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Case Study: High Income and Consumer Debt Free

Sean, from Alberta, emailed me to ask if I could analyze his financial situation. Judging from his financial stats below, he is in great financial shape as he has relatively high income and no consumer debt.

Now the fun begins.

Here is the lowdown:

  1. Married w/ baby on the way.
  2. Gross $135k last year, on track to about the same this year.
  3. $280k mortgage @ 3.25%. 1 year term, comes up in February. Purchased the house for $300 about 1.5yrs ago & it is now probably worth… $280k. Got to love Alberta real estate!
  4. Zero consumer debt! We hammered down for the last couple of years to kill this, which is why I haven’t been investing anything.
  5. $3500 in TFSA & will definitely get to $5k by December. No other investments or cash holdings. I have 2 Lines of Credit for a total of $15k, with no balance.

Paying off the debts has been my focus for so long & now that I am entering this next stage I could use some insight.

Goals:

  1. I want to get enough equity into the house to start making use of the Smith Manouver.
  2. Start contributing to my RRSP, to bring the taxable gross down & to set up for the future.
  3. Start RESP & contribute enough to get the maximum amount from the gov’t.
  4. Eventually buy a bigger house, but keep our current house as a rental. (This is my long term goal…)

Basically I am wondering how to best bring my taxable income down, while still building equity in the house as quickly as possible so I can start the SM going.

A couple of contributing factors:

  1. Wife stays home, so there should be a nice deduction there! Plus for the lil guy.
  2. I’ve been paying an extra 15% on the mortgage from the beginning & intend to increase that now that I have killed the car payments.
  3. I work out of the country & qualify for the Offshore Employment Tax Credit. In a nutshell, this means that I get a big refund every year, with the end of the year all said & done tax obligation around 15%.

This refund has mostly gone to debt reduction in the past & will now go towards house, SM, RRSP’s, etc, but am not sure how best to utilize it.

First I would like to congratulate Sean for taking priority in paying off consumer debt.  It’s difficult to get ahead financially when high interest debt is holding you back.  So basically, Sean is a little ahead of the common house hold.  He has lots of income, no debt, and is wondering what to do next.

1. Estate Planning and Insurance

Sean hasn’t mentioned if he has done any estate or insurance planning, but I think it’s important to mention.  With a baby on the way, and Sean being the main income producer in the family, insurance is a must.  I would suggest that Sean looks into term life insurance and disability insurance to provide an income stream for his family if the worst were to occur.

In addition to insurance, his family should obtain a legal Will to cover the basics of estate planning.

2. Build a Cash Reserve

After establishing the foundation of insurance, a cash reserve should be established.   How much depends on the family, but enough so that when unexpected bills come up (like a car repair, or leaky roof), they won’t need to go into debt to fix it.  For those that are more conservative, it may be wise to have enough cash around to cover expenses for 6-12 months should Sean lose his job.

Here is a post on figuring out how long your savings will last.

3. Start an RRSP

With the high income that he is making ($135k), I would suggest that he starts an RRSP.  Based in Alberta, Sean falls in the highest tax bracket which will add to his already large tax refund at the end of the year.  As I’ve mentioned before, RRSP’s have the most benefit for people in higher tax brackets, that is providing that the tax refund is used wisely.  Namely, to pay of debt or re invest.

How much should he contribute?  He could contribute enough to bring his income down to the next tax bracket, or simply maximize his contribution limit.  It really depends on his cash flow.

If they really want to start planning for the future, it may be wise to consider starting a spousal RRSP as well.  With his wife being a stay at home mom and no income, contributing to a spousal RRSP will help even out the income, thus reducing tax during retirement.

If Sean is new to investing, then I would suggest (as I always do) to index the portfolio for the long term.  Here’s a previous article with some tips on how self directed RRSP’s work.

4. Pay Down Mortgage

After contributing to the RRSP, if there is any cash left over, I would use it (and the RRSP tax refund) to pay down the mortgage.  Paying down the mortgage will create equity, which in turn creates equity to invest with if Sean decides to do the Smith Manoeuvre.

5. Smith Manoeuvre

Before Sean starts the Smith Manoeuvre, he’ll need at least 20% equity in his home based on the appraised value to avoid CMHC fees.  So if the house is worth $280k today, the mortgage should be paid down to $224,000.

Once he gets to that point, he should switch his mortgage to a readvanceable mortgage.  This will allow him to grow his HELOC as he pays down his mortgage principal.

One big thing to note is that the Smith Manoeuvre is a leveraged investing strategy and not a tax scheme.  Having said that, Sean will need to be comfortable with the added risk of leveraging his investments.

For those of you unfamiliar with the SM, here is my variation of the Smith Manoeuvre.

Final Thoughts

Every situation is different, but the basics remain the same.  If you have a family, insurance is a must along with a cash cushion (if you don’t have any high interest debt).  After that, it’s really a toss up between paying down the mortgage or contributing to the RRSP.  With Sean’s high income, I would suggest the RRSP route first, but use the tax refunds to pay down the mortgage.   The last step would be to use his HELOC to invest with, but again, this is not for everyone.

What are your thoughts?

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FT About the author: FT is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 37 comments… add one }
  • Four Pillars August 12, 2009, 8:57 am

    As usual – I agree with your analysis.

    He should focus a lot on the rrsp – it sounds like he probably has a lot of room. I would try to max the rrsp completely before worrying about borrowing to invest.

    He mentions a deduction for his wife and child. He can get a spousal credit for his wife but nothing for the kid unless they are disabled (I think). The spousal credit adds up to jack squat anyway.

  • Ray August 12, 2009, 9:40 am

    Great job Sean!

    I too believe it is important in his case to start an RRSP that is probably the best way for him to cut his taxes.

    Since wife stays home and has no income maybe give some thought to Spousal RRSP plan as well.

    With a child on the way the chances are that he will (or should) start an RESP or some type of education fund for his child.

    Another good way would be if he has some free time and motivation to start a small home business, this will help him deduct some costs like small part of mortgage, insurance etc as well it will allow you to pay your wife a salary which is tax deductible to you…..MDJ has a post on this take a look around.

    those are just some of my thought….good luck!

  • Kirk S. August 12, 2009, 9:49 am

    The thought of the cash reserve I think is important. If you are used to living a great lifestyle on one income and something would happen to that income, you need some backup. Before you say “I could never lose my job…”, please be realistic about the situation. The higher that you make for an income, probably also the longer it will take to find an equivalent job.

  • Mike - Fat Loss Tips August 12, 2009, 9:50 am

    I’m assuming the cash reserve is to be built inside the TFSA?

    Great analysis as always…

  • Alexandra August 12, 2009, 10:41 am

    Great advice, especially with regards to insurance. This is a key details so many people miss when planning their finances.

    I am wondering what the difference would be if he didn’t contribute to his RRSPs yet and concentrated instead on just the Smith Manoeuvre? Does the tax benefit of using his extra cash to put into RRSPs outweigh the tax benefit of having a tax deductable mortgage that is payed off sooner?

  • Denis August 12, 2009, 11:07 am

    Great advice on the Insurance and Estate Planning. My biggest issue is that there’s one hell of a liability that will come up in the very short term and he better be prepared for it:

    “$280k mortgage @ 3.25%. 1 year term, comes up in February. Purchased the house for $300 about 1.5yrs ago & it is now probably worth… $280k. Got to love Alberta real estate!”

    Negative or next to No Equity in his house when it comes up for renewal will require him to plan ahead to have a considerable down payment ready to go to pay for the difference once it comes up for renewal. He’ll need at least $14,000 (5%) + CMHC fees at renewal. I’d concentrate on making sure that 2) Build a CASH Reserve has enough available ahead of renewal time because a roof over your family’s head and avoiding a Power of Sale process is much more important than starting the RRSP when you’re looking at that type of liability coming up in very little time.

    He’s probably already used his first time home buyer’s option. That’s why I would put 4) Pay Down Mortgage above 3) Start an RRSP due to liability time lines. Worst case scenario he has the 2 LOCs that can cover the renewal liability (if they don’t cut back his credit lines), but you’ll be in the same situation you are now.

  • Subversive August 12, 2009, 12:25 pm

    Denis, this is an excellent point. He’ll need to make sure he has the 5%+CMHC fees (as you said) saved. Since he only has a 1 year term on the mortgage, this needs to be priority #1 at the moment. First time home buyer doesn’t really make any difference at all, any more, but no one is doing 100% LTV anymore, so you definitely need that bit of equity. If he’s paying down 15% extra, running the numbers through a basic mtg calculator (assuming 25 yr amortization) puts him somewhere around $270,000 owing after 1 year. He’ll need to do better than that if he wants his ‘built in’ equity to carry the difference. I would see if his bank allows for a larger percentage payment regularly. Some banks allow for as much as 100% extra each payment (I know my mtg with TD allows this), or he may want to save up and make a balloon payment to bring down the balance. In any case, I agree that should be first priority until he has that liability covered off.

  • nobleea August 12, 2009, 12:30 pm

    Denis, Subversive;

    At renewal, most banks just make you sign the papers and it’s done. Unless he switches banks, I doubt they’ll get an assessment done and make him go through CMHC.

    RE: RRSP – with the large tax deduction due to foreign work, is there going to be a huge tax refund? I don’t know where the foreign work deduction shows up on the income tax form.

  • comeleon99 August 12, 2009, 12:47 pm

    One thing to consider if you want move and rent out your previous primary residence. If you pay down your mortgage aggressively, it is difficult to refinance the rental such that the borrowed money is tax deductible, because if you pull out the equity or refinance to get money for a down payment on the new house the money isn’t being used for investment purposes and won’t be deductible.
    So if he plans to move in the near future, I would only pay down enough to give the minimum acceptable LTV, because the original mortgage is tax deductible after the change in use.
    I am going through this right now and since I had aggressively payed down my mortgage, the only way I could get the money out and have the maximum tax deductible interest I sold and repurchased my house. This obviously cost more in legal fees, but the tax deduction will almost pay for it in the first year.

  • Denis August 12, 2009, 1:15 pm

    nobleea – Personally, I’d air on the side of caution rather than just blindly believe that my bank is a nice guy and fine with continuing to lend me more than what my house is worth while rubber stamping me come renewal time.

    Here’s a recent story (July) of a family that could not get a renewal because of their negative equity situation, even after keeping up with ALL their payments during their term: http://bit.ly/FLk8G

  • cannon_fodder August 12, 2009, 1:19 pm

    nobleaa brought up the point I was thinking of as well. If his average tax rate is 15% (that’s what I’m inferring from his post) then the RRSP is not going to provide as big a windfall as people thinking his MTR is in the mid to high 40’s.

    I never agree with a big cash reserve. Get a line of credit sufficiently high enough to cover 6 months expenses and that way you don’t have a pile of cash sitting there doing nothing.

    I also tend to believe that the bank is not going to refuse to remortgage his house because the value has declined somewhat moderately. Thus, unless it makes him sleep better at night, that’s not where I’d focus first.

    1. Get a will made and make sure you have sufficient life insurance to provide for your (growing) family. Also look into critical illness and long term disability insurance. TOP priority!
    2. Max out a TFSA for yourself and your wife. If her tax rate is nonexistant and your tax rate is actually relatively average, the TFSA may turn out to be better than an RRSP for you.
    3. Do an analysis of how much an RRSP contribution will give you back in refunds and don’t over do it (i.e contributing so much that your MTR decreases to a level where it returns less than 30% to you).
    4. Take your tax refund next year, max out the TFSA again and put the rest against your mortgage.

    Thus, you would be building a retirement fund in both a TFSA (which could also act as an emergency fund if things get dire) and your RRSP while paying down your mortgage. But, you have to take care of you and your family by ensuring that you’ve planned for the worst while you hope for the best.

    In a few years, you could easily have $50k in TFSA’s and something less in your RRSP. Hopefully you will also have built some equity back into the house and you can add a non-registered portfolio to the mix. But build a solid foundation first before getting involved in a SM mortgage. Your family may continue to grow and with all of those stresses you want to make sure you can sleep at night. If you can continue to put in $10k/year into TFSA’s for you and your spouse and another $5-$10k into RRSP’s while eliminating your mortgage in less than 15 years you will be set up well for financial independence – SM or not.

  • Subversive August 12, 2009, 1:22 pm

    nobleea, I’m actually just finishing up dealing with getting new financing on my rental property because my previous lender (GMAC) decided they didn’t want to be in the mortgage business anymore and so isn’t offering any renewals once current mortgages expire. So, I had to run around and find new financing, thankfully I had enough equity in the property that it ended up working out okay, but I would hate to have been in that situation with less than 20% equity in the place. With a residence you could get by with 5% equity, but it’s foolish to assume the bank will be offering a renewal. I’ve been through a bunch of stuff in the last few months that have me adhering to the motto “It’s not done until it’s signed on the dotted line”. Assuming anything is a bad idea.

  • The Reverend August 12, 2009, 2:17 pm

    To upgrade to a big home and keep the existing one as a rental may require a significant amount of equity in the home. This should be considered before pursuing a SM, since it could limit your flexibility to move.

  • Four Pillars August 12, 2009, 2:58 pm

    Interesting point about the bank not having to renew your mortgage. I always wondered what would happen if I lost my job just before renewal time.

    This is an example of where the American banks are more competitive than the Cdn banks since they offer 20-30 year mortgages which transfers more risk to the bank. This might also be part of the reason most of the American banks are bankrupt but that’s another story. :)

    Denis – interesting article. Garth was pretty soft on them whereas the commenters ripped them apart.

    One other note – it looks like this guy chose a cheap 1 year mortgage for the low rate but I think this might have been a situation where it would have been less risky (albeit more expensive) to go for a longer term and have time to pay down the mortgage somewhat. I did this a few years ago when our mortgage was at an uncomfortable level – admittedly we paid through the nose in higher interest rates but at least we didn’t face any worst-case scenarios at renewal time.

  • cannon_fodder August 12, 2009, 4:06 pm

    It seems like we really are in a different time right now. Banks are getting increasingly risk averse so it may be prudent, especially if Sean is not with a major bank, to ensure he focuses on putting himself in a positive equity position in his house so that there are no surprises when it comes time for renewal.

    If he starts the renewal process within the typical 90 day window and starts getting a very uneasy feeling, perhaps he might have to go the extraordinary route of using his line of credit to borrow against and then pay the mortgage down just so it looks good to the bank. If the mortgage and line of credit are with the same institution then this sleight of hand will not likely escape their review.

  • Sean August 12, 2009, 4:56 pm

    Hi Everybody,
    When I asked FT to post somthing I didn’t expect so many responses so quickly! Great community here…

    Just to clarify:
    1. I have disability insurance. Term insurance & estate planning is getting updated as soon as I get home from work.
    2. Ill be starting an RESP for the little fella right away.
    3. I am currently building a cash reserve inside my TFSA. It will be maxed by the end of the month. Can i start contributing inside my wifes account?
    4. Im paying an extra 15% on my principle every month, but can also make an extra 15% lump payment on my total. As such Im putting an additional $1k / month. Lots of extra room.

    With regards to the mortgage. This will be the first term I have ever completed so I am not 100% familiar with the process, but like Nobleea said in post 8, it should just be a matter of going down, selecting a new term & signing. Ill be sticking with ScotiaBank for at least a while longer.

    With regards to the cash reserve I figure if I can max out the 2 TFSA’s every year that should be sufficient. Seems if I have the credit lines as back up that the extra could be better used elsewhere. My wife & I have even discussed a plan of canceling all non-essentials immediately in the event that I get laid off. And we could always sell the camper or (gasp!) the bikes!

    With regards to RRSP’s, Cannon_Fodder hit the nail on the head in post 11. The way the Offshore Employment Tax Credit works is that you pay minimum tax UP TO $100k, full tax on earnings over. So if I can apply deductions to get the gross under 100, that is where the benefit stops.

    While on the topic of post 11, what is an MTR?

    So basically it seems like the question is: Do I put my next tax refund onto my mortgage entirely to build equity or do I get into an RRSP & put whatever is left on the mortgage?

    Keep in mind that my renewal is coming up before my tax return. This is also my Second year in the house & I am putting everything extra onto the mortgage that I can, minus the TFSA, although I could pull that right before renewal & dump it onto the mortgage too.

    S.

  • Sean August 12, 2009, 4:59 pm

    Oh one more thing!
    Upgrading the house while keeping the current one is more of a 5 year goal, definitely not an immediate one. The goal for the more immediate future is a nice big safety net & security for my family.
    S.

  • tetsuo69 August 12, 2009, 5:22 pm

    Paying off the mortgage or putting it in an RRSP comes down to 2 main factors:

    – Can you get a reliable higher return from your investment in RRSP than your mortgage interest rate? Keep in mind your return on your mortgage is after tax, while your RRSP return is before tax (future tax, but its still a tax liability). I’m not sure of the math to translate future tax liability to a current rate, but being conservative I’d probably go full on marginal tax rate. This would also give some wiggle room for the unreliabliaty of markets depending on what you invest in. Stocks, I’d add an even higher premium.

    -Can you sleep at night knowing you net worth is growing but your mortgage is massive, and all the risk associated with that.

    MTR = marginal tax rate

  • Subversive August 12, 2009, 5:31 pm

    @ Sean post 16. One thing to keep in mind is it is always better to make the lump sum payment before you actually get close to renewal. Some banks have stupid rules about this sort of thing. My personal opinion is you can always catch up on this year’s TFSA contribution room next year, so I’d get that mortgage in a positive equity state ASAP. Given your income, you are unlikely to have any issues upon renewal, but I simply wouldn’t take any chances with that.

  • Denis August 12, 2009, 5:58 pm

    I’m with 19. Subversive on this one. In this case, due to the very short term time lines, I’d go with the mortgage payment to make sure you have some wiggle room / equity at renewal to mitigate your downside risk.

    If you had more equity in the house and more time, calculating future (long term) returns in either RRSP or Real Estate to make your decision is a great way to decide where to put your money. Times have changed though… I’m sure you noticed with the $20k drop in equity in the house, which is not bad considering that’s only 6.7%. Most RRSP accounts took harder hits than that this year. That aside … Keeping the house is more important than watching the retirement portfolio online. You can always top up and catch up later.

  • Sampson August 12, 2009, 6:21 pm

    My suggestion would be to put everything (TFSA included) against the mortgage. Ensure you have enough equity (20%) based on a conservative estimate of your house’s value (check out similar properties on MLS).

    When the time comes to renew your mortgage, get the readvanceable mortgage from ScotiaBank. Then you’ll have plenty of funds to use for investment, emergency, or anything else.

    Next year, start funding your RRSP, RESP and TFSA, where you cannot deduct the interest.

    There is obviously some risk involved, but if you know or are pretty certain your job is safe, then with your high income, you should easily be able to catch up those registered accounts in the near future, meanwhile, your SM mortgage is in place and can grow itself.

  • Vince August 13, 2009, 1:02 am

    Sean this is information for your mortgage that is coming up for renewal:
    – Scotia along with most of the big 5 have what is called a 20/20 policy which means that you can pay 20% down on your principal every year at any time and increase your payments by 20% per year. (if your goal is to pay your mortgage down as quick as possible), plus you can put down as much as you want at renewal of course.
    – As for the risk of the bank not financing you at renewal, again you are dealing with an A lender and you should not be worried about having your financing terms withdrawn if you have kept your payments up to date.
    – As for the CMHC premium, the premium you paid at time of purchase (likely tacked onto the principal) is good for a minimum of 25yrs so there is no premium to pay at renewal.
    – Finally, if Scotia did decide to reneg on their financing at time of renewal your CMCH or Genworth policy is completely transferable to all lenders… .so no need to pay another premium! This is something that many borrowers don’t know and end up paying unecessary premiums.
    – And finally, Scotia offers an early renewal incentive. You can renew your mortgage within the last 6months before your renewal date without penalty. Since you said you were likely staying with them for a while, you may want to act on this option and not take a chance that rates are higher in February.

    I hope this helps and good luck!

  • Sean August 13, 2009, 1:42 am

    Vince, that is Very helpful!
    Mine is actually a 15/15 policy, but that is still $45k a year.
    As far as CMHC I was pretty sure that was basically a one time deal, so thanks for confirming.
    The 6 month renewal incentive is news to me though. I might just start keeping a closer eye on rates! When I went with the 1 year term I had to buy out of my 5 year term. Saved over $600/month on interest (which went straight back on to the mortgage of course). Interest saved paid for the buy out in 7 months – extra $3k on principle by the end of the year.
    So in a nutshell, hammer down on the mortgage until I have a solid stake, with the tradeoff of having no cash reserve. (which wouldn’t be a huge amount in the period we are talking anyway.)
    If I can renew my mortgage again in September, then Ill have that 20% by next September. Then I can get a readvanceable mortgage & have the Option of doing the SM, if I feel thats right for us at the time.

    With regards to post 2, my wife is trained as a custom drapery seamstress & we have been building a workroom in the house. So that should be good for some right offs.
    S.

  • JJ August 13, 2009, 7:20 am

    Hey Sean,

    Thanks for sharing your situation with everyone. It has been interesting reading the advice provided.

    Congratulations on your first baby! It sounds like you and your wife are living your dream :)

  • Ann August 13, 2009, 3:54 pm

    TD’s policy is 100/15, so you can double your payments and make lump sum payments up to 15% of the original principle.

    ING Canada’s policy is 25/25.

    When I bought my first home, I signed up with TD for a 5-year term and a 13-year amortization because, unbelievable as it is, no other bank could beat their interest rate at the time (it took a week of negotiating). Once I felt secure in my job, I started doubling my semi-monthly payments and increased my lump sum payments to 12-15% per annum. The home will now be paid in less than 4 years, instead of the original 13.

  • Ann August 13, 2009, 3:56 pm

    Oh, I’d also check to see if lump sum payments can be made any time or just on the anniversary date. I know I saved a lot in interest with TD because I’m able to make lump sum payments any time I have the extra money.

  • jonbon August 13, 2009, 4:26 pm

    Sean,
    Thanks for sharing, you and I are similar in finances and current life changes. I would only add two things to the good article which we have done. If your wife chooses not to work until the youngest one is say 4 years old, there is a period where she makes no income. If you have been contributing to a spousal RRSP (ie in her name, but you take the tax deduction), she can start withdrawing it after 3 years if it is left untouched. After 3 years you can withdraw it as income. If you stay under the personal tax exception (I think ~$10k/yr) you can withdraw it without paying tax. The money taken out can then be applied to your mortgage, or invested, etc. I imagine some people will challenge this. My situation is that we currently have $40k in spousal RRSPs (which we recieved about $12k back in tax deductions), and plan on slowly taking it out. After removed, it will be reinvested in RRSPs, getting yet another tax deduction. In the end, $40k could turn into $40k*(1.3)*(1.3)=$67k

    The second note is when you renew your mortgage you might want to consider a variable rate. In most cases (8 times out of 10) variable rate saves money over fixed, as long as you can handle the risk. Right now we are paying 1.45% for a mortgage!

  • Sean August 13, 2009, 5:32 pm

    Good points Jonbon! Ill look in to the spousal RRSP.
    I like going with the shorter term as I feel I have a more active role in the mortgage, being able to take a fresh look every year.
    S.

  • Mark in Nepean August 13, 2009, 11:29 pm

    Sean, my suggestions….

    1) build your cash reserve/emergency fund first (say $10,000)…with baby on the way, you’ll need it even with your high income!
    2) finish maxing out your TFSA, then do one for your wife as well, as your second priority. Even if you have # 1 done ($10 K), with the TFSAs, you’ll have an even bigger emergency fund or savings for the future.
    3) start contributing to RRSPs as your third priority, to a) reduce your taxable income and b) build your retirement fund. Even $100-$200/month is a great start.
    4) pay down the mortage. Add a $100/mortgage payment. It will make a big difference.

    That would be my plan. It would avoid you from returning to consumer debt, something you shouldn’t be in given your income.

    Have fun!

  • Sean August 14, 2009, 1:32 am

    I appreciate all the input.
    I don’t want to be holding a huge amount of cash. If I can get the TFSA’s maxed I’ll be happy.
    Interesting that jonbon mentioned variable rates, as Ive been thinking about that. If I could get a rate that low for the next year I would probably hammer everything I could on to the mortgage.
    I know having a cash reserve is important, but I don’t feel like I own my house at all yet. Ideally I’d like to get my mortgage down to $200k, then start the SM. Thats a number I could live with.
    S.

  • Sean August 21, 2009, 8:47 am

    Update:
    I just received a windfall from work in the form of some owed back pay!
    Was going to top up both mine & my wifes TFSA with it.
    But when I went to add the last $1k to mine Im not allowed to do it! Ive put in $5k already this year, but I withdrew $1k a few months back.
    I thought I was allowed to do that & still be able to have that contribution room?
    S.

  • FT FrugalTrader August 21, 2009, 8:50 am

    Sean, if you withdrew $1k this year, then you can contribute that withdrawed amount NEXT year. To clarify, you can deposit $6k come Jan 2010 instead of $5k.

  • Sean August 21, 2009, 10:59 am

    And here I thought it was a revolving door…
    Well Ive still got $5k to work with in the wifes! Does it sound reasonable to keep mine in an ING account making 3%, so that its easy to get to, then invest hers in something a little more long term, such as index funds or the like?
    S.

  • Judy October 29, 2009, 8:12 pm

    Sean
    Just found this blog recently, and felt I should comment on part of your scenario: Just a word of caution on the Offshore Employment Tax Credit. My brother worked overseas for many years, and had this “Credit”. Lived a good life, until CRA audited his employer, disallowed their rating/standing (not sure of exact terminology), came back to him for the 3 previous years’ taxes. Taxes plus penalty plus interest meant he had to re-mortgage nearly-paid-for condo. His employer paid some dollars towards penalties and interest, but, of course, THAT counted as income! NOT a happy employee. And left company soon after as the regular tax regime not enough to balance out the negatives of working overseas. With hindsight, he said he should have saved, separately, the equivalent of the taxes, “just in case”!!

  • Sean October 29, 2009, 9:42 pm

    Judy,
    Thanks for that, but I definitely qualify for the tax credit.
    The exact definition of eligibility is that you are a Canadian citizen, working for a Canadian company, outside of the country for greater than 6 months, engaged in the exploration/exploitation of oil & gas.
    S.

  • Judy October 30, 2009, 4:30 pm

    Sean
    My brother didn’t lose HIS qualification for the credit, his employer did. The company failed to meet/maintain its standing as an Offshore Employer, (or employer offering offshore emp’t, can’t remember exactly what they “failed” on) which is why they paid out extra dollars towards penalties, interest. That credit had been offered as a perk of employment. Like I said, just a cautionary note.
    J

  • DW August 13, 2010, 2:07 pm

    Is there anyway we could follow-up on the progress to Sean’s situation now? I think that would be a great read to see how him and his family are doing 1 year later.

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