What is the best thing to do with $10,000?
July 29, 2014 7:32 AM   Subscribe

I have just found out that I will be inheriting $10,000. I want to maximize whatever I do with it, but I am not sure where to start...

Some particulars which may be useful:

- I do have unused room in my retirement account (RRSP). If I wanted to take money out of there to go back to school or buy a home, that is permissible, so putting the money in the RRSP will not lock it up per se.

- With that said, I am quite happy to be a renter and have no plans to buy a home. I only mention that because I think it's what my parents want me to do with the money, and so I feel that a solution for it which leaves that option hypothetically open, even if I do not plan to do it, will please them.

- I am common law married. We will be doing it officially next year, but already have money saved for it. We also contribute regularly, together, to a joint vacation account. I have no personal debt right now. He does, but will not let me help him with it.

- We plan to have a child as soon as the universe wills it to be so. We have about $10,000 already saved in a special savings account to cover extra stuff when/if this happens. I am not sure what else we would need to buy or to have, money-wise, for a child that this current savings will not cover.

- There is a possibility I will go back to school one day for a master's degree. If so, I am allowed to remove money from my retirement account for this purpose, so again, there is no penalty in putting it there...

So, it seems like maybe taking out $1000 or so for a vacation/some lifestyle upgrades might not be horrible, and then I should out the rest in my RRSP. Or...should I? Is there something better I can do with this money, given my situation?
posted by JoannaC to Work & Money (18 answers total) 2 users marked this as a favorite
Since you rent, call your landlord and ask if they'll give you a free month of rent if you pay for x number of months up front.

If you go back to school or have a baby, the expense of that and the adjusting-to-a-new-lifestyle costs will be mitigated by the significant budget surplus created by not having to shell out however much for rent.
posted by phunniemee at 7:37 AM on July 29, 2014 [2 favorites]

Are you up on your TFSA? You put money in there post-tax, so you take it out tax-free.
posted by jeather at 7:39 AM on July 29, 2014 [2 favorites]

Yes, TFSA - always available to you.
posted by lizbunny at 7:44 AM on July 29, 2014

He does, but will not let me help him with it.

I understand the moral stance here, and if that is what it is, then so be it. BUT, at some point, it might just be worth doing the math. If this is credit card debt, certainly the interest rate he's paying is higher than the interest rate you're getting on a return in your savings account or your RRSP. And since his debt is soon your debt, I would look first at paying off some his debt, which in the long-term scheme of things is probably the smartest thing to do.

Barring that, it sounds like sticking it in your RRSP if there's no penalty for withdraw for education of buying a home is probably the easiest and safest thing to do, especially when you plan on doing one of those two things in the future.

Another option is to stick a grand or so into an education savings account for your future child.

But yeah, definitely take 1,000 and do something fun or nice for yourselves with it. Life is about balance, and you do have to enjoy it while it happens.
posted by Lutoslawski at 7:52 AM on July 29, 2014 [3 favorites]

I would definitely go with the compounding interest to be found in the RRSP. If you do the math there, you'll see what the results will be at your retirement.
posted by Amy NM at 7:56 AM on July 29, 2014 [1 favorite]

Enjoy 1k, invest/lock 2k down for a year at least (CDs suck but remove the temptation for a period of time), give away/tithe 1k+, replace/buy quality household and durable items (bedding, winter wear, shoes, pots n pans, etc.) 1k, put 3k towards retirement, and the vacuum of life will take care of the remaining 2k.
posted by buzzman at 7:56 AM on July 29, 2014 [9 favorites]

TFSA and RRSP are both good saving tools for retirement. But:

Keep in mind that pulling from RRSP for a specified program usually means you have to repay in X years. If you pull from an RRSP just because you need the money, it's treated as taxable income for the year.

If you have TFSA room, putting $ in / taking it out is fine as long as you follow the timing rules. (Talk to your bank or look it up on the CRA site.) You can pull out all or just some of it at any time - it's just the yearly deposit limit that requires caution.
posted by maudlin at 8:12 AM on July 29, 2014

To answer the original question, I think the RRSP and TFSA are your best options, but you need to run the numbers to see what is most advantageous to you tax wise given your plans. You get a refund by dumping into your RRSP, but you have to pay those tax free withdrawals back later either through not deducting a contribution, or taking the withdrawal amount into income. If your tax bracket is lower in the future, it can work.

You will soon be married, and he has personal debt which will become your debt when you are married (and if you are common law married it might already be your debt but I am not a lawyer and I don't know how that stuff works).

Based on my experience as the partner with the prior assets during a contentious divorce in Ontario, it doesn't quite work that way. Both partners are responsible for assets and debts accumulated during the marriage, but assets and debts brought in are excluded in property settlements (with the exception of the family home and that only applies for marriage, not common law). My lawyer told me that if I was to bring assets into a marriage again, to bring them in as cash. If you want to pay off your partner's debt, do it after marriage, not before.
posted by TORunner at 8:14 AM on July 29, 2014 [3 favorites]

Can you use a little sliver of it to talk to a Certified Financial Planner?
posted by wenestvedt at 9:14 AM on July 29, 2014

I am not an accountant. This is not official tax advice.

Judging by the fact that you mention "RRSP," I am going to make the bold assumption that you live in Canada. I don't know the tax ramifications relating to inheritances in Canada. If you were in the US, I'd advise that you immediately set aside about 30% of your inheritance to cover the taxes.

When you are married, his debt also becomes your debt and your debt also becomes his debt. Although he may not want you to help out with "his" debt, since it will also be "your" debt, that inheritance (if there is any left), as well as any of your assets, might be able to be seized should he default. I would therefore advise that you somehow convince him to accept your help in paying down the debt with your inheritance.

To summarize:

* Set aside an amount sufficient to cover all inheritance taxes for which you will be liable (unless that amount will be automatically deducted, which the executor of the will in question may do for you). Consult an accountant or tax professional to find out how much. Consult with the executor of the will or the legal guardian of the estate to figure out if you actually need to do this.

* Set aside some amount to do something nice like take a vacation.

* With the remainder, attempt to pay down the joint debts you now share with your common law spouse.

* Failing that, put the remainder in a separate savings account. I don't know the tax laws related to RRSPs, but there are severe tax penalties for taking money out of a 401(k) or IRA (the US equivalents of RRSPs) before retirement; I imagine there are similar penalties in Canada. (Again, consult a tax professional or financial advisor.) You don't want to lose any money to the Crown that you don't have to.
posted by tckma at 9:19 AM on July 29, 2014

If I wanted to take money out of there to ... buy a home

This is certainly possible, through the RHBP, up to 25k/year. It's like taking a loan from yourself with 0 interest and a 15-year repayment schedule. As mentioned above, you do get a significant tax break putting the 10k in there first.

The TFSA, however, has far fewer strings attached and conditions.

Again, as mentioned above, you can't leverage an RRSP for education for yourself, but you can take advantage of an RESP for your child. The RESP, as well as being a tax shelter for you (up to 2k/year, I think), also mans that the government add a grant to that amount as well, usually an additional 20% of your contribution.
posted by bonehead at 10:27 AM on July 29, 2014

You will soon be married, and he has personal debt which will become your debt when you are married (and if you are common law married it might already be your debt but I am not a lawyer and I don't know how that stuff works).

Depending on where JoannaC lives, that may or may no be true. It would likely not be true in Quebec under the Civil Code. You would probably want to talk to a lawyer in other provinces which rely on the common law. This isn't a simple question; common-law is a bit different in every province.
posted by bonehead at 10:32 AM on July 29, 2014

I don't know the tax ramifications relating to inheritances in Canada. If you were in the US, I'd advise that you immediately set aside about 30% of your inheritance to cover the taxes.

There is no inheritance tax in Canada. Final taxes are paid by the estate (which can take up to two years if you have to use an escrow process), then the money disbursed to the inheritors.
posted by bonehead at 10:37 AM on July 29, 2014

Response by poster: Thank you for the answers. To answer a few questions---

1) Yes, Canada, Ontario

2) Paying off his debt is not a possibility. He simply won't. It is from legal bills on a prior divorce, and he will not accept help for it.

2) It sounds like the TFSA might have fewer penalties for withdrawing. But I think I am getting a higher return rate on my RRSP. I have been treating the TFSA like a personal savings account and withdrawing money from it every summer (I work as a teacher and do not get paid in the summer). I have seen the error of my ways in that and have now opened up a plain old savings account to save summer money, but I am not sure what I am allowed to put back into my TFSA at this point, and what it can do for me as a growing investment (the money just sits in there right now)

Thank you for the answers so far. I am reading attentively.
posted by JoannaC at 11:56 AM on July 29, 2014

I think you could do a lot worse than running a few scenarios on a tax calculator, to see what the difference between an RRSP/RHSP in-and-out and a TFSA is. I suspect, if you just want to use this as a house downpayment, then the RRSP route might net you quite a lot in tax savings. It did for me when I was in a similar situation. Be sure you're happy with all the conditions on the RHSP though (especially the repayment requirements).

On the other hand, if you want or need the flexibility, the TFSA may be the better choice.

Personally, I use QuickTax/TurboTax, but there are a bunch of others, as you prefer.
posted by bonehead at 12:06 PM on July 29, 2014

If you like the funds your RRSP is using, you are allowed to use the same funds in your TFSA. You are allowed to put back all the money you took out of a TFSA. The government has a site that should allow you to check your TFSA contribution room, or you can just phone them and ask.
posted by jeather at 12:36 PM on July 29, 2014 [1 favorite]

It would be helpful to know your tax bracket and that of your partner. Here are some options:

1. Put it in an RRSP. You can always withdraw it under the Homebuyer's Plan to buy a home if that is something you decided to do. You will get X% back on your taxes. Stick this in a TFSA for emergencies.
2. If your partner has a higher tax bracket, have him open a spousal RRSP for you. Gift him the $10k (you can gift up to $10k tax free) and have him immediately deposit it into your spousal RRSP. He then gifts back to you the amount he will save on his taxes. (Note that this affects his contribution room and you should consider that.) Stick that money in a TFSA. You can still withdraw this money for the Homebuyer's Plan or you can always withdraw it down the road if your income is low.
3. Put it in a TFSA.

(You can also withdraw RRSP money for the Lifelong Learning Plan. And a certain amount of it is creditor proof and exempt from consideration when you apply for scholarships and so on, though it's a small amount.)

Also, instead of socking your tax savings in a TFSA, you could stick it in your regular/spousal RRSP.
posted by Chaussette and the Pussy Cats at 1:05 PM on July 29, 2014

You can firewall his previous divorce debt by taking advantage of the fungibility of money. Just say "Honey, to help you pay off that debt I will handle the expenses for the next two months".
posted by srboisvert at 2:38 PM on July 29, 2014 [1 favorite]

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