How to leave your bank and start a new relationship with a credit union in 5 simple steps

notepad, pen, glasses and cup of coffee

There’s never been a better time to switch from your bank to a credit union.

From ever-rising fees, to poor service, to criticism over aggressive sales practices, Canadian banks have come under heavy scrutiny in the past year. So what stops angry and frustrated bank customers from immediately closing up their bank accounts and embarking on a new relationship – with a credit union?

At YNCU, the number #1 reason we hear is ‘it’s too much work to switch.’ And the truth is it can be complex and time consuming. On the other hand, it can be a smooth and relatively painless experience. Much depends on attitude, as well as having an organized approach.

Here are some things to consider if you’re planning to switch your bank accounts:

Chequing and savings accounts

Your first step is shopping around and deciding where you are taking your business. Before closing out your bank account, open up a personal chequing or savings account at your new financial institution.

Remember to go through several monthly statements from your existing account since they’ll have nowhere to go once you close your old account.

Here’s a handy account switching checklist courtesy of Your Neighbourhood Credit Union.

Depending on your bank, you can close a chequing or savings account at a branch by phone or online. There is usually no fee to close a chequing or savings account. BMO charges a $20 fee if the account is closed within 90 days. CIBC charges a $20 fee to close and/or transfer accounts to other financial institutions. Royal Bank’s $20 fee is waived if you close the account in person.

Credit cards

Credit cards and bank accounts are independent of each other. So you can have a credit card with one financial institution and a bank account elsewhere. Cancelling a card can be done at a branch or by phone and should be effective immediately.

There is no fee to close a credit-card account. Of course, you still have to pay the outstanding balance, fees, carry-overs and interest.

Remember that pre-authorized payments set up on the credit card will no longer be processed, so you’ll need to provide billers with your new credit-card number.

calculator and banking statements

Personal loans

You will first need to decide which new personal-loan product you want and apply for it through your new lender.

Once you’ve qualified, you’ll need to notify your current lender in person and pay the balance plus interest either by cheque or debit at the time of closing, or your new financial institution can arrange to pay out the loan for you.

Mortgages

For a conventional mortgage, it’s a good idea to wait until the mortgage term matures to avoid paying penalties. But you should start looking at mortgage rates several months before your term ends.

Plan to give yourself several months before the renewal date to pre-qualify with a new lender (you can lock in a rate 90 days in advance of the renewal date). This lead time allows the financial institution to process your mortgage application, which requires a property appraisal for a fee and proof of income and employment. The lender also needs to do paperwork to get a payout statement from your current lender indicating the mortgage balance.

Banks will charge a discount fee of several hundred dollars to transfer the mortgage title to your new lender but credit unions will sometimes cover it (try to negotiate this!).

If you decide to transfer your mortgage before the term matures, you’ll have to pay a penalty. Your mortgage document will have the formula to help you estimate the amount. But your bank will tally the exact amount.

Remember to provide the new mortgage details to your home insurer.

Investments

You can hold your registered savings wherever you want, including those that are employer-matched. In addition to simplified record-keeping (one statement and one slip at tax time), consolidating your savings means you could get a better rate on higher balances.

To transfer registered investments, such as RRSPs, RIFs and TFSAs, you’ll need to meet with your new financial institution and bring your statements. Once you settle on the appropriate investment vehicle, the adviser will fill out a transfer authorization form, which will be sent to your bank to request the transfer.

There is a transfer-out fee per transfer. Since you’re a new customer, it’s worth asking your new financial institution to cover this fee.

The transfer process takes several weeks to complete.

If you hold non-registered investments, such as GICs or term deposits, it’s advisable to wait until the maturity date to transfer them to avoid penalties.

Source: Chu, Showwei. How to Break up with Your Bank. Special to The Globe and Mail. Published Thursday, Apr. 06, 2017.

Should you contribute to a RRSP or TFSA? (Part 2)

Hand drawing money sign, "Where to Invest"

TFSA vs RRSP?

Last month I talked about when to use the RRSP vs TFSA. This week I will touch on this topic further.

RRSP’s are optimized when you make contributions when your tax rate is high, with the strategy to withdraw these funds at a later date (like retirement) at a lower tax rate.

Let’s take a deeper dive into this.

Suppose you earn $75,000 per year today. Making a $1000 contribution this year will save you $296 in taxes (29.65% tax rate). When you retire and you have a smaller income (for example, $40,000), you will pay $200 in taxes (20% tax rate) on a $1,000 withdrawal.

This tax savings can be further magnified by the fact that your original $1000 contribution has gained value since it was initially purchased. (The ‘time value of money’ effect)

During retirement, seniors have the ability to split income, including pensions and RRSP/RRIF accounts once over age 65. This can generate significant tax savings.

So why a TFSA then?

TFSA’s are an additional option to help Canadians save that is tax deferred. If you are in a high marginal tax rate, you will want to utilize the RRSP first. If your tax rate is low now, and you expect it to be higher in retirement than it is today, a TFSA is your best option.

All things being equal, if your tax rate never changes from now into retirement, than it makes no difference which one you choose (at least from a tax planning perspective)

The following illustrates this point.

TFSA vs. RRSP

(Notice the after tax outcome after 20yrs is identical when tax rates stay the same)

Source: Investment Planning Counsel, http://www.deferthetax.ca/rrsp_vs_tfsa

 

I would caution you when looking at these options to ask yourself what the intended purpose is for these funds? Tax savings today do have consequences in the future. The TFSA offers tremendous liquidity and the ability to take funds out and re-contribute back in. Once you access funds from an RRSP you can’t re-contribute unless you have RRSP room available.

Although these plans don’t seem overly complicated, making the right decision on how to build them is critical to their success. Mastering the basics is a good start, but seeking the advice of a qualified Financial Planner/Advisor can make a big difference down the road.

Grant Galloway, CFP, CLU, CHS

Financial Planner

Contribute to RRSP or TFSA? Here’s an easy way to know.

tfsa-or-rrsp

On my drive to work this morning, I couldn’t help but notice the $1.16 per litre gas prices… (As we start 2017 with yet another government tax grab on carbon).

I am hoping to help you and your members alleviate some of the tax pain this season with some proper planning!

If you have heard me speak about TFSA’s you will know how passionate I am about these plans. TFSA’s have now been around since January 2009 and they are literally one of the best things the government has given Canadians. The tax-free growth and access on these accounts is obviously the biggest attraction, but they are also a great estate planning tool, giving the ability to name a beneficiary or successor holder allows the funds to bypass the estate and avoid probate.

For 2017 we receive an additional $5500 of new TFSA contribution room, with a cumulative (lifetime limit) of $52,000

(Did you know if you were to max out your TFSA and invest into a conservative portfolio you could have nearly $1,000,000 in 40 years)

The turn of the calendar also brings a new RRSP season, the 2017 RRSP limit is $26,010

I continuously receive questions about the RRSP vs TFSA debate, when should you buy an RRSP? When should you buy a TFSA?

My first reply is YES, always…

Rule of thumb is it depends on your tax bracket, for example in 2017 if you earn over $45,916 you will have a top marginal tax rate of 29.65% this means the next dollar you earn above this income you give our friends at CRA 29.65 cents. Making an RRSP contribution reduces your total income..

Example: If you earn $55,916 in 2017 the last $10,000 you earned you paid $2,965 in taxes; if you made a $10,000 RRSP contribution you would save $2,965 in taxes. Perhaps generating a refund when you file your taxes in April 2018.

 

If you earn less than this $45,916 (24.15% tax bracket) I encourage people to make their savings contributions into a TFSA for now, once their income increases they can always transfer these contributions to an RRSP and still receive a tax refund at that time.

I don’t expect you to provide members with any kind of tax advice, however we would love to talk to them and give them the proper guidance.

Remember a dollar saved in taxes, is a dollar that can be reinvested and compounded over time.

Here is a link to the 2017 Tax Brackets and RRSP & TFSA Limits 

Want to know more about the differences between RRSPs and TFSAs (and which one is right for you?). Here’s an e-book.

Cheers

Grant Galloway, Financial Planner CFP, CLU, CHS

168 King St S Suite 2
Waterloo On
N2J1P6
519-579-7324 ext 1
226-218-4646 Cell
519-579-7597 Fax
1866-328-7324 Toll Free

 

 

 

Debunking Retirement Myths

young couple sitting on chairs on the beach

Wouldn’t it be great if your retirement could feel like your last vacation? It can, with proper planning and a strong discipline!

We are experiencing a silver Tsunami. The leading edge of the Boomers turned 65 six years ago. On average, 1,250 Canadians turn 65 years old every single day. Most Boomers were born between 1961 -1965. That’s why you feel everyone has been turning 50. And people are living longer, much longer.

With all of this happening, it’s small wonder that the media, politicians and the financial services business are all talking about retirement. That kind of focus may be good, because of what it means for savings habits and pressures on goods and services.

There are a lot of myths we have to be wary of if we want to ensure we have an adequate retirement income that lasts a lifetime.

 

Myth #1 – Retirement planning is just for older people

The definition of retirement is changing and even though it may seem like a long way off, use that to your advantage. Much like dieting and exercising, starting a plan and sticking to said plan are the hard parts.

Every little bit of savings helps and will make it easier, if you start early enough. Harness the power of compound interest where planning and saving a little now on a regular basis can let money work for you: 24 hours a day, seven days a week…for decades. Your money seems to grow slowly at first then starts to balloon as you get older, even if you put in the same amount of money.

Every year you delay means you’ll need to save more money and perhaps take on more investment risk in order to reach your goals.

 

Myth #2 – I’ll never be able to save enough for retirement

It’s surprising, even shocking, that with all of the attention devoted to an aging society and the need to save for retirement, that so few people are inspired to get started. Many do have a doom and gloom attitude about retirement. Myths aren’t helping matters.

“I’ll never be able to save enough for retirement.” That may seem true when you’re young, starting a family, paying off those school debts and dealing with a mortgage. Instead, you figure your income will go up in the future and you’ll work on developing your money management skills and habits then.

Don’t fall into the trap of thinking it’ll be easier to save for retirement in just a few more years. After all, there are competing and expensive needs no matter how old you are.

First you pay off your college debt and the next thing you know, you’re helping your kids pay off theirs. Then there is the house, wedding expenses, home renovations, grandkids and the list goes on and on. One day you’ll stop and ask yourself, ‘Where did the time go?’

Every year you delay starting to save ultimately means you’ll need to save more in order to get on track for a retirement that’s getting closer and closer.

The best time to start saving for retirement is when you are young and just starting to work. But if things just didn’t work out that way for you, then consider starting now. Let the power of compound interest work for you as long as possible.

 

Myth #3 – I need $500K, $1M, $2M to retire

The fact is that your “number” can vary greatly depending on your personal situation and goals, how long you expect to live, whether you will be single or with a spouse/partner and when you will retire.

Consider asking an advisor who specializes in retirement planning, or better yet, retirement income planning!

Consider trying some of the tools available from trusted sites produced by large financial institutions. And don’t forget government benefits like the Canada or Quebec Pension Plan (CPP/QPP) and Old Age Security. If you want to maintain the same lifestyle before and after retirement, your number is tied to how much income you will need to provide the same consumption dollars. That’s the money you normally spend on your own lifestyle. Add some extras to that bucket list of yours for those early years of retirement when you will be most active and spend more money.

 

Grant Galloway, CFP, CLU, CHS

Grant can be reached at  ggalloway@yncu.com

 

Building a House – Matt Lukas shares his experience

sectional couch

Subscribe to our blog to keep up with Matt’s monthly updates focusing on his house building experience.

As my wife and I do our progress inspections of the new build, we find ourselves getting into discussions about the new furniture and fixtures that will complement the house’s new style. We’ve visited a few different retailers to discuss our options – and we’ve done some research to figure out when is the right time to buy.

I’ve been a little taken back by sticker shock on some items – we want to get a new sectional sofa for our main living space, but I can’t justify spending over $5,000 for a couch, no matter how comfortable it is. The sales associate was on-the-ball noticing my look of dismay, and quickly chimed in that in-store financing was available. Not a bad idea, but not for me. couple with their dog

In my last blog I talked about budgeting, making sure my cash flow matched the needs and wants I had at the time. So while I could forego a little bit of savings to have a really nice couch – it doesn’t make long-term financial sense for me to spend the money now on furniture, and potentially forego years of retirement savings or dip deeper into my emergency savings if something bad happens.

This experience brought forward a few financial tips you may find useful.

Number one: Applying for in-store financing

Credit is important, using credit is important – but using your excellent credit to temporarily finance household goods is detrimental to your credit. Equifax Canada says that up to 15% of your credit score is comprised of the length you have established credit. New credit can hurt your score over the short run. They also note that 10% of your credit score is comprised of the type of credit you own – Mortgages, loans and lines of credit are good; credit cards are okay, in-store financing or prime lending is not so good and can hurt your score over the long-run. So, let’s go back to my situation in the furniture store.

Here I am, sitting on an expensive couch that my wife and I like, we’re feeling the pressure of buying from the salesperson and we need to make a snap decision about money. My best piece of advice, take your time and walk away if necessary. So, that’s what we did.

Number two: Do your research

It turns out, that awesome, expensive couch we were sitting on is manufactured and shipped from the States. As of right now, the Canadian dollar trades at roughly $0.75 USD – so from my perspective, the item is overpriced by 25% just based on the disparity of the currency. If I was buying last summer, this item should have cost much less.

My outlook has changed slightly, now when shopping for furniture, I’m going to ask about Canadian-made items – the pricing is much more competitive, the shipping and manufacturing time is less, and the quality is truly comparable.

Number three, my last point: Compound interest

I mentioned earlier that this type of purchase could significantly impact years of retirement income, and you may have scoffed and thought, “Really Matt, over $50 or $100 a month?”

The truth is, I’m not retiring tomorrow, and my investment time frame will be another 25 to 30 years (depending on the financial decisions I make today). The more I contribute to my savings now, the more opportunity that money has to earn interest; and, that interest earning interest, and so on. A wise man once said, “The greatest tool an investor has in their tool belt is time”, don’t squander the time you have now to plan for your future.

Tools I recommend:                                                                         

YNCU Retirement Planning Tools: https://www.yncu.com/Personal/ToolsAndCalculators/Calculators/RetirementPlanner/

Consumer Reports:

http://www.consumerreports.org/cro/index.htm

Equifax Canada: http://www.consumer.equifax.ca/home/en_ca

Follow me on Twitter @matt_at_YNCU for updates and more ways to be financially fit.

 

house under construction

Are you buying or building a house? Share your comments and questions with us!