The Unique Advantages of Health Care Spending Accounts
These accounts can pay you back for qualified health care expenses
A health care spending account (HCSA), also known as a health spending account (HSA), is an employee benefit that offers reimbursement for eligible health care expenses. These accounts can help supplement existing coverage and fill in the gaps where public health insurance falls short.
What is a Health Care Spending Account and how do I qualify?
The public health care system in Canada offers coverage for most medical expenses but not everything. Many health care services, like dental or vision care, are not covered by the system, and some Canadians opt for private insurance to cover these costs. This type of private insurance is rarely a benefit an employer can offer, especially if they are a small business.
Instead, many Canadian employers offer health care spending accounts that reimburse employees for health care expenses not covered under the provincial health insurance plans. HCSAs allow employers to offer employees money to pay for out-of-pocket health care expenses, like dental services, eyeglasses, or hearing aids. Eligibility is generally determined by the employer, but an employee must work at least 20 hours a week to qualify.
How do HCSAs work?
HCSAs are typically offered by employers as either part of a benefits package or on a stand-alone basis. They also offer certain financial advantages. Employers fund HCSAs on a monthly basis, and the money they contribute to the account is tax-deductible. Withdrawals are tax-free for employees as long as they spend them on eligible medical expenses.
An employee’s access to the money left over in the account at the end of the year depends on the plan their employer offers. Employers typically have three options for handling unused balances, including:
- Balance carry forward. With this plan design, unused balances at the end of the first year can be carried over, but unused funds left in the account for more than two years go back to the employer. This option allows employees to plan for large medical expenses over a two-year period, giving them ample time to use their HCSA funds.
- Expense carry forward. This option allows for expenses that remain unclaimed at the end of the benefit year to carry forward and be reimbursed with the next year’s funds. Unused funds, however, are returned to the employer at the end of the benefit year. This option offers employees flexibility, especially if they incur a large unexpected medical expense.
- No carry forward. This is essentially a “use it or lose it” design that does not allow unused balances or expenses to be carried over into the next benefit year. For employers, this plan design is straightforward and simple and works well as a one-time benefit or reward for employees.
What medical expenses are eligible for a HCSA?
Employees do not have to pay taxes on withdrawals for eligible medical expenses. The Canada Revenue Agency (CRA) determines what is considered an eligible expense, such as:
- Vision care, like eyeglasses, contact lenses, or laser eye surgery
- Prescription drugs not usually covered by Extended Health Care plans, such as fertility treatments
- Massage therapy
- Adult orthodontics
There are some medical-related expenses that aren’t covered, such as:
- Premiums for public health services
- Services from nonqualified medical practitioners
For a complete list of eligible expenses, visit the CRA website.
A HCSA offers tax benefits to employers and flexibility and freedom to employees, allowing them to pay for medical expenses not covered under their provincial health insurance plan. If you have any questions about your plan, contact your employer.
Learn how to get the most out of your own health insurance and contact us today at firstname.lastname@example.org or 647.349.7070 to get the conversation started.
You’ve spent years planning and saving for your retirement. And then, out of the blue, your employer hands you an early retirement offer that could change everything. An early retirement, or “voluntary severance,” offer is a financial incentive to resign that an employer may offer to senior employees when they need to reduce payroll costs. This voluntary package could be a boon, giving you the freedom to pursue other activities, or an unwanted complication throwing a wrench in your retirement plans. If you’re presented with early retirement, should you take the offer? Here are some factors to consider:
- Understand what’s in the package
When you receive an early retirement offer, the first step is understanding its component parts. Offers commonly include:
- Severance pay. The offer will probably include a lump-sum payment. For example, your boss might offer one- or two-weeks’ salary for every year you’ve worked for the company.
- Health coverage bridge. Your employer may offer to extend your job-based health care coverage to continue covering services unavailable under the public health care plan.
- Pension bridge. The package may include temporary retirement payments to keep cash flowing until your pension or the Canada Pension Plan (CPP) kicks in.
- Additional perks. An early retirement can include almost anything else, such as free financial planning or career counseling to help you move on to another job if you choose.
- Decide on your retirement plans and health coverage
An early retirement offer may complicate your financial plans. The financial incentives in the package will likely amount to less than you were expecting to receive in compensation in your remaining years of work.
Consider working with a financial advisor to determine whether a lump-sum payment will leave you with enough income to maintain your desired lifestyle once you retire. Are there adjustments you can make to your plan that will make early retirement more feasible, such as downsizing your home?
Consider, too, how early retirement may impact your CPP retirement pension. Will you have to collect benefits earlier than expected, permanently reducing your payments? Will doing so leave you with enough monthly income?
Health coverage is a parallel concern. If accepting the offer would mean losing your necessary supplemental health insurance, you have to decide whether you can afford taking out your own policy before you accept.
- Consider your ability to find another job
Even if you can’t afford to retire early, it could be worth it to accept the offer and then find a comparable job elsewhere, pocketing the package as a windfall. But the success of this strategy hinges on your ability to find another job, and in a reasonably short amount of time.
Before you accept the early retirement offer, research the job market. Are there plenty of openings at businesses that are willing to pay an experienced worker a salary comparable to yours? If not, you may not be able to count on replacing your current job with another one.
- Asses the financial stability of the company
If your company is offering early retirement packages, that might be a sign that the business is finding it difficult to stay in the black. If you decline the voluntary offer and stay on with the company, you could see more rocky times ahead. And if that happens, there’s no guarantee that the early retirement offers will come back. If you don’t have confidence in the medium-term viability of the company, taking the offer could prove to be the best move, even if what you’d really rather do is stay on.
- Know your alternatives
When your employer offers you voluntary severance, you don’t have to choose to simply decline or accept it. You can also negotiate the package higher or offer an alternative. If you’re amenable to retiring early but the package on offer leaves you with a gap in health coverage or too little severance pay, your employer may be willing to sweeten the deal. If retiring early isn’t an option for you, but moving to a part-time schedule is attractive and feasible, you could offer that as an option. It may satisfy your employer’s ultimate goal to cut back on payroll without having to fire someone.
A trusted advisor can help you navigate the opportunities and challenges of your golden years. Contact us today at email@example.com or 647.349.7070 to get the conversation started.
How to Evaluate an Early Retirement Offer | Second Careers | US News
Early Retirement as an Alternative to Layoffs | The Hartford
Wave of early retirement hits workforce. How to negotiate best deal (cnbc.com)
Here’s what to consider if your company offers an early-retirement package (cnbc.com)
Canada Pension Plan – Overview – Canada.ca
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.