Train of life | Young family with good income seeks advice on savings and taxation

At the dawn of their forties, Clément * and Sophie * are de facto spouses and parents of two young children (4 years and 8 months). This young family enjoys good income from employment (around $ 215,000 / year in all) which, combined with a reasonable lifestyle, gives it a strong capacity to save.

Martin Vallieres
Press

The situation

This is how Clément and Sophie were able to speed up the repayment of their mortgages on their home, with a total balance reduced to one-third of its market value of approximately $ 700,000. Also, Clément and Sophie have already established education savings plans (RESPs) of a few thousand dollars for each of their two children who are still preschooler.

On the other hand, Clément and Sophie’s registered retirement savings plans (RRSPs) and tax-free savings accounts (TFSAs) still show considerable balances in unused contributions, to the tune of $ 300,000 in all.

Also, Sophie recently received a sum of $ 250,000 as a pre-inheritance bequest from a close relative.

In this context, Clément and Sophie are looking for advice on the best ways to channel their strong savings capacity for their medium-term and long-term family projects.

Among other things, they are planning finishing work on the basement of the family home, around $ 40,000 in two years, and the new replacement of the family vehicle, estimated at $ 60,000 (including taxes), also in two years.

In the longer term, Clément and Sophie want to plan to build up a financial asset for Sophie’s early retirement plan in about fifteen years, at age 55. Sophie would then be eligible for the first level of annuities (approximately $ 37,000 per year) from her employer’s defined benefit pension plan.

At the same time, Clément and Sophie are looking for advice in order to optimize the tax situation of their budget and their family assets according to their income at already high tax rates.

Clément and Sophie’s situation and concerns were submitted for analysis and advice to Julie Tremblay, financial planner and financial security advisor at IG Gestion de Patrimoine in the Lévis region, near Quebec.

Advice

Before sharing financial and tax planning advice with them, Julie Tremblay considers it important to remind Clément and Sophie to check the adequacy of their marriage and estate documents.

“When a couple lives as common-law partners, and the members of the couple are parents of small children, it is particularly important that these agreements and documents [contrat de vie commune, testaments et mandats en cas d’inaptitude, assurance vie et invalidité, tuteur des enfants en cas de décès des deux conjoints, etc.] are well suited to the continuity of financial and personal obligations in the event of major disruptions to the family situation ”, indicates Mr.^me Tremblay.

That said, in terms of financial and tax planning, Julie Tremblay notes that Clément and Sophie enjoy good income as a “starting point” in terms of budget planning for their important medium and long-term projects.

However, underlines M^me Tremblay, this level of family income further enhances the importance of carefully considering the tax impacts of their next financial planning decisions.

In Sophie’s case, Julie Tremblay recommends that she “use her inheritance of $ 250,000 to cover her arrears of $ 112,000 in unused RRSP contributions, and thus reduce her tax for a few years.” Second, M^me Tremblay recommends that Sophie make up her contribution arrears of $ 52,000 in her TFSA.

As for the $ 86,000 balance of the amount of the inheritance, Julie Tremblay suggests that Sophie split it into two portions. A first portion of $ 46,000 would be put in an unregistered investment savings account, and a second portion of $ 40,000 could be used to advance work on the family home, “but after this singular contribution from Sophie in the ‘family real estate asset would have been included in the cohabitation contract with her de facto spouse, ”emphasizes Mr.^me Tremblay.

Regarding Clément’s financial situation, Julie Tremblay also recommends that he prioritize reducing his arrears of $ 75,500 in RRSP contributions in order to optimize the tax return during his years of high taxable income.

“Clément would even benefit from withdrawing amounts from his TFSA in order to maximize his annual contributions to his RRSP. He would obtain good tax refunds which could then be used to, in particular, refund withdrawals made from his TFSA up to the limit of the annual amount, ”explains Mr.^me Tremblay.

In addition, by striving to make up their savings arrears in accounts with tax advantages, Clément and Sophie will also be able to optimize their financial leeway for their next major expenditure projects: work on the house, planned for $ 40,000, and the new replacement of the family vehicle, estimated at $ 60,000.

“Depending on the evolution of interest rates by then, and the return on their savings in TFSAs or non-registered accounts, Clément and Sophie will then be able to choose the best way to finance these projects between the use of their mortgage credit and withdrawals from their savings accounts, ”says Julie Tremblay.

* Although the case highlighted in this section is real, the first names used are fictitious.

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