Alternatives are investment options beyond the typical stocks, bonds and cash found in most portfolios. They can be tangible assets like precious metals, or they could be financial assets like private equity or hedge funds. Alternatives tend to be riskier than traditional assets, which means investors usually have to meet certain criteria to access them. Here’s a closer look at alternatives and some of the most common options available.
What is an alternative investment?
An alternative investment is a financial asset which does not fall under a conventional investment category, like stocks or bonds. These can include real estate, private equity, commodities or even art and antiques. They aren’t subject to the same regulatory requirements as conventional investments and don’t need to disclose the same amount of information as publicly traded companies. Alternative investments are also fairly illiquid. The investor pool may be limited, making it hard to find buyers. Additionally, it may be difficult to determine asset value.
Because alternative investments tend to be more complex and less regulated, they also come with a higher degree of risk than conventional securities. As a result, they are typically only available to accredited investors. An accredited investor must have an earned income of at least $200,000, or $300,000 together with a spouse, for at least two years in a row. They may also have at least $1 million in financial assets alone or with a spouse, or net assets surpassing $5 million.
Types of alternative investments
A hedge fund is a private, professionally managed and largely unregulated pool of capital whose managers can buy or sell any assets. Because they operate under fewer regulations, hedge funds can invest in more complicated deals than other funds. They can also use complex strategies, like volatility or merger arbitrage, to generate higher returns. Hedge funds tend to be more expensive to participate in than conventional investments.
This category can include rental properties, real estate development companies, raw land, preconstruction investments and more. Real estate is a valuable diversification tool as it experiences low volatility and is not highly correlated with other asset classes. So, when stocks are down, for example, real estate may do better.
Private equity involves investing directly in companies that are not publicly traded. A relatively large investment is typically required. Often these investments are in new companies with the potential for substantial growth. However, new companies are relatively untested, exposing investors to the risk they might fail.
Crowdfunding arrangements pool together money from individuals to fund new business ventures, such as real estate projects. In return, investors receive equity shares of the company. Non-accredited investors may be able to participate in regulated crowdfunding, but there are limits to how much they can invest. There are no limits for accredited investors.
Commodities are often investments in raw materials, such as metals, energy and agricultural products. They can be risky investments, since outside factors, like the weather or natural disasters, can affect their supply and demand. However, commodities can also provide diversification within a portfolio, since their prices tend to move in opposition to stocks.
While alternative investments can be a key tool for diversification, it’s important to do your due diligence when considering which investments to buy. Understand the risks and limitations and remember that alternatives may be difficult to sell quickly and could potentially be more volatile than traditional investments.
While alternative investments can be a key tool for diversification, it’s important to do your due diligence when considering which investments to buy. Understand the risks and limitations and remember that alternatives may be difficult to sell quickly and could potentially be more volatile than traditional investments. To find out if alternative investments is the right strategy for you contact us today at firstname.lastname@example.org or 647. 349.7070.
Registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) are tax-advantaged accounts that can help you boost your retirement savings. Both accounts are designed for long-term growth, but they differ in how your contributions are taxed and when you can withdraw funds. Here is a breakdown of the differences between an RRSP and a TFSA and how to choose the best one for you.
Registered retirement savings plans
An RRSP is designed specifically for retirement savings. Anyone with an earned income who files a tax return can contribute to an RRSP. Contributions are tax-deductible and your earnings grow tax-deferred. There is no age requirement for when you can make withdrawals from your RRSP, but when you do withdraw funds, you will pay income taxes on both your contributions and earnings. You will need to claim your withdrawal as income when you file your taxes.
You can contribute up to 18% of your earned income in the previous year to an RRSP, with a maximum contribution amount of $27,830 for tax year 2021. There are no requirements for minimum distributions, but you can no longer make contributions to an RRSP once you turn 71. At that point, you must close your account and either convert it to a registered retirement income fund (RRIF) or buy an annuity.
Tax-free savings accounts
Unlike an RRSP, a TFSA can be used for any kind of savings goal, not just retirement. Anyone age 18 and older can contribute to a TFSA, and you don’t need earned income to qualify.
Contributions to a TFSA are made with after-tax dollars and your earnings grow tax-free. Withdrawals are tax-free and you can take money out at any time for any reason without paying a penalty. And if you do take money out, you can recontribute the same amount the following year in addition to the annual maximum of $6,000.
How to choose which account is best for you
Both RRSPs and TFSAs allow you to grow savings through investments, but how they can be used and how and when they are taxed may have an impact on which account you choose.
An RRSP can only be used for retirement savings. You must have an earned income and file a tax return to qualify. A TFSA, on the other hand, can be used for any savings goal, and anyone age 18 and older can contribute regardless of earned income. RRSPs offer much higher contribution limits, and contributions are tax-deductible, lowering your tax bill the year you contribute. You defer paying taxes until you withdraw funds. TFSAs offer smaller contribution limits; contributions are made with after-tax dollars; and withdrawals are tax-free.
You can make contributions to both accounts at the same time, and if you can afford it, maxing out contributions for each is a great strategy for saving. However, if you can only choose one, first consider your savings goals. If you are saving for something other than retirement, a TFSA may be right for you. You may also want to consider your future tax rate. If you anticipate a higher tax rate in the future, a TFSA may be the better choice, since withdrawals are tax-free. And if you expect a lower tax rate in retirement, an RRSP can offer you more tax advantages since you can lower your taxable income now and pay a lower tax rate on future withdrawals.
Whether you choose to fund an RRSP, TFSA or both, you’ll be taking advantage of tax benefits that can supercharge your savings and bring you closer to achieving your financial goals.
We can help put together a solid long-term plan that suits your financial goals and needs and answer any questions you may have about TFSAs and RRSPs. Contact us at 647-349-7070 or at email@example.com to get the conversation started.
If you are fortunate enough to have kept your job throughout the pandemic and even received a bonus for 2020, count yourself lucky.
After a year of being told all the things you can’t do, the impulse to take your bonus on a spending spree would be completely understandable.
Yet before you whip out your credit card, take a moment to consider embracing your good fortune as an opportunity to top up your registered retirement savings plan (RRSP).
Contributing your bonus to your RRSP will help supercharge your retirement savings, setting the stage for much bigger rewards in the years ahead. And just as importantly, it will help you create something positive out of such a horrible year.
The 60-second RRSP refresher
What is it?
An RRSP is a powerful investment tool that delays the timing of when you pay income tax. This may not sound significant, but the impact on your finances can be huge.
How does it work?
Directing your bonus to your RRSP allows you to invest pre-tax income, separating it from your taxable income before the government takes a big bite out of it. As the investments within your RRSP account grow over the years, any dividends, interest, and capital gains that they accumulate are not taxed.
How does this help me?
By starting with a larger pre-tax amount and avoiding tax deductions as it grows, your RRSP has the potential to grow much larger compared with investments made over the same period that are not tax-protected.
Reap the rewards of a tax-protected investment
The graph below illustrates the difference between contributing a bonus of $10,000 towards your RRSP vs. getting your bonus in cash (taxed at 47%). In both cases, we assume a growth rate of 5% per year.
As the graph shows, putting your bonus into your RRSP can help you reap significant rewards over the long term.
Follow the rules or pay a price
To take advantage of the great benefits offered by RRSPs, you need to play by the rules. This means staying within the contribution limits.
For the 2021 RRSP season, individuals are allowed to contribute up to 18% of their income or $27,830 – whichever is lower.
Keep in mind:
Some factors can reduce your contribution limit (e.g. contributions made to your employer’s pension fund)
Some factors can increase your contribution limit (e.g. unused contribution room from a previous year)
You can find your contribution room for 2021 on your latest notice of assessment from CRA. If you can’t find your NOA, you can call your accountant and/or CRA.
In general, withdrawing funds from your RRSP before you retire will result in a considerable penalty, so this is something to avoid unless absolutely or strategically necessary.
There are exceptions when early withdrawals are allowed – such as to pay for education or buy a house – but these withdrawals must meet specific criteria. To ensure you don’t accidentally break the rules, it’s always a good idea to consult your financial advisor before withdrawing.
Don’t miss the deadline
Timing is also critical when it comes to your RRSP. To be counted by CRA as an RRSP contribution for the 2020 tax year, it must be made by 1 March 2021. If you miss this deadline, you’re out of luck.
This means that if you want to put your 2020 bonus to work in your RRSP, you need to take action now:
Speak with your financial advisor about how to use your bonus to maximize the value of your RRSP
Determine your RRSP contribution room
Check with your employer for any internal deadlines for directing your bonus towards your RRSP (this may be earlier than the CRA deadline)
Today’s opportunity, tomorrow’s windfall
If you’re a working professional with a high income, maxing out your RRSP contribution is almost always the right decision. And if you are among the lucky ones to come away from 2020 with a bonus, now is your chance to move forward with some lasting good from a year to forget.
If you would like help optimizing your RRSP or would like to discuss other complementary strategies within an overall financial plan, Rubach Wealth can help. We invite you to contact us at info@rubachwealth or 647.808.7700 to discuss how acting now can give you so much more to be thankful for in the future.
Tips for a Successful RRSP Season in 2021
With RRSP season here once again, now is the time to give some extra thought to your retirement.
Arguably, retirement planning can be stressful – especially as you draw closer to your retirement day – and the uncertainty of the past year certainly hasn’t helped. Outliving your savings is, rest assured, a lot more stressful. If you want to enjoy your retirement years in comfort, what should you be doing now?
MAXIMIZING YOUR RRSP CONTRIBUTIONS
Contributing to a registered retirement savings plan (RRSP), and ideally maxing out your annual contribution limit, is one of the fundamentals of sound retirement planning.
If you’ve been doing this diligently over the years, well done! However, it’s also important to review the investments in your RRSP to ensure they continue to align with your investment objectives and risk tolerance.
Here’s an overview of key information and some helpful tips to ensure you have a successful RRSP season in 2021.
- Contribution deadline: March 1, 2021
- 2021 contribution limit: 18% of earned income (less any pension adjustment) to a maximum of $27,830
MAKING THE MOST OF YOUR RRSP
How to maximize the value of your RRSP will depend on your specific needs and situation. However, here are some general tips to consider.
- Consider recent market developments. Historically, annual returns on equities following downturn years have yielded higher than average returns. Whatever you do, don’t try to time the market. Given the upheaval seen in financial markets in 2020, you may want to discuss with us an RRSP strategy that makes sense based on your needs.
- Use an RRSP catch-up loan. An RRSP catch-up loan can help you utilize any unused RRSP contribution room. Depending on your personal income tax situation, this may result in a tax refund that could be used to help pay down the RRSP loan. This is not a strategy for everyone. Let’s talk before you do it!
- Invest your tax refund or bonus. If you’re banking on getting a tax refund this year or expecting a bonus from work, what are your plans for this money? Rather than spending it on nice-to-have things, consider putting some or all of it into your RRSP. You may have to forego a bit of fun in the short term, but it can help give your retirement lifestyle a big boost in the long term. We can show you what that looks like for you.
- Plan for taxes. As you put money into your RRSP, always remember that what you’re doing is deferring taxes today, not avoiding them forever. When you start withdrawing RRSP funds during retirement, you’ll have to pay tax on this money. The key to remember (and the big benefit of an RRSP) is that the tax rate will be based on your tax bracket at the time of withdrawal rather than your current tax bracket. In theory, you will be at a lower marginal tax rate… but what if you’re still at the highest? By simply looking at your RRSP account statements and not thinking of future taxes, you may think you will have access to more money than what you will actually have.
TAKING ACTION FOR A SUCCESSFUL RRSP SEASON
If the events of 2020 have left you stressed out and mentally exhausted, we get it. Yet an open conversation with your financial advisor to check in on your retirement plans might be just what you need to shift your focus to brighter days ahead.
Investing a small amount of time into retirement planning now to ensure you get the most out of this RRSP season will pay dividends many times over in terms of peace of mind and financial stability going forward.
Have you already maxed out your RRSP contribution room? This is a good problem to have! If you’re now looking for other investment alternatives to help you shelter additional growth from taxes, we can help.
Whatever your situation, we invite you to contact us at info@rubachwealth or 647.808.7700 to discuss your options. The RRSP deadline is approaching, so now is the time to act.
Marriage is the perfect time to start shopping for life insurance. Why? Because it’s when you start sharing your life – and your debt – with the one you love.
Here’s why life insurance for married couples should go hand in hand with saying, “I do.”
A shared life means shared responsibilities
While it’s quite unromantic to think about all the legal and financial changes that come with signing a marriage license, I firmly believe in talking about it.
The reality is that marriage comes with a joint responsibility of sharing life together, which includes debt.
Even if you have no outstanding debt at the time of your wedding, you will undoubtedly be sharing some financial obligations with your spouse down the road, whether that’s a car, a house, graduate school or credit card debt.
With this financial future ahead of you, now’s the time for you and your spouse to review your insurance coverage. Having the right type and right amount of insurance will help ensure that your finances are protected from any accidents or lawsuits down the road.
You can lock in a good rate now
In general, life insurance premiums increase with age, so the earlier you lock in a rate, the more affordable it can be.
Some plans even let you cancel later, so it’s possible to get out of a policy if at some point you decide you don’t want it anymore. The one thing you can’t do is go back in time and purchase a new policy 10 years down the road at the lower rate that you’d be able to get at this age.
If you’re starting married life with fewer financial burdens – e.g. no house, no kids – taking on a small monthly premium won’t be a significant burden on your bank account now, but it will set you up with more affordable premiums for the future when you may face more financial stress.
Purchasing life insurance when you’re healthy also makes a lot of sense as it guarantees you’ll be covered no matter what happens to your health in the future.
When it’s not always happily ever after
When you’re preparing for your wedding day, it’s natural to think your love will last forever. Unfortunately, divorce becomes a reality for some couples, and not all of them are prepared for the financial fallout.
A report from the BMO Wealth Institute found that 70% of surveyed Canadians are financially unprepared when going through a divorce. What’s more, divorce can impact women particularly hard: 43% experienced a substantial decrease in household income after their marriage ended.
We hope you never have to go through a divorce. If you do, however, it’s critical to examine your current life insurance policies and any spousal coverage benefits to which you may be entitled. Your beneficiaries – the people you’re leaving money to – should also be re-examined.
Building a shared future together
Marriage is about building a life together with someone you love. And while it may not sound romantic, that includes a financial life.
Chances are you will need to buy life insurance at some point as part of your shared future – particularly if plan to have kids one day. So, as you start building your new married life together, keep in mind that this might also be a good time to apply for life insurance so you can take full advantage of your youthfulness and good health.
For a conversation about how to set your young family on the right financial path, contact us at firstname.lastname@example.org or at 647.349.7070.
While various government programs have helped the country through these challenging times, this support has been incredibly expensive. Sooner or later, the government will need to take proactive steps to tackle an enormous deficit. Unfortunately, this means tax increases may be on the horizon. If you are concerned about the prospects of a rising tax bill and want to stay ahead of the curve, we highlight some tax strategies that may help. Strategies for optimizing your taxes Effective tax planning is highly dependent on your personal situation, so there is no one-size-fits-all solution. However, here are 4 strategies that may be useful in optimizing your tax situation:
- Estate freeze. An estate freeze can be used to defer the realization of taxable capital gains in the value of a family business. After a properly structured freeze, any further growth in the company’s value will accrue not to the owner, but rather to their successors or to a discretionary trust set up as part of the freeze.Estate freezes have many potential benefits, including locking in probate tax liabilities, locking in a purchase price for a business, providing retirement income and strengthening creditor protection.
- Capital losses. Stock markets around the world have plunged during the pandemic, and despite some strong rebounds, many investors have stock portfolios with unrealized losses. It some situations, it can be beneficial from a tax perspective to sell holdings and trigger capital losses to offset capital gains.Capital losses can be applied retroactively up to three years and carried forward indefinitely. However, there are restrictions on how such losses can be applied, so any decisions should be made with advice from a tax professional.
- Prescribed rate loan. A prescribed rate loan allows individuals with high marginal tax rates to transfer investment income to family members with low marginal tax rates.Under this strategy, the high-income earner makes a loan to a family member or a family trust, which invests the money and earns investment income. The high-income earner receives interest payments at a rate prescribed by CRA (currently 1%) while the remaining investment income can be distributed to the family member(s) and will be taxed at their lower tax rate.
- Spreading corporate losses. Owners with multiple businesses are not allowed to directly consolidate their profits and losses across their corporate group to minimize their overall tax bill. However, there are permissible tax strategies that can be used to spread at least some corporate losses and achieve similar outcomes.Management fees are one example, although there are restrictions on how this strategy can be applied.
Being proactive ahead of potential tax increases Nothing is certain about how the government will navigate these challenging times, but one thing is clear: tax increases are a real possibility as the government determines how to pay for its extensive pandemic relief programs. Whatever happens in one month or one year, there are steps you can take now to proactively optimize your tax exposure and extract any corporate surpluses in a tax-efficient manner. To discuss how tax strategies can help to strengthen your financial situation, contact us at email@example.com to schedule a call with a Rubach Wealth advisor.