Archive for February 22nd, 2012
Timing RRSP withdrawals is important
By Talbot Stevens
For all of the positives of RRSPs, there is one negative every RRSP investor will eventually have to deal with – taxation. While some describe investment growth inside RRSPs as “tax free,” I suggest “tax deferred” is more accurate because eventually every penny of your RRSP (or RRIF) will be withdrawn as taxable income.
Recognizing that most Canadians prefer to pay less tax, the big RRSP question is: “Are there ways to withdraw RRSPs tax free – legally?” Yes, there are. Ignoring the Home Buyer’s Plan and Lifelong Learning Plan, which help fund your first home or an education, there are a few ways to pay less or no tax.
The first basic concept is to strategically time your withdrawals when your income is lowest. Since the basic personal exemption allows us to each earn about $ 10,000 a year tax free, if you had no other source of taxable income, you could withdraw this amount from an RRSP and effectively pay no tax. Your financial institution will withhold 10%-30% for taxes when you draw the money, but you should get this back when you file taxes if you have no other income.
Most of us can’t live on only $ 10,000 a year, but this idea can apply to more than hermits, especially now that we have TFSAs. If you retired a few years before your spouse, and they covered all of the expenses, you could draw the amount of the basic exemption each year from your RRSP tax free. Those who are single or not relying on the support of a partner could cover expenses by withdrawing from TFSAs or even unregistered equities that have capital losses. In both cases, there is no taxable income, so you can earn – or withdraw from RRSPs – the basic exemption without tax.
Even if you can’t withdraw your RRSPs tax free, timing your withdrawals to be taxed less might still be beneficial. If you could withdraw $ 30,000 a year in a 20% tax bracket early in your retirement, and were confident that your tax rate would jump to 35% or 45% later, it might make sense to take a smaller hit sooner, even though you give up years of tax-deferred growth.
The second fundamental way to reduce or eliminate tax on RRSPs is to create a tax deduction that offsets the tax on withdrawals.
A controversial approach that was popular in the past is the “RRSP meltdown” strategy, where the offsetting tax deduction is created by the interest expense on an investment loan.
As an example, if you had $ 150,000 of RRSPs that was not critical to your retirement, you could withdraw, say, $ 10,000 a year over a 15-year period. Assuming a constant 5% cost of borrowing, $ 10,000 a year would cover the interest expense on a $ 200,000 investment loan. The tax due on the $ 10,000 RRSP withdrawal is offset by the $ 10,000 deduction for the interest expense, so you get your RRSP out “tax free.” At the end of the 15 years you pay off the investment loan, essentially having converted your $ 150,000 of registered funds into hopefully a higher amount unregistered funds, which are taxed less as capital gains and dividends.
While an RRSP meltdown strategy can benefit the investor or beneficiaries on paper, it has many risks. Clearly, if you’ve never leveraged before, starting this riskier strategy when you’re near or in retirement, with funds that you can’t afford to lose, is a dangerous idea. Probably the biggest risk is related to timing and what’s called the sequence of returns. If you start the strategy just before a big market drop and your $ 150,000 quickly becomes $ 100,000, the $ 10,000 a year withdrawals will cause the RRSP to implode and not last 15 years. In addition, your $ 200,000 of leveraged investments will also be down a lot, resulting in significant losses and emotional stress.
- Talbot Stevens is a financial speaker and author of Financial Freedom Without Sacrifice.
Entrepreneurship isn’t about money, it’s about changing the world
Eva Blue via photopin cc
Matt Mullenweg
Entrepreneur Matt Mullenweg recently said that his motivation isn’t to make money, it’s to change the world. Mullenweg is the founder of Automattic and Audrey Capital, as well as a founding developer behind popular blogging platform WordPress. He says he believes that everyone who has changed the world is a type of entrepreneur. “It’s about drive and ambition, not owning a business or being a boss,” he said in an interview.
Mullenweg didn’t start a company as a kid, but he did have an obsession with business cards. “I thought all you needed to start a business was a business card, and I loved printing things and those perforated card sheets you could buy,” he said. “I’d make business cards for everything.” He may not be obsessed with business cards anymore, but he has an impressive startup resume. His first claim to fame was being a founding developer behind WordPress, the largest self-hosted blogging tool in the world. The inspiration for starting to blog came from reading blogs by Jeffrey Zeldman and Anil Dash. “I ended up using open source software called b2 on my own site, and when that project stopped development it became the base of WordPress,” he said. “In the beginning there were never any grand ambitions, I just wanted better software for my own blog and liked the idea of sharing the improvements I was making.” WordPress now powers over 60 million blogs, 16% of all websites.
WordPress is an open-source project, not a for-profit business. Mullenweg decided to start his own company, Automattic, as a for-profit entity whose commercial interests would benefit the larger non-profit community. “I wanted to create a company that I wanted to work at,” he said. “I knew that the more people we could get working on WordPress full-time the faster the software would grow, but in creating a company I didn’t want to make the mistakes that I perceived many open source project founders made when they started a commercial entity.”
Automattic offers over 12 tools for WordPress including spam filter Akismet and survey tool Polldaddy. He says the company’s product releases have been driven by products the team wanted to use themselves. “Almost everyone in Automattic is a blogger, so we experience the software every day just like our users,” he said.
Geoffrey Anderson: As the House Transportation Bill Languishes, There’s Still Time to ‘Fix It First’
Let’s look on the bright side of life.
By all accounts, you would be hard-pressed today to find anyone who views congressional inaction positively. But with the House of Representatives’ transportation package languishing amid opposition from both Democrats and Republicans, members of Congress at least have added time to address the bill’s severe shortcomings.
Our country’s roads and bridges are in desperate need of repair, so crafting economically beneficial legislation with bipartisan support should be lawmakers’ top priority. Transportation and Infrastructure Committee Chairman John Mica has already shown us what’s possible when business development and other interests meet, including language in the House bill that would spur development around transit stations and jumpstart real estate investment. With that kind of cooperative leadership as a model, the House would be wise to make the following revisions, showing voters that it’s the congressional branch with the capacity to get things done in an election year:
- Restore guaranteed funding for public transportation. Let’s talk economics, not politics; historically, investments in public transportation generate 31 percent more jobs per dollar than construction of roads and bridges. Moreover, millions of Americans rely on transit systems to get them to and from work, shops and schools every day. Retaining a dedicated source of funding for public transportation adds certainty that those economic connections remain in place. Ignoring 30 years of bipartisan policy, destabilizing business growth and stranding seniors and commuters without cars hardly seems like a way to win hearts and minds.
- More emphasis on bridge and road repair. Our existing transportation infrastructure is falling apart: One in nine of the bridges and overpasses American drivers cross each day is rated in poor enough condition that they could become dangerous or be closed without near-term repair. The longer we wait to fund these maintenance projects, the more they’ll cost; according to the American Association of State Highway and Transportation Officials, every dollar spent to keep a road in good condition avoids 6-14 needed later to rebuild the same road once it has deteriorated significantly.
- Reinstate measures that provide funding to pedestrian and bicycling safety programs. The decades-long neglect of pedestrian safety in the design and use of American streets comes at heavy cost: From 2000 to 2009, 47,700 pedestrians were killed in the United States. Considering the unfathomable toll such deaths take on families and on economic development and medical costs, it simply doesn’t make sense to cut safety funding when we really should be adding to it. With an increasing percentage of the American population wanting to live in walkable communities with housing options near jobs, shops and schools, the transportation bill needs to support programs in line with those market trends.
- Transportation comes first. Partisan add-ons have marred Congress’ recent debate over the transportation bills. While lawmakers certainly have the power to raise contentious issues in enacting new legislation, those are distractions that will keep the country from achieving its primary goals. Whatever you think of the specific proposals, everyone knows they amount to poison pills that will delay needed funding and reform until next year.
It goes without saying that Americans are ready for an economically sound, people-friendly, and bipartisan transportation bill. It’s a good thing our elected officials have extra time to meet those expectations.
From:The Blog
As life changes, finances change
By Denise Deveau
As soon as she began her career in her 20s, Shelley Pringle was contributing to an RRSP. Back then it was a simple matter of putting a few extra dollars aside each month.
“I knew I needed to get in the game as soon as possible. But when you’re young, it’s hard to think seriously about it,” says the Toronto-based PR consultant. Marriage and a mortgage changed the investment picture once she hit her 30s.
“Other things took a higher priority. But as the years went on and the house was off the list of things we had to save for, we began to think more about our RRSPs,” she says.
Now in her 50s, she is “starting to take retirement more seriously.”
As investors change, so do their plans.
“Everyone is different. But everyone ages one year at a time,” says Gaetan Ruest, assistant vice-president strategic investment planning for Investors Group in Winnipeg.
The first stages of planning should begin in your 20s, a time when many are experiencing the changes that a new job, new income and in some cases new student debt bring. At this stage, retirement planning is barely in the picture.
Putting aside even a little bit of cash for your RRSP can go a long way, despite the temptation to spend all your new-found income, says Katrine Clark, financial advisor with Edward Jones in Vancouver.
“People need to get the message that starting early makes a huge difference in terms of compounding. It’s also a great time to take advantage of any company plans.” Mr. Ruest suggest trying to put aside about 10% of your income every month, including any company pension fund contributions.
“The earlier you start investing, the more time you have and the less money you need because you can allow it to grow over time.” Once you hit your 30s and 40s, things get more complicated and new realities set in. Family expenses, mortgages and careers become competing priorities for your hard earned dollars.
“Expenses go up and even if your career is going well, your disposable income is probably less,” Mr. Ruest notes. That’s the time to consider what’s most important in your planning he adds.
“You shouldn’t overlook paying down your mortgage or funding your children’s education. Hopefully you’ve put enough money aside in the early years to create significant growth in your portfolio and can take a break from contributions if you have to so you can meet your priorities.”
While there are many pressing things to spend your money on, you should still try to do what you can on the contribution front, Ms. Clark advises.
“It’s especially important in this time of your life to not lose focus on your retirement goals.” If all goes well, a 50-something will likely be at their peak earning years and nearing the end of their mortgage payment and supporting their children. With more cash flow, it’s time to get serious and play catch-up, Mr. Ruest says.
“You’re now at the final hurrah towards retirement. So you need to make sure you’re on track to meet your needs.And if you took a bit of a break in your contributions during your 30s and 40s, this is the time to make up for it.”
At this point, it becomes increasingly important to protect your savings. That means rethinking your risk tolerance and working on building a balanced portfolio, Ms. Clark notes. “You should be adjusting your portfolio and finding the best places to utilize the income.”
And even when your retirement date approaches, the planning isn’t over, cautions Mr. Ruest. “This is when you take any risk in your portfolio off the table. You need to be more defensive and conserve that value you built over the years by reducing your equity exposure. Don’t take risks with that nest egg, because it has to last a long time.”
Sponsored entry: Are you prepared for the journey of going public?
By David Fabian
No one will tell you going public is easy, but the rewards can be monumental. The key is proper preparation, experienced guidance and effective execution. When preparing to issue an initial public offering (IPO), you should take into consideration such factors as the strength of capital markets, timing, your company’s past and current performance as well as the related costs (current and future) associated with being a public issuer.
Valuations
The valuation of a business is crucial when preparing to go public. This is a great indicator for potential investors and shareholders as it not only showcases your company’s worth, but also helps determine if your IPO is profitable and sustainable. There are a couple of ways of conducting a valuation. The first is to get a sense of your company’s value from the investment bank taking it public. The second is to have a valuation performed in advance by an accounting firm.
Conducting an extensive comparative analysis will allow you to better understand the market and heighten your competitive edge. Assessing similar companies in your market that have experienced issuing an IPO is a great way to learn from their mistakes and successes and also prepare you for your journey. Your assessment should look at reviews of financial statements, operational structure, boards of directors’ composition and year-over-year growth (or retraction).
Governance and corporate structure
With heightened corporate governance standards for public companies and increasing liability exposure, the process of assembling a strategic board of directors is more complicated and critical for today’s IPO candidates than it was in the past. Unlike a private board, your public board will require a substantively diverse mix of audit, governance, compensation and compliance specialists. Corporate strategists and experienced executives will also ensure you receive good counsel. Attracting the right board members can be difficult, so ensure you can clearly outline your company’s purpose and long-term vision.
Retaining the right talent and molding your company structure to operate in a public environment require a lot of time and money. To avoid any public scrutiny and lawsuits, you must train your employees to adjust to an increased level of transparency.
Timing and market readiness
Many companies are still too small when they decide to go public and usually lack the necessary resources and expertise needed to thrive in the market. Part of transitioning to a public company is converting and adhering to International Financial Reporting Standards. The conversion is not only very expensive, but time consuming.
In addition to ensuring your internal environment displays market readiness, you must first evaluate your competitive environment and determine whether the market is ready to accept an IPO. To determine this, choose an underwriting group that is familiar with the IPO pipeline and can assist in determining when to file the prospectus document.
As the saying goes, timing is everything. If timed properly, you will achieve a favourable position with potential shareholders and also provide your investors with the greatest gain for the months and years after the IPO.
If timing isn’t right, you should consider waiting to ensure optimal returns — as taking the time to understand the pros and cons of an IPO and the impact of such a transaction on your organization is vital to a company’s success.
Is your company ready?
Going public is a landmark decision for any company. Without the proper framework, it’s unlikely that your business will succeed in issuing an IPO. Many pieces need to fit together — such as the right timing, the right economic climate and the right financing — to issue an IPO and maintain long-term success. Having all of these key elements secured and primed before moving forward will strengthen your position. If one piece falls short, your whole IPO opportunity may be in jeopardy, and the outcome could be costly.
Rather than asking if the markets are ready for you, determine whether you are ready for the public markets.
David is a partner in the Assurance group of Ernst & Young. David has over 17 years of experience and an extensive background managing audit and tax assignment for both private and public companies. David works predominantly in the manufacturing, steel, technology and professional services sectors. Over the years, he has built a practice focused on assisting clients in expanding and diversifying their business units throughout North America and worldwide.
