Personal finance can be complex. Not only can the concepts and rules be challenging, everyone’s situation is also unique: One logical money decision for one individual could be an inappropriate move for another person. And there can be a lot riding on your decisions: your retirement, your children’s education and your lifestyle may be at stake.
At each stage of life not only do your life goals shift but so too does your financial focus. At age 25, budgeting may be your most important concern. At age 50, your tax strategy may dominate your thinking. Fortunately, a greater knowledge of finances can allow people to make more informed choices.
So, before you make your next money move, here’s a chance to test your financial know-how. We hope this may be an opportunity to learn and motivate you to apply your knowledge to your financial scenarios with fresh eyes.
1) What percentage of your annual income can be contributed to your Registered Retirement Savings Plan (RRSP)?
A. There is no limit
B. 18% of your income, with some exceptions1
C. 10% of your net worth
Investing in mutual funds and other investments within an RRSP can be a great method to benefit you and your family now and in the future. RRSP contributions can lower your taxable income and may even help contribute to a tax refund annually. With annual contributions over time, investments within an RRSP can provide a method of compounding savings to fund your retirement years. You can continue to contribute to an RRSP until the end of the calendar year when you reach the age of 71.
2) The principal residence exemption is….?
A. A tax exemption for seniors who sell their home
B. A deduction for those helping their children with their first home
C. A tax credit for home renovations
D. A tax exemption from capital gains on a primary residence
When you sell property, any capital gains are taxable. This could be a major burden for those selling real estate because the gains on real estate could be large (especially given the current housing market). Fortunately, the principal residence exemption grants an exception for your primary residence or family home (under certain conditions). If you have more than one property, it’s best to consult a financial advisor on how you can manage the principal residence exemption or other tax strategies.
3) How old does a child have to be to have a Registered Education Savings Plan (RESP) set up for them?
A. One year old
B. One year old but younger if their sibling has an RESP
C. No age minimum so long as the child has a Social Insurance Number
D. No age minimum as long as a parent has an RRSP
The fact that you can begin contributing to an RESP at year one of a child’s life means you have a number of years to contribute to your child’s education before they actually need to use the funds. The Canada Education Savings Grant is also available, to a maximum $500 annually (up to $7,200 in total). Annual contributions can be invested — they may compound over time and can offset future educational costs.
4) The most important advice a financial advisor can give you is about:
A. Retirement planning
C. Paying for a child’s post-secondary education
D. All of the above
Members of a typical household may have their hands full balancing today’s needs with tomorrow’s plans. Often, it’s a juggle between short and long-term goals: paying bills, stashing money away for a child’s education or even ensuring you’ll have an enjoyable retirement. A financial advisor can provide options around budgeting, saving and planning out your goals. With investing, a financial advisor can discuss your risk tolerance, time horizons and financial aims to see what products are right for you.
5) The best method for calculating how much income you need for retirement is…?
A. Your highest maximum income, less 10% annually
B. 7% of your savings annually, times 25 years in retirement
C. It depends on the value of your home and when your kids move out
D. It’s based on your personal situation and tied to your retirement goals
Retirement planning is probably one of the major goals in life: What you do with savings and investing in the first two-thirds of your life may influence what options you have in the last third. And your family, your finances and your wishes and intentions are unlike anyone else’s, something no standard formula can capture. That’s why it may be best to consider seeking out a financial planner who can help shape a goal-based financial plan. It can take care of your current needs but also help you achieve your objectives when you are no longer working.
6) When there is economic uncertainty, avoiding the stock market is the best method to keep your money safe over the long term.
During economic uncertainty, some investors may panic and liquidate their investments in the hope they can avoid a market sell-off. In a study, TD Asset Management suggests what can happen when investors try to time the market and are on the sidelines during periods of growth: If you had missed out on 1% of the best market days between 1989 and 2019, your portfolio would provide a significantly lower performance. You can read more about, The power of staying invested.
7) When a parent passes on assets to an adult child in a Will, the child is taxed on property they receive but not RRSPs or Tax-Free Savings Accounts (TFSAs) under the Canadian Inheritance Tax.
B. Incorrect: The beneficiary doesn’t need to be a child
C. Incorrect: Art works will also be taxed
D. Incorrect: There is no Canadian Inheritance Tax
It’s a trick question but many Canadians may be unsure how taxes work when assets get passed down to family members named in their Will. While beneficiaries don’t pay tax on any assets received, that does not mean that taxes won’t impact the estate. Anyone wishing to pass on a legacy to their family will want to consider how to organize their money, property and other assets to mitigate taxes when they pass away. These are things a professional planner may be able to help you with.
8) Fact check: At age 60, you must withdraw your investments from your TFSA.
A. Yes, correct
B. No, but you must withdraw 7% per year
C. No, there is no age limit on when you need to withdraw funds
D. No, but you must make an entire withdrawal at age 65
One of the valuable aspects about TFSAs is that there is no age maximum when you must stop contributing. As well, you never lose contribution room if you don’t add to your TFSA one year. In fact, even if you make a withdrawal, that withdrawal amount will be added back to your TFSA contribution room at the beginning of the following year.
Financial literacy is a skill that can provide immediate benefits. Knowing how best to utilize registered accounts like RRSPs, TFSAs and RESPs can ease some of the anxiety around long-term financial goals such as retirement or saving for a child’s education. But putting all your financial responsibilities and wishes together can be complex: A discussion with a financial advisor can provide you with suitable recommendations that match your unique situation.
- Your annual contribution limit is related to how much you earn. For 2021, the RRSP contribution limit is 18% of your previous year’s earned income, up to the maximum amount of $27,830 (a number set each year by the government), plus previous unused contribution room less any pension adjustments ↩