income you earn, the more income tax you pay.  For 2014 in Ontario, we pay at a combined rate of 20% tax on the first $40,120 earned.  Any income above that is taxed at gradually higher rates. At an income of $85,000, the top tier is taxed at approximately 33%.

The deductions in the example cited above actually save the individual 33% of $15,000, whereas the tax credits save approximately 20%.  Credits are of the same value to all taxpayers no matter how much income is earned.

Some examples of Deductions are;

  • pension and RRSP contributions
  • split pensions
  • union dues
  • child care expenses
  • spousal support payments
  • employment expenses

Some examples of Credits are;

  • eligible dependents
  • CPP and EI premiums
  • public transit
  • children’s fitness and art amounts
  • home buyer amounts
  • tuition
  • disability
  • family tax cut

Medical expenses and donations are technically like credits but have a specialized calculation and treatment.

The province is free to either follow the federal tax credit system or introduce tax credits that are unique to Ontario.  In most cases, the amounts are very similar.

Both credits and deductions save you money, but understanding how each works may help you maximize those savings.

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What are the pros and cons of holding a non-arm's length mortgage for a rental property within my RRSP?

Tagged: Financial Planning Investing

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Most people are not aware that they can hold a mortgage in their RRSP.  It can be used to generate consistency and stability during periods of fluctuation in the equity markets, and when there are lower returns on fixed income investments.  This type of investment is considered a fixed income investment as it earns only interest income. Both arm’s-length and non-arm’s length mortgages can be held within your RRSP, but there are different rules for each.

It is important to understand the difference between arms-length and non-arm’s length. Two people are considered to be dealing at arm’s length with each other if they are independent and one does not have undue influence over the other.  However, the Income Tax Act deems some people NOT to be at arm's length with each other (non-arm's length).  This is the case with what the Income Tax Act calls "related persons": individuals connected by blood relationship, marriage or common-law partnership or adoption.  Blood relationships do not normally include aunts, uncles, nieces, nephews, or cousins for purposes of the Income Tax Act.

You must have a self-directed RRSP and a sizeable amount of money to make this type of investment worthwhile.  The fees to set up a mortgage inside of your RRSP are quite high, so to make it financial feasible you need to have a fairly large mortgage. There are also ongoing annual costs. The set-up fees range from $800 to $1,200, plus an appraisal fee on the property. Annual fees vary from $350 to $500, plus the mortgage insurance cost for a non-arm’s length mortgage. 

Any investment inside your RRSP must be a “qualified investment” as per the Income Tax Act. A non-arm’s length mortgage must be insured by Canada Mortgage and Housing Corporation (CMHC) to become a qualified investment.  The mortgage also has to be administered by an approved lender under the National Housing Act. Most major commercial banks no longer perform this service as it was not profitable for them. The rates and terms for the mortgage must follow normal commercial practices.  Mortgage payments are paid to your RRSP and are not considered contributions from you. 

The main advantage to having a mortgage inside your RRSP is the interest income.  The interest rates are usually higher than if you invested in a Bond or Guaranteed Investment Certificate (GIC). 

The disadvantages are the high fees, the dollar value required inside your RRSP, a potential lack of diversification inside your RRSP, and the probability of earning a higher return on other investments.

The time to consider this type of investment inside your RRSP is when the interest rates are high and the equity markets are extremely volatile. This is a specialized product that suits individuals with a high dollar value in their RRSP who are looking for a predictable rate of return.

In today’s economy, you can obtain a mortgage at a rate of 2.6% for a five year term. The TSX averaged annual returns of  4.7% for the last 5 years, and 6.7% over the last 20 years.

One example would be to obtain a five year closed mortgage at 2.6% with a 25 year amortization outside of your RRSP and to invest your money in quality equities inside your RRSP.

As always, you should be consulting with a qualified advisor on your individual goals and needs. - J.R.

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Are there any drawbacks in investing in those funds that change based on your retirement age?

Tagged: Investing Retirement

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These funds, called target-based or target-date funds, are designed as a simple investment strategy where the asset mix becomes more conservative as the fund approaches the maturity or end date.  The focus of target-based portfolios is usually the preservation of capital. Often these types of funds are used by investors who feel overwhelmed by the vast choices of mutual funds in the market today. Target-based funds rebalance the portfolio on a regular basis.

These types of funds have been popular in the Unites States since the mid-1990s and are now more readily available in Canada.

As with any type of investing, you need to ensure that your selections meet your needs by evaluating your personal risk tolerance and the need for growth or income in your portfolio. Drawbacks of these types of investments are outlined below.

Fees:

Fees are often 1% or higher than other similar portfolios. When assessing the returns in the markets, the TSX has averaged 7% over the past 40 years.  Due to the lower rates on interest being paid on investments, the fees charged on investments become a very important factor when reviewing the type of investment. Saving 1% every year on your investment portfolio can significantly increase your retirement savings over the long term.

Lack of Flexibility:

The funds asset mix is set and cannot be altered by the individual investor. Your needs may change over your life, and this plan does not allow for changes such as income or job changes, divorce, death, or birth of a child. If these funds are held outside of your RRSP, there are tax implications that should be assessed to determine if this is the most tax effective strategy for your income level. In addition, these funds may only address one aspect of your retirement needs – either saving for retirement or post-retirement income.

Risk Tolerance:

With any investment, you need to assess your risk tolerance, goals and financial needs.  Target-based funds do not have an industry-standard asset mix and will vary from fund to fund.  Some may be more aggressive, and the fluctuation in the market may be more risky than your risk tolerance level. Others may be more conservative and may not grow enough to meet your needs.

Complacency:

Many investors feel overwhelmed by the choices in the market and select these funds to provide security and simplicity for their portfolios and retirement. It is important, no matter what type of investments you hold, to have an annual review of your accounts and assets in order to determine if changes are necessary. Without this annual process, investors are often caught unaware that their returns and savings may not meet their retirement needs.

Target-based funds are just one of the many types of mutual funds available to you.  Regardless of your investment knowledge or time frame for investing, you should always obtain advice to ensure the investment strategy is aligned with your needs and goals. - J.R.

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What is an MER?

Tagged: Investing

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MER stands for Management Expense Ratio. A Management Expense Ratio is a benchmark used to evaluate the amount of fees paid for management and administration of mutual funds. Another term used in mutual funds is the management fee; this is different from the MER as it does not include the administrative expenses.

Management expenses include the direct costs incurred by the investment company or bank for managing the investments, including the hiring of the portfolio managers and the investment team.  The portfolio manager and investment team are responsible for the buying, selling and monitoring the investments in the mutual fund.

Administrative expenses include all the costs of operating the mutual fund such as accounting and distribution fees, legal, marketing and other administrative expenses. These fees are not related directly to the investment but are required to ensure the mutual fund is being run correctly. Included in the administration costs are the trailer fees paid to the investment advisors selling the mutual funds to you. This is like a commission, and the investment advisor receives this amount regularly regardless of how your investment is performing.

The MER percentage is calculated by totaling the management and administrative expenses and then dividing that amount by the average value of assets invested in the mutual fund. For example, if you have a mutual fund that has an average of $50 million in assets and a MER of 3%, then the total fees would be approximately $1,500.  The lower the MER, the less it costs to manage and operate the mutual fund.

Each mutual fund discloses the MER in their literature, but you do have to make sure you are comparing the same information.  Some funds may report the management fee ratio separately from the MER. For example, the management fee may be reported as 1.5% and the MER as 1.89%.  As the management fees are included in the MER, you need to subtract the management fee ratio of 1.5% from the MER, resulting in the total operating or administrative expense of .39%.

MERs are deducted from the income of the mutual fund prior to the funds being distributed, which means that mutual fund companies all present the return on investment net of expenses. In other words, if the fund shows an 8% return and the MER is 1.8%, the fund actually earned 9.8%.

Understanding MERs helps you to evaluate the effectiveness of the fund manager. Knowing how mutual funds are compensated and how expenses are covered  will help you to evaluate the investment and ensure you are getting the best returns for your hard-earned dollars.  You should review the MERs along with all management fees your advisors are charging (whether buried in the investments or paid directly) to ensure you know what your expenses are and that you are receiving the level of advice you are paying for.  It is well worth the time to review management and investment fees to ensure you are not paying too much. -J.R.

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