Pay down the mortgage or do RRSPs? -- LIFE LETTER for November , 2004, poses a very pertinent question. Jack and Dianne chose Option 3. Depending on your circumstances, yet another avenue may serve you even better. Please call me for details..

Tax planning tips for year-end and beyond -- The December issue of LIFE LETTER offers some tax saving tips you may not have thought about. See your accountant about these..

THE STOCK MARKETS - As of November 30, 2004, the S&P TSX Composite is up 9.84% year-to-date; Dow Jones is at - 0.25%; the S&P 500 is at +5.57%; and the NASDAQ has grown by 4.66%. The major European and Asian indexes stand from a high of 11.80% for Hong Kong's Hang Seng to a low of 4.06% for Germany's DAX.

WALTON INTERNATIONAL - Walton sells residential real estate within the city limits of Calgary and Edmonton. At the time of this writing, Mathisen Financial, Inc. has clients on a waiting list to acquire these properties. Walton International's performance record over the past 25 years is: Double your money in 4 years at an average annual growth rate of 18.00%. If you want more information on this unique investment opportunity, please contact me. New Walton offerings are sold within a few days after release. Why not join the waiting list to benefit?

My bi-monthly update on my two personal portfolios, carefully and conservatively constructed, based on my own research of the markets and risk tolerance profile:

PORTFOLIO #1: March 7,2003 to November 30,2004: the return is 27.9%
PORTFOLIO #2: April 28,2003 to November 30, 2004: the return is 31.6%

Mathisen Financial, Inc. can also offer clients savings/chequing accounts that pay about the same interest as short term GIC. But you money is not locked in. Call me for details.

HAPPY INVESTING!
Sincerely,
Hans Mathisen

 

LIFE LETTER

Pay down the mortgage or do RRSPs?

Jack and Diane were wondering if it would be better to pay down their mortgage or make RRSP deposits. They want to minimize what they pay in debt interest, but they also want to retire early.

They just bought a new home with a $150,000 mortgage amortized over 20 years at 5%. If they stick with it and assume the interest rate doesn't change, they will pay $86,565 interest.

If Jack and Diane "pay down" their mortgage by $6,000 each year, they can shorten the payment period to 11 years and reduce their total interest on the mortgage to $46,006. They plan to start making RRSP deposits after the house is paid off.

They are both 30 years old. If they wait until age 41 and start making $6,000 annual contributions to RRSPs at 7%, Jack and Diane will accumulate some $230,274 at age 60. That generates a lifetime income of about $1,365 per month.

In order to pay down the mortgage by $6,000 per year, they actually have to earn about $9,112 before taxes (rates vary slightly from province to province). If they made $9,112 annual deposits to RRSPs after the mortgage is paid off, they would accumulate $349,709 at age 60. This means about $2,089 lifetime monthly income.

By committing $9,112 of earned income to reach their goals, they could put $6,800 into RRSPs each year starting right now. They could then use the annual tax savings of $2,312 to pay down the mortgage. The mortgage will then be finished off in 15 years with total interest paid of $64,082.

By putting $6,800 per year into RRSPs now and increasing it to $9,112 when the mortgage is done, they would accumulate $709,543 at age 60. This gives them a lifetime income of $4,260 per month.

Jack and Diane's choices are:

Option 1 - Get rid of the mortgage in 11 years by making $6,000 annual pay downs, then put the $6,000 into RRSPs each year until age 60. This reduces total mortgage interest to $46,006 and gives them total RRSP savings of $230,274 at age 60.

Option 2 - Pay off the mortgage in 11 years as above, and then start RRSP deposits of $9,112 each year until age 60. Same mortgage interest of $46,006, but RRSP totals of $349,709 at age 60.

Option 3 - Pay off the mortgage in 15 years by contributing $6,800 to RRSPs each year and applying the tax savings of $2,312 to mortgage principal, then increase RRSP deposits to $9,112 per year. The mortgage interest will total $64,082, but their RRSPs will accumulate to $709,543.

Jack and Diane decided that Option 3 gives them the best of both worlds. Though it costs a little more in mortgage interest, it significantly increases their retirement wealth at age 60. In short, it costs them $18,076 mortgage interest to get an extra $359,834 in retirement savings and double their RRSP income.

Copyright © 2003 Bowen Financial Inc. All rights reserved

Want help with your retirement planning?
Call Hans Mathisen today at (306)242-7042.
or email - hans@mathisen.ca

 

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LIFE LETTER

Tax planning tips for year-end and beyond.
As Walter turned age 69 this year, he needs to make RRSP contributions before the end of the year for them to qualify for deduction. The normal 60-days extra does not apply because he has to convert his RRSPs to an income before the end of the year.

His 2004 income determines his 2005 RRSP contribution amount, but Walter won't be able to make a deposit next year because he is now 69. He can avoid losing his allowable deduction by making his 2005 deposit in December 2004. This will attract a 1 monthly penalty by Canada Revenue Agency (CRA), but only for the month of December.

Is it worthwhile? Lets say Walter's 2004 income gives him the maximum RRSP contribution limit of $16,500 for 2005. If he deposits the full amount in December 2004, he will be assessed a penalty of $145 ($16.500 minus the $2,000 allowable over-contribution limit times 1). He then claims the full deduction in 2005 and saves about $6,600 in income taxes (assuming a 40 marginal tax rate). He will net a tax saving of $6,455 after paying the penalty - a saving he could have lost forever.

Tax-free Income
Geoff turned age 65 in 2004 and is still working. He plans on delaying income from his pension, RRSPs and Canada Pension Plan (CPP) until age 69. But Geoff wants to benefit from the Pension Income Credit right away. What can he do?
Individuals age 65 or older arc entitled to a non-refundable tax credit of 17% on certain income to a maximum of $170. To qualify for this credit, all Geoff has to do is convert a portion of his RRSPs to generate an annual income of $1,000.

Reduce Taxes Deducted From Your Paycheque
Carolyne makes regular monthly RRSP deposits through a pre-authorized withdrawal plan. She gets a nice refund every Spring, but would like to benefit from the tax savings right away. After all, who wants to lend money to CRA interest-free?

She can apply to CRA for a reduction in the taxes withheld on her employment income in respect of her regular RRSP contributions. Carolyne will need to complete and submit to CRA a form T2131 "Request to Reduce Tax Deductions at Source" along with proof of her monthly RRSP deposits.

Charitable Contributions
Donations to charities must be made by the end of the year for them to be deductible from 2004 income.

Free Paper!
Hundreds of thousands, perhaps millions, of used computer printer toner and ink cartridges end up in the garbage every year. Take your used cartridges to an Office Depot store near you. They will give you a free ream (500 sheets) of their EnviroCopy brand recycled paper and recycle the cartridges for you.

The information contained in this article is general in nature and is intended for informational purposes only. Before taking any action on income tax related strategies, you should consult with your appropriate legal, tax or accounting advisor.

Copyright © 2003 Bowen Financial Inc. All rights reserved

Want help reducing your tax bill?

Call today:
Mathisen Financial, Inc. (306)242-7042
or email Hans at hans@mathisen.ca.