Queenie Case Study - Canadian Retirement Savings Question

[queenie]

I legitimately know that we are coming at this incredibly late and that we are still making lots of mistakes.  I will not flinch if being punched in the face.  My question is regarding Canadian income tax and retirement savings, so I am hoping that some Canucks can jump in and help me out.  I am starting from knowing zero information.

Husband's 2014 gross income: 132,748
My 2014 gross income: 3,270 *

* I am a stay at home parent.  My income is just hobby income from a handful of weekend photography gigs.

I am looking at my husband's final pay stub from 2014, he paid $37,025 in Federal Tax.

We haven't started RRSPs yet.  We do both have a TFSA account (just a basic savings account with PC Financial at, I think, 2.5%), but so far we have less than $2,000 combined.

Up until a couple of years ago, we didn't have a very high income and were pretty deeply in debt.  Not including the mortgage, we had $61,619 in debt on January 1 2013.  We currently have $19,352 (a car loan).  We also had $0 savings and now have about $10,000 of "emergency funds" that are not generating income for us or doing anything.  I'm ready to shift gears a little bit.  While we will continue to pay down our debt as much as possible, I need to know what we should be doing with savings.

Would we be better off focusing on putting money into RRSP or TFSA?  I like the availability of the TFSA for emergencies, but now that we are at about $10k, I feel like that is probably good for the TFSA and maybe we should be looking at the RRSP?  Am I right that it might benefit us more at tax time to be putting into RRSP instead of TFSA?

Additionally, does anyone have information on income splitting?  I think that it might help us this tax year, but I don't really know much about it.

__________________________________________________________________________________________________________

Posting details in case it helps determine our best course of action.

I am 34.
DH is 30.
We have 4 children.

Household Gross income: $136,318.

Debts:
Mortgage - $1106/month. Current balance is $153,622 at 2.89%.
Car loan: $457/month. Current balance is $19,352 at 3.02%.

Fixed Monthly Expenses *approximate:
Internet/Phone: $150/month (High, I know.  We have unlimited data for streaming)
Gas Heating: $85/month
Electric/Water: $150/month
Water Heater: $25/month
Cell Phone: $75/month
Vehicle/Home/Life Insurance: $499/month (Gross, I know!  This is 2 vehicles, 1 motorcycle, home, and life for DH and I)

Our grocery bill fluctuates, but is high - maybe $700/month. 
Fuel is around $120/month.
DH has a fast food and coffee habit.  And we are both a bit spendy on various things.  I know it's bad.  I know that we need to adjust everything.

Assets:
Value of our home is approximately $175,000
TFSAs: $1,433
Savings: $10,838
RRSP GIC: $591 (was set up by an old employer, can't touch it or change it)
RESP: $2,541
* Not including our vehicles here because they are just depreciating all of the time.

Total LIQUID Assets: $12,271

We have a benefits plan, so don't generally have medical expenses.  We have saved up for braces for DH, which will be OOP, and that planned spending amount is not included in our "savings" listed above.

We do have a credit card that we use for the points, but pay off monthly.

[Prairie Stash]

Hi, it's always a great time to start. I'm Canadian too, similar situation.

Income splitting applies to families with kids under 18, it basically combines your household income and divides it in 2. It'll save your household up to $2000. In your case you could hit the max, congrats.

Your husband should contribute to RRSP immediately, as in today. Phone your bank or get on their website and open a RRSP account. Put all 10k into it. Depending on your province you'll get 4k back when you file. The deadline for 2014 contributions is tomorrow, act fast.

If you miss out then get ready for it in 2015. I recommend simpletax or Ufile; both free to use. Put various contribution scenarios in and watch what happens. Imagine putting $24k into his RRSP and seeing a 10k cheque.

[queenie]

Thank you PP!

I am going to file our taxes online with the free software.  It's what we did last year as well.  I am hoping that it won't be difficult to set up the income splitting.

I don't think we'll make the deadline for tomorrow then - DH is out of town working.  We wouldn't be able to access all 10k tomorrow anyway, as a large chunk of it is in his vacation pay account that needs to be paid out from his employer.  We can request it any time, but it takes a couple of weeks to be processed and the cheque mailed out.  Otherwise it is paid out annually in June.  I should have looked into all of this sooner.

So it is definitely better to be putting into RRSP than TFSA in our case, right?

I have so many questions still.  I'm anxious about moving all of that money into RRSP in case we have some unexpected expense.  Additionally, if we do move all 10k, would it be smarter to put that on our debt, or is the RRSP still a better idea?

Why is this not more black and white for me?  I am so afraid of making the wrong choice and doing something stupid.  We've never had extra money to decide what to do with before!

[queenie]

Oh!  I also don't know what sort of RRSP is best?  I said earlier that our TFSAs are just basic savings accounts and I think that there is something better than that, isn't there?  I also read that PC Financial has crappy TFSA and RRSP options, and that is who we bank with. 

We do have a joint CIBC account, but don't really ever use it.  All of our monthly bills come out of the PC account, so that is where DH's cheques get deposited.  Though, I suppose that we could just deposit a portion of his cheque into each account?

[plainjane]

Ok, so you have ~12k in low or no interest accouunts.  And you feel more comfortable with a good e-fund.  You have 19k in debt.

It is difficult to make strong recommendations without a bit more information.
- what rate is your debt at?
- how much "extra" do you have each month to save/invest/pay down debt?

TFSA and RRSP are just names for the type of tax-advantaged umbrella that accounts fall under.  You can have any kind of account under that umbrella - you can keep all the money in a high interest account, you can buy GICs, you can have mutual funds, or you can buy individual stocks.  Given your information thus far, I recommend having an emergency fund (3 months of living expenses) in a high interest TFSA account.  That way if you need the money, you can take it out, but you aren't losing anything to taxes.

I would take the lump sum of money that is over and above that emergency fund that is in the TFSA savings account, and put that into a Tangerine Investment Fund - probably the RRSP Balanced Portfolio.  Then set up an ongoing transfer over to Tangerine for each paycheck of the money that makes sense once you've figured out what that is.

There are more optimal approaches from a math perspective, but the most important part is getting started. http://canadiancouchpotato.com/recommended-funds/ is great if you want to go down a rabbit hole of complexity and geekery.  Tangerine is really easy to work with, which is one of the reasons I recommend them for you instead of TD (which you'll see recommended as well, but can be more difficult to set up properly).

[RetiredAt63]

Gordon Pape discusses this in his book on TFSAs.  I have the original and he has come out with an updated version.

Mr. Frugal Toque went into all the ins and outs on his guest blog so I won't bother repeating him.
http://www.mrmoneymustache.com/2013/09/21/canadian-investing-with-mr-frugal-toque-part-1/

[Retire-Canada]

With that high level of income you should be:

- max both RRSP and TFSA every year
- kill remaining debt quickly
- start saving excess $ in non-registsred accounts

At this point just get the money into your TFSA or RRSPs.

Next read about these portfolio options and pick one to follow:

http://canadiancouchpotato.com/model-portfolios-2/

-- Vik

[queenie]

Thank you PJ!  The 19k of debt is the car loan at 3.02%.

I would like to sell the car at a loss (we could sell it for approximately $10k, I think) and pay down the remaining debt.  This would also decrease our monthly insurance expenses.  DH has waffled on this - he was on board and now is not.

The "extra" that we have each month has been difficult to predict.  DH works contract work and has slow and busy periods.  He is currently in his most lucrative period ever in history - last month he net around $15k.  This is severely atypical, so our spending lately has been as well.  This is why we have some savings for the first time ever, and why we have taken our debt down to just the mortgage and the car.  We also did some repairs to the house.

But, when his income increases, he gets spendier - he bought an Ipad Air 2 and a laptop last month.  He has other expensive hobbies, like his motorcycle and paintball.  I have an expensive hobby as well, though I try to offset it by generating income from it as well.

We are full of shame.

My best estimate for a typical monthly net income for DH would be $3,500.  Our typical monthly expenses would be $3,500 - that includes paying our credit card off monthly, contributing $250 to TFSA, and obviously our monthly debt - the car.
So, obviously we need to reduce our monthly expenses.  Obviously.  I'm an idiot.

[queenie]

Retiredat63 I read that article today, which is what got me started thinking about RRSPs vs TFSAs, and thinking RRSPs make more sense.  It's also where I read that PC Financial stinks for investing.

PJ, I will check out the Tangerine Investment Fund.  I looked at the website last week, but got intimidated by how much that I don't know.  The TFSA that we have is a high interest account, I think.

Vikb - this income level is new to us.  I'm not positive that it will last, because the nature of DH's work is unpredictable.  He works in sewer and watermain on contracts, so it always depends on if there is work or not.  Lately, there has been A LOT of work and he has been pulling in a lot of overtime.  It was not that long ago that we had a household income of $30-40k.

But thank you everyone for the advice.  I am going to aim to max out RRSP for 2015, assuming work remains steady.  I am going to sit down with DH when he is home next to look at the Tangerine Accounts.

[Retire-Canada]

Vikb - this income level is new to us.  I'm not positive that it will last, because the nature of DH's work is unpredictable.  He works in sewer and watermain on contracts, so it always depends on if there is work or not.  Lately, there has been A LOT of work and he has been pulling in a lot of overtime.  It was not that long ago that we had a household income of $30-40k.

Whether it lasts or not save and invest while he's making that sort of $$. Even if he drops $50K/yr to $86K/yr you should till max both RRSP/TFSA and put money in non-registered accounts.

-- Vik

[queenie]

Okay, that is what I will aim for.

I am a little concerned that he will burn out at this job.  He has been there for about 2.5 years, and it's such a physical and demanding job.  It does have a stellar pension, assuming that he stayed there until retirement.  But I honestly don't know if that is possible.

In the meantime, we will try to maximize as much as possible.

[sky_northern]

Vikb - this income level is new to us.  I'm not positive that it will last, because the nature of DH's work is unpredictable.  He works in sewer and watermain on contracts, so it always depends on if there is work or not.  Lately, there has been A LOT of work and he has been pulling in a lot of overtime.  It was not that long ago that we had a household income of $30-40k.

I am a little concerned that he will burn out at this job.

Both reasons to ensure you are putting as much as you can aside and trying to fight life-style creep of your DH's recent hard work.

Tangerine is a good suggestion for mutual funds for someone starting off. Start a RRSP account with whatever is leftover after you have a conferrable 'emergency fund' in your high-interest TFSA - 3 to 6 months of basic living expensive is generally what is suggested, you have to decide what is right for you.

I would also make sure to talk to your DH about your financial goals. Make some plans together so that your spending and saving on the same page.

[queenie]

Thanks sky_northern

DH and I skyped tonight and talked a bit about things.  We talked about this RRSP stuff for the first time - up until this point our discussions have always revolved around trying to pay down debt and trying not to spend money.  It was a good discussion and we sort of talked about how much we would want to have available to us in retirement and when we'd like to retire and if we should rely on his pension or not.  We went over the retirement calculator scenarios on Tangerine.  So we came up with the goal to pay $500/month into RRSP until the car is paid off (hopefully the end of this year and we discussed how we could be aggressive with it) and then ramp it up to $1,000/month.

Further down the line we should be able to increase that - particularly when I can work full time (our youngest will be in school in 2 years).

He responded much better to this than to debt repayment.  I think that the saving will come easier once that is our primary focus - he seems excited about getting to "our number" in our RRSP.  Debt repayment has been hard for him and I've had to really push him for it and I think that is because he can't "see" the benefit ... just our bank account draining each week.  But we're getting closer to being done with that part.

[subbs]

Read:

Canadian Couch Potato Website - Questrade and managing your TFSA's and RRSP's is joke simple.

Personal Finance Canada Reddit group, will give you another veryg ood case study.

Book:
If you only read one book in your life about finances I would recommend

Millionaire Teacher.


Take those steps and you will now know what to do.

[Prairie Stash]

Tangerine is pretty great for starting out, if you can use a referral code I have mine below ;) (shameless plug)

The only down side is they have higher MER on their investments than just buying a Vanguard ETF. Until you have $25K or more its a meaningless argument. Don't get distracted from the goal of getting money into it.

As a secondary goal for the year you should check out TD's RRSP services (I don't have anything to do with TD). I use RBC Direct, I recommend them personally. Specifically think of buying Vanguard ETF over a longer term.

With $500 contribution on $130k income you can roughly expect a tax refund of $215. Do it 12 times and you'll be looking at a nice cheque in the spring ($2500 on top of your other potential refunds)