If I were to ask you how much you earn, you could give me salary that you and your employer agreed on. But, be it $40,000, $60,000 or $100,000, the lifestyle will be right up there with the level of earnings. With the quest to own the nicest car, home and clothing that they can afford, people often lose sight of the future, and how the choices made today impact their quality of life later on.

You don’t Make as Much Money as You Think You Do
It’s hard to hear, and I’m sorry to be the one to tell you. But if you don’t believe me, look at your paystub. It tells a story. It shows you the amount of tax that is taken off at source, as well as your contribution for the Canadian Pension Plan (CPP) and EI. Do you belong to a union? Are you part of a pension plan? The details and their costs, are all there waiting to be discovered. The true amount that you earn, often referred to the net amount, is what you have left in your hands to spend after all deductions and taxes have been taken. A successful budget uses this number to determine actual annual income, and what percentage of that money is being spent on the things you need versus things you want.

Your Needs Versus Your Wants
Your budget can be broken into two categories: needs and wants. Generally speaking, your fixed expenses should be your needs and your variable expenses your wants.

Fixed expenses are the things that are necessary to live which are difficult to change over the short term: your rent or mortgage, heat & electricity and a basic amount of food and clothing costs. Variable expenses are everything else: the entertainment budget, eating out, and any indulgences. After going through a bugeting exercise, you become aware of what you can’t immediately change without longer term planning. This lets you focus on what you can.

To get a realistic picture of your expenses, first look at the amount on your paycheck that you actually take home. Compare that to your bills. You can quickly see which categories are eating up the largest percentage of your earnings. Or, you may find that your fixed expenses don’t make up that much of what you spend and you still don’t know where your money goes. A monthly budgeting exercise of simply tracking all your expenditures can open your eyes to the impact of lifestyle indulgences.

Debt & Savings
Not to be ignored, debt and savings need to be in balance in your budget as well. The interest owed on your debt is the premium that you pay to use someone else’s money before you’ve earned it yourself. Your savings, on the other hand, give you the chance to be the lender and have a bank pay you for the funds in the account which they can then lend to someone else.

Understanding where your money is spent is a crucial first step to the peace of mind that comes with a balanced budget. The clarity it brings can help you live a lifestyle that you can afford that will allow you to save to meet your goals, and have a promising future.

Now before you take this the wrong way, understand that I’m most certainly not telling you to stop saving. Rather I’m suggesting an alternative to the conventional way of thinking. This post is for those who took Mom & Dad’s advice. The hands of time have them marching steadily towards retirement and they have fat RRSPs, full from years of contributions… and little else.

My message to them is as follows. Please continue to save. In that regard, you’ve been doing the right thing. RRSPs have served you well in that they have grown tax-deferred all these years. You never received a tax slip when the funds do well, but the day is coming when you will have to start taking income, and for that reason, it’s a good time to review your strategy.

Here are a few reasons why having all of your money in RRSPs can be a bad thing during retirement:

Potential for taxation in a higher tax bracket
When all of your money is in RRSPs, there is no where else to go when you need money for a large purchase. A lump sum withdrawal is taxable at the your highest tax bracket. It’s added to your other taxable income for the year, and this can bump you up into the next tax bracket.

More taxes withheld OR larger quarterly installments
When you make a withdrawal from registered money, withholding tax is taken off the top before you get the withdrawal in your hands. It’s as if the CRA is saying – okay, we’ve let you defer taxes this long, now that you’re taking money out of the RRSP, we’ll take some of the tax that we know you’ll have owing off the top, and we’ll square the rest with you at tax time. The percentage they take depends on the size of your withdrawal: up to $5,000-10% is withheld, $5001 to $15,000, 20% is withheld and $15,001 +, 30% is taken off. So if you wanted to make a $20,000 withdrawal, taxes would be $8,571.42, which means you’d have to take out $28,571.42 to end up with the same $20,000 in hand.

Potential for OAS Clawback
When income during retirement starts to exceed $69,562 (2012 rate), part of your Old Age Security will begin to be clawed back. If you’re saying to yourself that your income during retirement won’t be that high, consider those lump sum withdrawals – to fix a roof, go on vacation, buy a new car – that could put you over the threshold and cause you to start having to repay your OAS.

What Should you Do?
Now that I’ve told you what you shouldn’t do, here’s what you should do. Talk to a financial advisor about a Tax Free Savings Account and when those are maxed out, non-registered savings. You can think of both of these as having tax paid capital. In a Tax Free Savings Account, your growth didn’t cost you anything. In a non-registered savings plan, you will receive a tax slip for growth every year, but this means you won’t get one when you make a withdrawal. Well balanced income during retirement is about having RRSPs and other investment vehicles so that you can structure your withdrawals in the most tax efficient way.

I’m not much of a gambler myself and the good news is, the tax system is set up so that it doesn’t have to be either.  Here are some guidelines as to whether or not you’re on track to writing a cheque or getting a refund.  This is not tax advice, so please consult your accountant for advice specific to your situation.

As an Employee
If you punch the clock from nine to five and get a T4 for doing it, the company you work for is responsible for deducting  enough tax at source to make sure that the government gets their cut of what you earn before the end of the tax year.    Here are some situations where this would not be the case:

-          If you work a second job From a tax standpoint, each employer you work for will act as if they are your only employer.  This may mean that your second employer is withholding less tax than you would owe.  This is because in Canada, the percentage of tax that you owe, (your tax bracket)  increases with the amount of money that you make.  So your second employer could be deducting tax at a lower rate, since they have no way of knowing what you earn at your other job.
 
-          If you changed jobs during the year Similar to the point above, with a job and salary change, the amount of tax withheld at your new employer may not accurately reflect the total income that you earned during the year.
 
-          If you told the CRA you were going to make RRSP contributions and didn’t Some folks that want to make RRSP contributions but can’t find the cash in their day to day budget can apply to the CRA to reduce the tax withheld so that they can make a contribution directly into their RRSP.  The deduction that you get should offset the taxes that were not paid.  If you decide to do this, get proper authorization and don’t follow through, the CRA can penalize you, and wont authorize it again.

If You’re Self Employed
If you’re self employed, not only are you responsible for all of your taxes, but also  for government benefits such as both the employer and the employee portion of the CPP that is automatically deducted from an employee’s paycheque.  As a self employed individual, taxes have to be budgeted for as income is earned throughout the year.

Once You’ve Retired
If the amount of taxes you had owing for the previous year was over $3,000, you will have to pay the government quarterly installments.  This means that every three months you have to send them a cheque for taxes owing.  An alternative to this is having the tax automatically withheld before you receive payments from your pension, annuities and other benefits like CPP and OAS.  This will only work if your income comes  from sources that allow the withholding.

So there you have it.  A few quick tips to see if you’re on track, and to let you know what you can expect whether you’re an employee or newly self employed or retired.  But whatever your case may be, if you tax return provides you with a hefty refund you’ve paid too much tax during the year and should engage in some planning to take advantage of missed opportunities.

Most tax credits are non-refundable. This means that once you’ve reduced the income tax that you owe to $0, any remaining credits can’t be used. Another way to think of it, is that you can never use a non-refundable tax credit to get a refund.

On the other hand, a refundable tax credit will pay out even if your taxable income is $0. A common example of this is the GST/HST credit. This credit is based on your family income, which means the combined total of both you & your spouse or common law partner’s net income. The GST/HST credit has to be applied for every year on your tax return form. If you missed filling it out, you can file a T1 Adjustment at any point during the year. So if you are over the age of 19, be sure to file a tax return to gain access to these credits.

If you want more information about the income levels for the GST/HST credit, click here.

A spousal RRSP is similar. You put the funds in on your spouse’s behalf and the contribution reduces your taxable income – which means that you get the deduction. The concept here is that when your spouse makes a withdrawal in the future, he or she will pay less tax due to his or her tax bracket being lower than yours. Your taxable income will also be lower in retirement, as you’ve shifted some of these registered assets into your spouse’s name. There are other good reasons to have retirement income in both your name and your spouse’s name. Here are a few:

After age 65, money coming out of the RRSP in the form of a Registered Retirement Income Fund or Annuity allows your spouse to gain access to the Pension Income amount, which is a non-refundable tax credit. There are two benefits to this strategy. By making contributions and splitting income early on, you set yourself up to pay less tax during your retirement, as money that would be in your name is now in your spouse’s name. Secondly, your tax rate is usually lower during your retirement than during your working years.

What are Attribution Rules?
The money that you put into a spousal RRSP is supposed to be earmarked for retirement. If a deposit is made into a spousal RRSP and the other spouse withdraws the money within three years of the deposit, the money that is withdrawn will be taxable in the hands of the contributing spouse. The CRA came up with attribution rules to keep the higher income earner from putting money in, taking the deduction, and having the lower income spouse take the money out in the following year.

Is it a Good Idea?
While every situation is unique, a spousal RRSP can be a good tool. It is useful when there is a substantial difference between the amount of income that you make and the amount of income your spouse makes. It also has a place when one spouse is enrolled in a pension plan and the other is not. If you will have tax owing this year, it makes even more sense to contribute. Spousal RRSPs are a good way to save tax now and split income during retirement.

All of the Growth is Tax Deferred
Your money grows at an increased rate since you don’t have to pay tax on the gains. The tax becomes payable when you withdraw the money.

You have the Opportunity to Split Income with Your Spouse
If your spouse is in a lower tax bracket, you can make a contribution to a spousal RRSP on his or her behalf. You would save the tax at your higher tax rate. When the money is withdrawn, it becomes taxable to your spouse at his or her lower tax rate, providing that the withdrawal happens more than three years after the last spousal deposit. The end result is that the family pays less tax overall, both now and in the future.

You are Providing a Source of Income for Your Retirement
Fewer individuals have pension plans and government benefits aren’t sufficient to maintain the lifestyle that most of us now enjoy. Did you know that those who qualify for full CPP in 2012 will receive $986 per month? However, not everyone qualifies for the full payment, since the amount you have contributed is based on your salary. The average monthly payment received in 2011 was $534. It is the responsibility of each family to make sure they can maintain their lifestyle and provide for future care.

RRSP Loans are Available
For those that want to contribute to RRSPs but don’t have the extra cash on hand, RRSP loans are available. With interest rates being so low, this is a good time to take advantage of them, if they makes sense when the rest of your finances are taken into consideration.

What’s a Mutual Fund?
A mutual fund is a collection of stocks and bonds that are put together into a portfolio. A fund manager and a team of analysts actively watch all the companies within the fund and make the decisions regarding when to buy or sell each company. It can also hold fixed income products like government or corporate bonds. The fund has to be run according to a given set of parameters which indicate if the fund is for a conservative, moderate or more aggressive investor. The funds are categorized by these parameters.

In most cases, when you’re invested in a mutual fund, you are actively invested in the market. You can make money if the fund does well, but you can also lose money if the fund does poorly.

How about a Segregated Fund?
Segregated funds are essentially mutual funds sold through insurance companies. You get the same active management, and in some cases the same management companies but with one big difference. Segregated funds have a way of managing your long term risk by adding a component of insurance to your investment. Let me explain.

Like a mutual fund, you can lose money if the markets go down. But, when you initially purchase the fund you get to choose how much of your money you want to guarantee that you’ll get back at a point of time in the future. You can guarantee 75% or 100% of your deposits, and the guaranteed amount becomes payable either on death or 10 or 15 years from when you opened the contract, respectively. Now that in and of itself isn’t incredibly exciting but, what does get exciting is an additional feature that allows you to reset your guaranteed level when the markets have done well. When the value of your account has gone up, you can tell the insurance company that you want that new higher level to become the new level of guarantee. If the markets subsequently go back down, you get the new guaranteed amount, after a new 10 to 15 year period. These contracts do have age restrictions for these resets, and there is also a cost for this feature. The management expense ratio, which is the fee that you pay to the fund company to manage your funds for you, is higher to account for the additional insurance protection provided by the guarantees. The insurance company is actually putting the extra money aside to ensure they can live up to their guarantee.

Preparing for the Future
Segregated funds work best with long term time horizons and can be very helpful during retirement planning, as you know ahead of time the amount of the guarantee. When timed correctly, the purchase of these funds can help protect your nest egg from an untimely down market right before retirement. Segregated funds also have death benefit guarantees to make sure that on your death, your beneficiary will receive at least all the money you deposited, less withdrawals. In addition, as segregated funds are insurance company contracts, at your death, your money passes outside of your will directly to a named beneficiary. The advantage of having your money pass outside of the will is that the money does not become subject to probate fees. You beneficiary designation is part of a private contract, so there is confidentiality around who has been named as beneficiary and how much they will receive.

Your advisor should be asking you a series of questions to make sure that you both have a clear picture of what you want to accomplish. This would include both short term and long term goals, with checkpoints along the way to monitor your progress. The questions that will help this process can include variations of the following:

What the money will be used for? When you will need the money? Will you be dependant on it at a future date, such as during retirement? Other questions would be: How comfortable you are with loss? (They say that the pain of loss is much worse than the pleasure of a gain). Are there other people depending on it as well? The decisions are also best made in context of your portfolio as a whole, as well as your net worth.

Your advisor should also talk to you about how you would react to hypothetical situations like events in the news or an untimely loss. Risk and reward do go hand in hand, but it’s never good if your risk makes it hard to sleep at night. A calculated risk, based on solid information, is a lot less risky than making an uninformed decision.

Your progress towards achieving your goals can be more important to define and measure than the actual rate of return on your portfolio. By determining clear goals and checkpoints to see your progress can take much of the day to day stress of the market out of your investment experience.

Even the most solid company with stellar management will have some years that are better than others. Sometimes the movements in the market has nothing to do with the companies themselves, but are determined by the broader economic landscape, or even by major fund manager buying or selling large volumes of a particular holding. Often, the perspective that helps during a particularly scary event is ‘this too shall pass’. Everything is temporary. Keep your goals in mind, review your progress regularly and you’ll be well on your way to long term success.

What is a dividend?
To put is simply, as an investor, a dividend is your share of the company profits. Corporations exist for one reason alone – to make money for their shareholders. It can be debated that corporations exist to provide a good or service, but the management of every successful company knows that once the daily business is done, their job is on the line if they haven’t turned a profit. Who are these shareholders to whom they are accountable? If you own stock in a publicly traded company, it’s you.

Where does a dividend come from?
Once the company has become profitable, the management has to make one of two choices. The first is that they can keep the money that they’ve made and say that at some point in time they will reinvest it into the company to make more money. When they do this, the funds on the balance sheet are called ‘retained earnings’. The second option is to pay it out to the shareholders. If you own stock, each share that you own will have an amount of dividend attributable to it. This makes sure that all shareholders of publicly traded companies receive the same percentage of compensation for their ownership.

Is there anything to guarantee that dividends will keep getting paid?
Unfortunately, no. Dividend payments are made when there is sufficient cashflow to pay them out. However, management knows that missing or reducing a dividend payment is looked on unfavorably by analysts and the investment community, and can be a sign that the company is in trouble. They will do everything in their power to make sure that the company is able to meet what they view as an obligation to their owners, the shareholders.

What are you doing when you re-invest your dividends?
Re-investing your dividend means you’ve indicated that, you would like to use the money to increase your ownership in the company, instead of taking a cash payment. The dividend payment is used to purchase more shares which does two things:

1) Increase the amount of dividends that you will receive in the future, as the dividend is paid out on a per-share basis.

2) Give you the opportunity to have a greater participation in the company growth, as your ownership has increased.

The decision is yours. Whether you take them in cash, or reinvest them, a dividend is a good way of receiving value in return for your investment in a publicly traded company.

The cost of caregivers or devices to keep us going can add up. Any extra help that we can get is a good thing. Assistance in the form of the disability tax credit may be available. This credit is available to people that qualify, regardless of their age.

What’s the Credit Worth?
If you were claiming for yourself, and are eligible in 2011 you can received a non-refundable tax credit of $7,341. The credit is used to reduce your income tax payable and is not received in cash. Non-refundable means that if you don’t use some or all of it, you lose it. It can’t be used against income in future years, it can only be used in the year that you are eligible to receive it.

If you have a family member (namely your spouse, common-law partner, child, parent, grandparent, grandchild, brother, sister, aunt, uncle, niece, or nephew) that relies on you to survive and is earning no income of their own or a low income, you can make the claim on their behalf. Your taxable income would be reduced instead of theirs.

If the disabled dependant is under the age of 18, there is an additional $4,282 that may be available. This is subject to reduction based on other claimed expenses.

That would be helpful, how do I qualify?
Your Doctor (or a certified specialist) needs to conduct an assessment of your abilities. They will have to complete a Disability Tax Credit Certificate, which you would then submit to the CRA for review. The required certification form can be sent in at any point in the year – in fact, the CRA encourages it so their verification doesn’t delay processing of your income tax at tax time.