How can you properly use a substantial inheritance to strengthen your short-term financial situation, while optimizing your long-term financial planning? This is the question asked by spouses Mélanie*, 26, and Robert*, 27, who have also been new parents for six months, after having recently inherited the sum of $200,000.
Posted at 7:00 a.m.
The situation
“Can we consider using this sum to carry out our plan to buy a duplex as owner-occupiers? Or should we prioritize the “filling” of our savings accounts like the TFSA and the RRSP, which are still almost empty? asks Mélanie during a conversation with The Press.
While their budget situation appears decent, with employment income (approximately $123,000 per year) covering their lifestyle well (approximately $50,000 per year), Mélanie and Robert’s joint balance sheet remains largely stripped of assets. in tax-advantaged savings accounts.
Numbers
Mélanie*, 26, and Robert*, 27. Married and parents of a 6 month old child.
Employment income: approximately $123,000 per year
Common financial asset
- in Registered Retirement Savings Plans (RRSPs): $10,000 (unused contributions: $54,000)
- in tax-free savings accounts (TFSA): $0 (unused contributions: $128,000)
- in current savings account: $200,000 (recent inheritance)
Common passive
- line of credit balance: $35,000
Expense budget: $50,000 per year (housing: $18,000, family life: $32,000)
In their Registered Retirement Savings Plans (RRSPs) and Tax-Free Savings Accounts (TFSAs), for example, Melanie and Robert have accumulated “unused contribution room” for a total value of $182,000. On the other hand, their common balance sheet contains a liability of $35,000 in the balance of a line of credit without mortgage guarantee, and therefore at a high interest rate (13%).
In this context, the recent receipt of a $200,000 inheritance appears to be a solid foundation on which Mélanie and Robert could build their financial wealth, while supporting the budgetary needs of their young family.
But to achieve this, admits Mélanie, “we seek advice in order to properly align our short- and medium-term budgetary priorities with our longer-term financial concerns, such as retirement savings”.
The situation of Mélanie and Robert was entrusted for analysis-advice to Louis Morneau, who is a financial planner and advisor in financial security products at the firm Aisance Gestion de patrimoine, in Brossard, on the South Shore.
Advice
“For young parents like Mélanie and Robert, it’s often the moment in life when the couple has great financial needs for the family, but very little means, notes Louis Morneau from the outset. But here, the situation appears more favourable. Revenues exceed expenses; the spouses are not over-indebted, and they are lucky enough to benefit from a substantial inheritance. »
Nevertheless, Mélanie and Robert have a few steps to take in order to optimize their financial planning. First, recommends Louis Morneau, “the repayment of the line of credit is the financial element that could be settled the fastest.”
PHOTO ROBERT SKINNER, LA PRESSE ARCHIVES
Louis Morneau, financial planner and advisor in financial security products at Aisance Gestion de patrimoine
“At 13% interest rate, it is obviously very disadvantageous. By fully repaying this line of credit, Melanie and Robert would save thousands of dollars in interest costs. »
How ? “By killing two birds with one stone, through their RRSP,” replies Louis Morneau. By contributing to the maximum of unused contributions [environ 54 000 $] in their RRSPs, they would obtain a tax refund of around $20,000 in all, which would then be used to repay more than half of the line of credit. The balance of the balance to be paid, approximately $15,000, would then come from their amount received as an inheritance. »
Property purchase
Once the $35,000 line of credit has been purged from their balance sheets, while having properly bailed out their respective RRSPs, Mélanie and Robert will be able to better prepare the budget and the financing for their project to purchase a residential duplex.
“As long as this project is well prepared, and well managed afterwards, becoming the owner-occupant of a duplex can be a significant long-term advantage,” points out Louis Morneau.
However, in the current context of “soaring real estate prices and rising interest rates to come”, Mélanie and Robert will have to pay particular attention to budget planning and the financial conditions of their real estate project. Starting with the down payment. Louis Morneau suggests that they aim for a minimum of 20% of the purchase price in order to avoid the significant additional costs of “CMHC-type” mortgage insurance.
Mélanie and Robert must also plan for the additional expenses that will result from their new situation as owner-occupants: transfer duties and “welcome” property tax, initial repair or renovation work, additional furnishings, etc.
“For a young couple considering the purchase of their first home, it is very important to make a budget to ensure their ability to repay [le prêt hypothécaire] and pay other unavoidable expenses. It’s good to want a new home, but it mustn’t become so expensive that it prevents them from living normally,” warns Louis Morneau.
RRSP, TFSA, RESP
As for Mélanie and Robert’s concerns regarding long-term financial planning, Louis Morneau reminds them that tax-advantaged savings accounts such as RRSPs and TFSAs remain “excellent for accumulating savings for retirement”. And this, even if Mélanie and Robert each benefit from a good base of retirement savings with the retirement plans related to their work.
In the meantime, Louis Morneau recommends that young parents consider setting up a Registered Education Savings Plan (RESP) for their child.
“It could be very advantageous to them over the years considering that the maximum contribution of $2,500 per year in an RESP gives access to a tax subsidy of up to 30%, explains Louis Morneau. In addition to this tax subsidy on contributions, the assets accumulated in an RESP can grow tax-free. »
Moreover, underlines Mr. Morneau, “in the event that their child does not pursue post-secondary studies, Mélanie and Robert could take back the capital accumulated in the RESP and transfer it to their RRSP tax-free”.
“For young families, the RESP is a good means of savings that should not be overlooked in their financial and tax planning. »
Another element not to be overlooked for Mélanie and Robert? “As young parents, it is important to keep all the “protection” aspects of their family up to date. Starting with the drafting and notarial registration of their wills and protection mandates, points out Louis Morneau.
“Mélanie and Robert must protect themselves against the consequences of work disability, premature death or serious illness on their financial security. Otherwise, such an unforeseen event could seriously compromise all their financial planning put in place over the years. »
* Although the cases highlighted in this section are real, the first names used are fictitious.
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