I have five children and would like to start preparing for their future, primarily their education e


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

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investing in a whole life insurance policy, which allows you to accumulate excess cash in the policy that can be withdrawn to fund your children’s education.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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I’m at least 20 years away from retirement. Although I know my goal is long-term growth, I can’t help but panic when I see any dips in my investments. How often should I be reviewing my investments?

Tagged: Investing Retirement Saving

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This is a great question!  Reviewing your investments too often can cause stress and anxiety depending on what is happening in the market place. Your focus should not be just the returns your investments are making, but also your net worth and cash flow. These 3 key areas should be reviewed annually.

What is net worth?  Net worth is calculated by taking all the assets you own (e.g. house, cars, RRSPs, investments, etc.) and subtracting your liabilities (e.g. mortgages, student or car loans, credit card debts, etc.). The goal is to have your overall net worth grow each year. Net worth is a good indicator of your overall financial position.   You could have a great return on your investments of 10% or higher but if your overall net worth is declining, then it’s an indication that you may be living outside of your means.    

What is cash flow? Cash flow looks at all of your income and expenses on a monthly basis to ensure that inflows are greater than the outflows. In other words, is your total income higher than your total expenses? If not, then it doesn’t matter how good the return on your investment is because your overall net worth will be declining. This will impact your lifestyle now and at retirement.  There are lots of free cash flow products available, even mobile apps for your smartphone, to help you review and monitor your cash flow as well as set up a budget.

Having a well-balanced portfolio is key to reducing anxiety due to market fluctuations.  Reviewing your investments along with your net worth and cash flow should be done at least annually.  You may also want to review them before making any major changes in your life (such as starting a new job or moving). When reviewing these 3 areas of focus, it is also important to define what you consider a balanced lifestyle to be.  Is it being able to have an annual vacation with the family or having a larger home?  It is important to enjoy your journey through life and not just focus on how your investments are doing!

Setting a goal helps you to review your net worth, cash flow and investment objectively and, if done annually, allows you adjust your goals based on the overall performance and not what is happening in the markets.  Here are some retirement strategies that can help you achieve your goals over the long term and still have a great night sleep.

  • Pay yourself first:  take the top 10% of your earnings and invest those funds annually. 
  • Set a budget:  determine how you can live comfortably on 90% of your income and still enjoy the fruits of your hard work. 
  • Enjoy the journey:  plan an annual vacation, make a special visit to family or friends or a monthly dinner out or spa treatment – choose something important to you.
  • Review your net worth, cash flow and investments annually:  make it a comprehensive financial review, not just a review of your investments.
  • Be real: set realistic goals every year but live passionately and dream big!
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I have RRSPs invested with more than one company. Is it better to consolidate these investments with one company or does it matter?

Tagged: Investing Retirement Saving

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There are no rules to limit how many investment accounts you manage; you are allowed to have as many different RRSP accounts as you wish.  However, it is not advantageous to have multiple accounts. Remember that your RRSP contribution limit is set by Canada Revenue Agency based on your earned income from the prior year, regardless of how the contributions are divided among different accounts.

The benefits of consolidating RRSP accounts are as follows;

  1. Simplification: The primary benefit to consolidating is the ability to track total performance and returns in one place with one set of reports to read, understand and follow.
  2. Economies of Scale: In general, the more money you have in one place, the less you will pay as a percentage of the trade.For example, a stock trade of $50,000 costs less as a % than a stock trade of $5,000.Also, mutual funds tend to have preferred pricing if a client holds a large amount of one product.
  3. Annual Fees: Administrative account fees can be waived for clients with larger portfolios.  If you have 3 different RRSPs at three different institutions, it is likely you are paying an annual administration charge at all of them (i.e. $150 x 3 = $450 vs having one RRSP fee at $150).
  4. Diversification: It is commonly understood that your total portfolio of RRSP investments needs to be balanced to your risk tolerance, time frame and economic expectations.A financial advisor can assist you with achieving this balance.“Diversification” is not achieved by having RRSPs with more than one company.“Diversification” in investing refers to holding a range of asset classes in a portfolio (stocks, bonds, mutual funds).This needs to be evaluated across your entire holdings.You could have significant exposure to market fluctuation if multiple RRSPs with different companies are invested in similar stocks.It’s extremely difficult for a financial advisor to manage a diversified portfolio if they aren’t managing all of the RRSP assets.
  5. Planning: It is more difficult for a financial advisor to project expected retirement income if they only have regular access to parts of the portfolio. Also, account beneficiaries named on RRSP documents need to be consistent with will details and legacy wishes for effective estate planning.Multiple holdings simply multiply the chance of errors.

Sometimes there are limitations to what can be transferred from one company to another.  Before giving transfer instructions, it is always advisable to consult a financial advisor.  If you have an advisor who is fully licensed for insurance, stock and mutual funds, then they can usually transfer the products “in kind”, which means you are just changing the name on the statement; the product remains intact. 

Keep in mind that the benefits of consolidating increase as the dollar size of your portfolio increases. - SM

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I want to save money for my children’s education. I understand how RRSPs work, are RESPs similar? What do I need to do to set one up?

Tagged: Life Events Saving Taxes

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A Registered Education Savings Plan (RESP) is a contract between an individual (or the subscriber) and a person or organization (the promoter, such as a bank) for the purpose of saving for the education of one or more beneficiary (the future student).  The plan is registered, meaning that during the period of saving, the income earned within the plan is able to grow tax free.  Limits exist to establish how much you can contribute to the plan for each beneficiary.

Here is an overview of how an RESP generally works:

  1. A subscriber enters into an RESP contract with the promoter and names one or more beneficiaries under the plan.
  2. The subscriber makes contributions to the RESP. Government grants (if applicable) will be paid to the RESP. These grants can be the Canada Education Savings Grant (CESG), Canada Learning Bond (CLB), or any designated provincial education savings program.  The subscriber cannot deduct their contributions from their income on their tax return. 
  3. The promoter of the RESP administers all amounts paid into the RESP. As long as the income stays in the RESP, it is not taxable. The promoter also makes sure payments from the RESP are made according to the terms of the RESP.
  4. When the payments are ultimately made to help finance the student’s post-secondary education, they are made as follows:
    • A return of the subscriber's contributions tax-free.
    • Accumulated income (known as educational assistance payments or EAPs), which is required to be included in the student’s income in the year in which it is received.

A Registered Retirement Savings Plan (RRSP) is a plan that is established to help people save for their retirement.  The plan is registered with the government, and allows you, or your spouse or common-law partner to contribute to it.  RRSP contributions can be used to reduce your taxable income.  Any income earned in the RRSP is usually exempt from tax as long as the funds remain in the plan.  However, when you withdraw the funds during retirement, you have to pay tax on the entire amount withdrawn from the plan.

When we have limited resources, it is always difficult to decide where to put those extra dollars – do we save for retirement, or save for our children’s education?  My recommendation is usually to do both if you can.   I am an advocate of paying yourself first, so I believe that you should just make it part of your monthly plan and budget to contribute to both your RRSP and RESP, saving for both the future of your children and your future retirement.   It is always easy to find other places where you can spend money, but it is so very important to save for the future.

The chart below outlines the similarities and differences between an RRSP and an RESP:

  RRSP (Registered Retirement Savings Plan) RESP (Registered Education Savings Plan)

Annually you can contribute up to 18% of your earned income, plus any unused contributions carried forward

Maximum annual limit for 2014: $24,270

No annual limit

Lifetime contribution is maximum $50,000
Contributor Contributor Subscriber
Beneficiary Contributor or the annuitant (which can be your spouse) Must be a Canadian resident at the time of the contribution, and have a Social Insurance Number.  This would be the student – can be a specific student or a family plan if you have more than one child.
Withdrawals Full taxed

Consists of:

Educational Assistance payments (EAPs) – taxable

Accumulated income payments (AIP) – taxable

Refund of contributions to the subscriber or beneficiary – not taxable
Government incentives Deduction in the year of contributions (reduces your taxable income thereby reducing the income tax you owe)

No deductions when you make contributions.

Canada Education Savings Grant (CESG) = 20% of your annual contributions to a maximum of $500, lifetime limit of $7,200

Canada Learning Bond – additional benefits if you receive the National Child Benefit Supplement.
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What is a Registered Disability Savings Plan?

Tagged: Benefits Saving

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A registered disability savings plan (RDSP) is a long-term savings plan intended to help parents and others save for the financial security of a person who is eligible for the disability tax credit.  The plan first became available to Canadians in 2008.

How it works:

Eligibility – the person who is eligible for the disability tax credit must be a Canadian resident, under 60 years of age and have a social insurance number. 

Establishment – A parent or legal representative may establish the plan on behalf of a minor. A disabled adult with mental capacity must establish the plan themselves.  A qualifying person can only establish and administer an RDSP on behalf of the beneficiary if they lack the mental capacity to do so themselves.

Tax Deferral – Income earned in the fund grows on a tax-deferred basis (similar to RESPs) so the tax on income earned is charged when the funds are withdrawn. The initial contributions to the RDSP are not tax-deductible, and as such are not included in income when paid out of an RDSP.

Contribution Limit – Contributions can be up to a lifetime limit of $200,000 but there is no annual contribution limit. Contributions can be made by anyone with the written permission of the plan holder as long as they are made before the end of the year the beneficiary turns 59.

Benefits – The government of Canada assists people to save in two ways;

  1. The Canada Disability Savings Grant, which matches personal contributions. The maximum grant of $3,500 annually is available to a maximum of $70,000 per plan.  For the first $500 contributed annually to the RDSP, the government will deposit $1,500.  For the next $1,000, the government will deposit $2,000. To qualify for the maximum match, the beneficiary must file personal tax returns and their family income (if over 19, theirs and their spouse’s) must be under the income threshold ($87,123 in 2013)
  2. The Canada Disability Savings Bond provides funding for people with low and moderate income levels, updated annually for inflation.  For 2013, if the beneficiary’s family income is less than $25,356, the government deposits $1,000 each year to the RDSP to a lifetime maximum of $20,000.  If income is between $25,356 and $43,561, then the government deposits a portion of the $1,000 into the RDSP.

Withdrawals – Payments to the beneficiary must begin when the beneficiary turns 60.  RDSP income will not affect entitlement to Old Age Security and GST credits.  In the event of the RDSP beneficiary’s death, the plan’s value is paid out to the beneficiary’s estate. If the RDSP has received government funding (through the Canada Disability Savings Grant and/or Canada Disability Savings Bond), some or all of the government funding may need to be paid back if withdrawals (either voluntary or due to death) are made within 10 years of the grant or bond received. 

RDSPs should not be considered an alternative to setting up a trust. To build a secure financial plan if you or someone you care about has a disability and qualifies, the RDSP is one vehicle to be added to a comprehensive plan including insurance products and trusts. - SM

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As a new registrant, I’m worried about how to budget now that I’m self-employed. How much of my earnings should I be saving to pay my taxes? How can I properly calculate my income versus my expenses?

Tagged: Budgets Financial Planning Saving Taxes

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Congratulations on becoming a new registrant, and on joining the self-employment world.  No one likes the dreaded ‘B’ word – budget - but now that you are self-employed, your ability to budget will be very helpful in preventing surprises when you file your tax return.

In order to determine how much you should be saving for your taxes, you do have to prepare some type of budget to determine how much money you plan to make, and therefore how much tax you need to pay.

Taxes are determined based on your net income for the calendar year – January 1st to December 31st.

First, you must estimate how many courses of care, and therefore how much income you will earn in the calendar year.  This will represent your total professional revenue.  The next step is to determine the expenses you expect to incur during the course of the same period.  There are always expenses that will be fixed (for example, your membership dues, professional fees, accounting fees, professional development and training courses will generally always be around the same amount no matter how many courses of care you bill).  Then there will be expenses that will vary based on how busy you are – car expenses, meals and entertainment, office supplies, and other supplies, which may be more discretionary.

Once you have calculated your revenues, less expenses, consider if you have any other sources of income – interest, dividends or other employment income. Are you making additional RRSP contributions that will reduce your income? Calculate all the income, less all deductions and now you have your taxable income.

Canada has multiple tax brackets, which have increasing amounts of tax the more money you earn.  This is called marginal tax.  The more you earn, the more tax you pay.  In 2014, the tax brackets in Ontario are as follows (the information below has been updated to reflect 2015 tax rates, combined Ontario and federal tax rates as noted here:

Tax Bracket Rate
Up to $40,922 20.05%
$40,923 to $44,701 24.15%
$44,702 to $72,064 31.15%
$72,065 to $81,847 32.98%
$81,848 to $84,902 35.39%
$84,903 to $89,401 39.41%
$89,402 to $138,586 43.41%
$138,587 to $150,000 46.41%
$150,001 to $220,000 47.97%
$220,001 and Over 49.53%

So based on the above, you should save accordingly.

The biggest surprise when someone first becomes self-employed, is the requirement to contribute both the employer and employee portion of Canada Pension Plan as part of your personal tax filing.

The maximum CPP contribution amount for a self-employed person in 2015 is $4,959.90.  If you earn less, you pay less. If you earn more, this is the maximum you will pay.  Although you get a non-refundable tax credit for half of it, it is still an amount that you must pay – so it should be part of your budget as well (updated to reflect 2015 amounts).

The second year of self-employment does get easier, in that CRA will begin to request installment payments. These are quarterly payments wherein they ask you to pre-pay the taxes you owe. This way, you don’t have to wait until the each April to pay. CRA will request payments on March 15th, June 15th, September 15th and December 15th. However, if your income fluctuates, the ability to budget for how much you owe will still serve you well so you don’t have to pre-pay too much.  A warning to those who choose not to pay their taxes on a timely basis – the penalties and interest can be quite costly.

Remember, it is important to obtain tax advice whenever you deal with the CRA. Be sure to contact your tax adviser for assistance if you have any questions about your tax installment requirements. - RMI

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I recently received an inheritance.  Is it better for me in the long run to use it to pay down my mortgage, contribute it to a Tax Free Savings Account (TFSA) or put the money into my Group RSP?

Tagged: Debt Investing Life Events Saving Taxes

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An inheritance may be considered a gift from someone special in your life. And as such you may have an emotional connection to it that you should consider – do you want to use it as emotional investment or a practical one?

An emotional investment is using the inheritance in a way that reminds you of that person such as a special piece of jewelry or a cabin on the lake you used to spend time together on. The investment may contribute to your overall net worth while achieving the emotional connection you are looking for.

Or you may choose to use this inheritance on something more practical, such as an investment. How do you choose what to do?  First, evaluate your current financial position. Take a look at what you owe, your investments, and your monthly cash flow. Could you use your inheritance in any of these areas? 

You may be close to retirement and need to reduce your debt so that you’ll be debt free when you retire so that you can use your cash for a better retirement lifestyle. Or, you may have a large mortgage and are struggling to make ends meet. In these cases, consider using the money to pay down your mortgage.  The interest costs on your mortgage may be higher than any income you could get investing the money. Check with your lender about penalties for pre-payments on your mortgage. Consider investing the monthly savings from a reduced mortgage payment into an RRSP or TFSA.

When investing a lump sum amount into your RRSP, the factors you need to consider are:  your current taxable income level, your RRSP limit, and the total amount you wish to put into the RRSP. RRSPs allow you to defer paying income tax until you take the funds out at a later date – preferably when your income is at a lower taxable level. You could put your inheritance into an RRSP and then take the tax savings from this and put against your mortgage allowing you to achieve two objectives – increasing your retirement fund and paying down your mortgage.

When investing in a TFSA, the objective is to earn money that is sheltered from taxes. Unlike an RRSP there is no tax deferral benefit. But putting your inheritance into a savings account earning .5% interest doesn’t achieve much.  Consider working with a qualified investment advisor to ensure you are getting the best return on your investment while considering your risk tolerance.    

If you are in a committed relationship one important consideration is that if you use your inheritance to pay down your mortgage or contribute to a joint asset, then the funds become part of the “family assets”.  To protect these funds in the event of a relationship split, you may want to keep them in a separate investment in your name only. It is important in this case to get legal advice.

There are many variables to consider when it comes to an inheritance, so working with a qualified accountant and financial advisor will help you analyze your situation and options. -JR

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How much will I need for retirement?

Tagged: Financial Planning Retirement Saving

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How much you need for retirement will vary for each individual.  The goals and objectives you set for your retirement will guide you in determining your retirement income needs.  Where you live, the lifestyle you choose, the activities you want to participate in, will all influence the amount of money you need. It’s important to take the time to consider what you want your retirement to look like.  Write down your dreams, desires, goals and bucket list. The closer you are to retirement age, the more important this planning stage becomes. 

Once you have determined your retirement lifestyle, you should look at what annual retirement income you’ll need to fund that lifestyle. Consider both day-to-day living costs as well as the cost of other expenses such as travel and entertainment. This exercise is more of an art than science as you are predicting future costs. Working with a financial advisor or accountant can help if you are not sure of how to put those numbers together.  You also have to consider how saving for your retirement will mesh with your current lifestyle. It is a balancing act of living for today and planning for tomorrow.  When working with your advisor make sure that the plans they are recommending fit both of those needs and that you are not being encouraged to save more in order to sacrifice your lifestyle today – remember advisors earn more if you save more.  You want financial freedom and a comfortable retirement however, you also want to live a balanced lifestyle now.

When you have your retirement income projections, you can then figure out if you have enough funds to retire.  You need to look at all sources of retirement income – your own savings and government pension. If you retired in 2014 and were 65, you’d receive approximately $19,000 a year from CPP and OAS. Research suggests a 4% withdrawal rate from your retirement savings in order to maintain your principal, as this withdrawal rate would equal the average annual income that your investments earn.  For example, if you have $500,000 retirement savings, this would provide an additional $20,000 income while preserving your capital of $500,000. Combined with your government pension, this would provide an income of approximately $40,000. 

If you are a midwife or have an employer RRSP plan, your benefits program helps to fund your retirement savings plan, which starts your savings for retirement sooner than most Canadians. Planning for retirement now gives you time to adjust your expectations and to balance your goals and dreams with current lifestyle choices. It may allow you to choose an earlier retirement date, or you may choose to work beyond 65 to save for the type of retirement lifestyle you want.

While dreaming about your ideal retirement lifestyle can be exciting, putting together a balanced financial plan for retirement is not easy. Working with qualified advisors to develop that plan can help you achieve your goals. Choose your advisor wisely to ensure you are getting the support that fits your needs. -JR

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I’m concerned about investing in oil and formula companies, but I’m concerned that “ethical” or similar investments also may have lower returns.  How can I invest ethically without compromising my own retirement?    

Tagged: Investing Saving

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The latest buzzword and a growing area in the investment community is “ethical” investments. But what are they and how do you choose? You need to clearly set out what your objectives are for this type of investment and understand how you invest ethically without compromising your retirement. In addition to determining ethical investments, you also need to be clear about your risk tolerance and rate of return that you want to achieve.  By knowing these things, you can determine if you can invest ethically without compromising your retirement.

In understanding more about investing ethically, you can go one of two ways – either do your own research or work with a qualified investment advisor.  

The decision to invest on your own without the support of an advisor will require a substantial amount of time to research, review, select and then monitor your investments to ensure your objectives are being met.  This is not something that I would consider doing unless you have a real interest and passion for it. 

Investment advisors have developed relationships with experts that allow them better access to the decision makers at various companies or funds that you may be considering. They also utilize industry specialists to review trends.  All of this provides your investment advisor with timely, relevant and detailed information that they use to evaluate the investments to determine if they meet yourethical as well as investment objectives. 

So how do you find an investment advisor that is right for you? A personal meeting with an advisor is the first step to determine if the fit will work for you.  Be sure to have your ethical and investment objectives clearly defined so you can evaluate if the investment advisor will be able to meet both of those needs. Always be sure to ask for references and follow up on them.

When using an investment advisor, review their personal views as well as corporate polices on ethical investing to ensure they align with your values. In my opinion, choosing the right advisor is more important than choosing the right investments. 

Just remember, you’ll need to review the performance of all your investments to determine if your retirement goals are being met.  Before handing your money over to an investment advisor spend the time to research, review and read all the information on the overall fund, the manager and the investments to assess the compatibility with your own objectives.  In addition, be sure to set clear goals and monitor them on a regular basis (quarterly or annually), this will provide you with the ability to track your retirement funds and be sure you are continuing to meet your retirement needs.

Each one of us has our own personal objectives, needs and goals for our retirement. A lot depends on lifestyle choices, age, and the amount of contributions made on an annual basis. The variables are endless which shows how important it is to work with qualified advisors to ensure you are achieving the goals you have set out for yourself. - JR

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