Justine wonders whether she should add money to her TFSAs, RRSPs or RESPs, or is it best to pay down her mortgage?
Justine may want to reassess her investment strategy at this time, planner says. Photo by Brent Lewin/Bloomberg By Julie Cazzin and Brenda Hiscock
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Q: I recently received a payout from a critical illness insurance policy. I now have a lump sum, tax-free amount of $275,000. My husband and I want to maximize this opportunity to boost our finances. I plan to work for the foreseeable future and both my husband Mark and I earn about $70,000 annually.
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Our plan includes paying off our consumer debt of $8,000, topping up both tax-free savings accounts (TFSAs) — $100,000 between us — and the registered education savings plans (RESPs) for our three daughters by $5,500. We also have unused contribution room in our registered retirement savings plans (RRSPS) and they total $92,000 for me and $60,000 for my husband. Is the best financial move to top these up? If so, should we do it all in one year, or over a few years?
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We also have a $260,000 mortgage at three per cent for three more years and wonder if we should pay down some of it. And, finally, should we get a second opinion from an adviser on how to invest this money in our RRSPs and TFSAs? What type of adviser do we look for? — Justine
FP Answers: Justine, you have recently received a payout of $275,000 in critical illness insurance, which pays out a lump sum, tax-free payment if you’re diagnosed with a serious health condition such as a heart attack, cancer or stroke.
Before deciding how to best use the funds, you need to consider if there will be any upcoming costs or impact on your future work status related to your recent health condition. Once you’ve taken this into account, given the rising interest-rate environment that we are in right now, it makes good sense to prioritize paying down your consumer debt as well as topping up your TFSA since that will allow you to shelter future growth from tax.
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You are considering topping up the RESPs for your daughters by $5,500. I’m assuming this is in order to maximize grants. Depositing $2,500 annually per child to a RESP will maximize the grants, but there is no actual annual limit on RESP deposits — just a lifetime maximum of $50,000. Having said that, making annual contributions of $2,500 per child ($7,500 per year for three daughters) to maximize the 20-per-cent government grant may be more advantageous.
You and your husband also have a lot of RRSP room available. But I’m unsure if you have employer contribution matching plans in place. If so, it’s important to prioritize maximizing those plans.
Topping up your RRSPs could provide some benefit, but given your income level, it wouldn’t be advantageous to maximize the contributions all at once. RRSP contributions reduce your taxable income. If you reduce your taxable income below $50,000, the tax savings are quite minimal and may not provide any advantages at all.
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Ideally, you want to deduct at a rate that is higher than the rate you’ll pay in retirement to come out ahead. Also note that when you contribute, you don’t need to deduct the amount all in one year. You can carry forward a deduction to the following year.
Your mortgage is at a rate of three per cent. If you can earn a higher rate of return in your TFSA than your three-year mortgage, you will come out ahead. Currently, there are three-year guaranteed income certificates (GICs) that pay more than four per cent, so it may be advantageous to invest the funds.
It’s also a good idea to reassess your investment strategy since your financial situation has recently changed significantly. Working with a certified financial planner can help you determine your best course of action.
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Recommended from Editorial FP Answers: How can I better achieve my goals as set out in my financial plan? FP Answers: What is a pension bridge and should I take it? FP Answers: How do I recognize investment bias in myself and my adviser? First, you may want to work with your planner to assess your risk tolerance to find a strategy that works for both of you. Ensure you complete a separate risk tolerance profile for the RESP funds as that timeline is typically different than other savings plans.
If you believe in passive investing, want to keep costs low and need a bit of investing support, robo-advisers may offer a good solution. If you want to invest on your own, all-in-one or asset-allocation exchange-traded funds (ETFs) are a passive, low-cost approach to consider if you are not comfortable selecting and monitoring a handful of ETFs yourself.
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Article content DIY investing is not for everyone, and investment advisers can help. But be aware that you pay for that help through higher fees. Working with a good planner can assist you in determining the best path forward with your investment planning. I wish you all the best in your recovery.
Brenda Hiscock is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. She does not sell any financial products whatsoever. She can be reached at bhiscock@objectivecfp.com.
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