Simon and Wanda have reached a turning point in their lives, from trying to save money to enjoying the fruits of their labor. Simon is 60 and Wanda is 58. Their children are 19 and he is 21 and are attending college.
Recently, the couple had some money left over, so they swapped their family home for a condo in the city and a house in the country. A portion of that surplus, along with RESP savings, will be used to pay the children’s tuition fees for the next four years.
Simon and Wanda run a successful IT business and plan to sell it someday. They hope to win $1.3 million. They roughly plan to retire in 2031, with a retirement budget of $140,000 a year after taxes.
In addition to the money they made from selling their home, they have a tax-free savings account, a properly sized registered retirement savings plan, and about $200,000 in cash in the business. They have an additional $930,000 in cash and an investment in a holding company.
They want to give each of them $250,000 as a down payment on housing once their children finish school. “What’s the best way to give that amount?” Simon asks. “May I give them a tax-free gift?” ”
They also wonder how they will invest the proceeds of selling the company.
We asked Jason Heath, an advice-only financial planner at Objective Financial Partners in Toronto, to look into Simon and Wanda’s situation.
Heath said Simon and Wanda have almost $4 million in assets, in addition to a condo and a country house, and are well positioned for retirement.
“Assuming they keep working until 2031 and sell the company for an expected $1.3 million, I think they can probably afford to spend about $190,000 a year, factoring in inflation, until age 95,” planners say. . This assumes an annual inflation rate of he 2%, an annual return on investment of 4%, and no real estate sales.
“Based on this, it looks like they can give their children $250,000 each as a down payment on housing without sacrificing their retirement lives,” Heath said. In fact, they may be in a position to consider additional gifts for their children over time.
Planners point out that there is no gift tax in Canada. “Unless they sell and gift their investments for profit or withdraw from tax-protected accounts and companies, there will be no tax implications.”
Wanda and Simon have some easily accessible unregistered TFSA savings to fund these gifts, and will likely have even more if they sell the business.
“Frankly, I think Simon and Wanda could retire well before 2031,” Heath said.
Planners say the couple’s projected cost of living is only about $63,000 a year, not including monthly savings. They are targeting $140,000 in after-tax income after retirement. This means a significant increase in spending.
“Employers like Simon and Wanda may need to consider that company-paid expenses, such as cell phone bills, car payments, food and entertainment, become personal expenses in retirement,” the planner said. says. Two properties also have car replacements, refurbishments and repairs. So perhaps their retirement budgets allow for some of these increased costs.
From an investment perspective, planners say they can consider more aggressive asset allocations in these accounts because they can probably keep the TFSA for the rest of their lives after the business sale. “Their unregistered investments have ballooned from the sale of the business, and combined with the RRSP, should be able to fund the withdrawal with a combination of earnings and partial withdrawal of capital.”
They should also consider paying a strategic dividend to themselves from the holding company after they retire, he said. Ultimately, you may not need to withdraw money from companies, as your personal wealth and government pensions may well cover your expenses. However, retirees who have corporate assets can withdraw some from the company in the form of dividends, depending on the tax rate, thereby reducing their combined personal and corporate taxes and increasing their after-tax estate value. It may increase.
Their investments are projected to peak at about $4.5 million when they retire, and they will still be in the same range when they turn 95, planners say. Therefore, they do not reduce their capital much and live mainly on investment income and pensions.
On top of that, you don’t have to earn a high rate of return to reach your goals. Their initial exit rate may be only about 3% of their investment. Interest or dividends may achieve that.
Simon and Wanda plan to start receiving Old Age Security benefits at age 65, but do not know when they will receive their Canada Pension Plan benefits.
“If they are still working at age 65, their income is too high and the OAS may be revoked unless they reduce their salaries,” Heath said. The OAS is a means-tested annuity that is reduced as you earn higher incomes.
They may want to consider deferring OAS and CPP until they are fully retired, and could start both by age 70 at the latest, planners say. “If you’re healthy, you might get fewer months if you wait until you’re 70, but your monthly payments will be higher than if you started earlier. They can break even in their mid-80s. You can expect it.”
If Simon and Wanda decide to sell their business, they are considering whether to invest the proceeds in individuals or corporations. “Their company may be eligible for a lifetime capital gains exemption, which could personally make the sale of shares in their business tax-free,” Heath said. Capital gains exemption exempts capital gains from the sale of small business corporate stock up to $971,190 per taxpayer ($1 million for agricultural or fishing properties). “When a business buyer purchases an asset, they may ultimately receive the proceeds as a business and invest the funds in the business.”
The planner says Simon and Wanda don’t have a will, so that should be a priority for them. “They have a pretty big fortune and they have to consider if they want to give it all to their children or if they have other family members, friends or charities they want to benefit from.”
Given the significant corporate assets, they may want to draft primary and secondary wills, Heath said. Most people have only one will, but he can have multiple wills to cover different types of assets. Because a secondary will deals with assets such as stock in a private company, you can avoid Ontario’s probate fees by processing it under a separate will.
people: Simon, 60, Wanda, 58, and their two children, ages 19 and 21.
problem: Can you afford to give your children a down payment and is that money taxable? Where and how should you invest the proceeds if you sell your business?
plan: Give your children any surplus money from the sale of your home or from TFSA. When selling a business, you don’t need a high rate of return to reach your goals, so you can invest conservatively. Consider receiving corporate dividends.
In return: Understand that you should be able to achieve your financial goals, etc.
Monthly Net Income: $14,695.
assets: His TFSA is $90,000. Her TFSA is $69,000. His RRSP is $600,000. Her RRSP is $840,000. Country house $750,000. Cityhome $750,000. $200,000 in operating company cash. The operating company has an estimated market value of $1,260,000. $700,000 in holding company cash. The investment portfolio of the holding company is $230,000. Child Enrollment Education Savings Plan $50,000.Total: $5,539,000
Monthly spending: Condo fee $1,400. Property tax is $625. Water, sewer, garbage $60; home insurance $150. $75 for electricity. $90 for heating. Maintenance $250. Gardens $75; Transportation $515. $700 for groceries. Clothing $300. The loan limit is $250. Gift, Charity $500. Vacation, travel $750. Food, drinks and entertainment $525; personal care $75. Club membership is $75. $125 for pets. sports and hobbies $150; doctors and dentists $150; Drugstore is $50. RRSP $3,335. TFSA is $1,000. Total: $11,225.
liabilities: The line of credit is $105,000.
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