Expecting to use savings
Second baby and unemployment force couple to plan carefully
THE PEOPLE
Scott and Keira, both 37, have been married for five years, and are expecting their second daughter. The dual-income earners thought they had their finances all figured out: they have good salaries, love to invest and are able to meet all their expenses. Maximizing education savings and their tax-free savings accounts (TFSAs) are priorities for them. The latter savings are for a bigger home. THE PROBLEM
Just as Keira is about to go on maternity leave, Scott was downsized from his $73,000-a-year job in media advertising. The couple aren’t sure how they will manage on a considerably reduced income. While Keira will receive 95 per cent of her income ($102,000 a year) for the first 17 weeks of her leave, after that she’ll have to rely on just an estimated $500 a week in employment insurance. So the couple is worried about depleting their savings and rising child care costs (expected to cost an additional $2,100 a month for the new baby) once Keira returns to work next summer. “We have emergency savings that we haven’t had to touch yet and need to know how we can make things work if by some chance I cannot find meaningful employment soon,” Scott says.
Scott currently receives employment insurance that will stop when he receives his negotiated, lump-sum severance in January that he’s deferred for tax reasons. Scott will also be receiving a pension payout from his employer and isn’t sure of the tax consequences. He is actively job searching and also thinking of returning to school for a one-year postgraduate program. If they must tap into their savings, how do they do so in the most tax-effective way?
THE PARTICULARS Assets
Non-registered accounts: $45,000 in stocks and exchange traded funds
Combined Tax Free Savings Accounts: $114,000
Combined Registered Retirement Savings Plans: $175,000 RESP: $18,000 House: $950,000 Liabilities: Mortgage: $197,000 Home Buyer’s Plans: $27,522 to pay off in the next 11 years THE PLAN
Scott and Keira’s monthly expenses are approximately $7,000 a month and they meet all their line items with Keira’s income, Scott’s EI and money received from the Canada Child Benefit (CCB), notes Sabine Lay, a certified money coach at Money Coaches Canada in Burlington.
Depending on whether Scott is still unemployed and decides to go back to school, and depending on Keira’s actual monthly income, they will need some cash to make up the deficit. The good news is Scott’s severance money should be able to bridge the gap.
Scott can return to school for his post-graduate degree and they should be able to make ends meet. They have enough in their savings accounts to pay for his $5,000 tuition and other expenses.
If Scott does not return to school and finds employment by January 2019, depending on his income, they can use some of the severance pay to make a lump sum payment to their mortgage and possibly maximize their TFSAs for 2019, Lay says. As for the $40,000 pension Scott will receive from his employer, Lay recommends he ask to have some of the pension directly transferred to his Registered Retirement Savings Plan, where he has $14,000 in available contribution room. The difference will be paid out to Scott minus a 30 per cent withholding tax. Lay says he could use the money to contribute $3,500 to maximize Keira’s TFSA for 2018 (Scott’s TFSA is all topped up) and also top up Registered Education Savings Plans for their daughter and new baby. Lay recommends the couple put the rest of the money in a separate savings account for potential taxes owing for the 2018 and 2019 tax years.
She doesn’t believe they’ll need to sell their non-registered stock investments. “But if they wish to do so, they could take advantage of 2019 being their lowest possible tax year, thus reducing the capital gains taxes,” Lay says.
As for long-term goals, it will depend on their income at that time. Lay says they could consider a longer amortization period to lower their mortgage payment for the years they have high child-care costs.
“They would benefit from a detailed cash-flow management plan, so they can pro-actively plan their spending and saving,” Lay adds. “This would help them understand whether they will be able to afford a higher mortgage and child-care expenses in the next few years, and to assist them in making smart financial decisions.”