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
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