What would you do if you won $150,000 in a lottery?

[Nufy]

Super Size that combo meal for me and the little lady...

Its our Anniversary.

[Robbob]

Originally Posted by flameswin

You have a Tax Savings Free account? Sorry to hear that. I'm no banker, but I'd highly suggest getting out of that if you can. TFSA's are where it's at.

Typo, meant TFSA

[Locke]

Originally Posted by Canehdianman

Top up TFSAs and RRSPs (in that order).

Take a great vacation.

Rest on mortgage.

Sorry, I dont mean to pick on you and I've only skimmed this thread so I dont know if its been said but I have clients that have won the lottery and that is just a terrible idea.

TFSAs are cool, but you shouldnt take Tax-Free money and invest it into a Taxable vehicle.

[Barbecue]

Originally Posted by CalgaryFan1988

A financial advisor would recommend paying off your mortgage. At least in my experience.

Wrong, a financial advisor will tell you to both invest it and retain a mortgage

Why? because for themselves and the banking industry, they want to earn margins on both the investment and the loans.

To the customer, Don't do this. It makes as much sense as cranking up the Heater to warm up the house from using of the Air conditioner. Why do that when you can just turn off the AC? Of course the energy company, or financial planner, will tell you otherwise to make more $$ from increased energy use

Retaining the mortgage at 3% would mean your investment would have to do 3% or better to make it worth while. You have to see it if it was a leveraged investment. It's risky, and you're better off paying off the mortgage if you think the investment will do 2.9% or worse

My advice to the OP is to pay off as much of the outstanding the mortgage, and use whatever money that's now "gravy" from your income to invest

[Northendzone]

some things i'd consider in no particular order:

- vacation to europe or hawaii
- book the moab trip my wife has cleared me for
- make some capital investmets in house
- pay down house
- $15 to $20 k in some kind of savings that is relatively accessible, transfer funds to rrsp as needed
- order a couple of pizzas with double everything
- buy my wife the tag-huer watch she has wanted for a few years now

[Slava]

Originally Posted by Barbecue

Wrong, a financial advisor will tell you to both invest it and retain a mortgage

Why? because for themselves and the banking industry, they want to earn margins on both the investment and the loans.

To the customer, Don't do this. It makes as much sense as cranking up the Heater to warm up the house from using of the Air conditioner. Why do that when you can just turn off the AC? Of course the energy company, or financial planner, will tell you otherwise to make more $$ from increased energy use

Retaining the mortgage at 3% would mean your investment would have to do 3% or better to make it worth while. You have to see it if it was a leveraged investment. It's risky, and you're better off paying off the mortgage if you think the investment will do 2.9% or worse

My advice to the OP is to pay off as much of the outstanding the mortgage, and use whatever money that's now "gravy" from your income to invest

Well this is just ridiculous. There are plenty of advisors who don't work for the bank (I'm one of them). Think of it this way. You can invest and maybe double the $150k winnings over the next decade (7.2% return). Then pay off the mortgage at $300k less the ten years of payments and have money leftover in your account. Or just continue borrowing at the 3% you already are, and continue with those payments, and earn more than that 3% on the $150k you just won.

As an aside, I'm not sure what you have against financial advisors/planners, but it sounds like you got burned by someone or had some bad advice. Don't tar and feather the whole industry though. There are plenty of good advisors out there who will give you unbiased advice.

[ken0042]

Originally Posted by Locke

TFSAs are cool, but you shouldnt take Tax-Free money and invest it into a Taxable vehicle.

Wouldn't you still get a major tax break this year though? For example if I had $50K in RRSP eligibility (because it carries over year after year) and my income is $70K, wouldn't I get a tax refund as I would now be taxed as if I had earned $20K this year?

Sure the end product is taxable when you pull it out again, but isn't the whole point of an RRSP to defer the tax to when your income is lower?

Also, isn't there a limit of $5 or $6K on TFSAs?

[Canehdianman]

Originally Posted by Locke

Sorry, I dont mean to pick on you and I've only skimmed this thread so I dont know if its been said but I have clients that have won the lottery and that is just a terrible idea.

TFSAs are cool, but you shouldnt take Tax-Free money and invest it into a Taxable vehicle.

I don't mind being corrected at all!

I'm not sure I completely agree with you though. At least for my situation (which I think is what we were asked in the beginning by the OP), I'd rather have the money in an RRSP than an unregistered account. It's true I'll pay taxes when I withdraw it, but for those 30 years, it will grow tax-free. Registered account gets taxed every year. Is there some other sort of investment vehicle you would recommend over the RRSP (instead of the unregistered account I assumed)?

[Barbecue]

Originally Posted by Slava

Well this is just ridiculous. There are plenty of advisors who don't work for the bank (I'm one of them). Think of it this way. You can invest and maybe double the $150k winnings over the next decade (7.2% return). Then pay off the mortgage at $300k less the ten years of payments and have money leftover in your account. Or just continue borrowing at the 3% you already are, and continue with those payments, and earn more than that 3% on the $150k you just won.

As an aside, I'm not sure what you have against financial advisors/planners, but it sounds like you got burned by someone or had some bad advice. Don't tar and feather the whole industry though. There are plenty of good advisors out there who will give you unbiased advice.

I shouldnt have called it the "banking industry" but rather the Financial Services industry. Even though you dont work for a bank and get nothing out of a paid mortgage, the motivation is to obtain $150k in investments now instead of the significantly less $1k per month.

But what's to say they will get a 7.2% return and double up in a decade? That's just a predicion. Heck, they could very well lose 7.2% and end up with nothing and still continue to pay 3% on a mortgage. If there was any gaurentee the OP can be reassured, it would be a paid off mortgage and end up with zero debt

I have nothing against Financial advisors or planners, it's just this particular advice they collectively seem to agree on that makes no sense to the OP

[Slava]

Originally Posted by ken0042

Wouldn't you still get a major tax break this year though? For example if I had $50K in RRSP eligibility (because it carries over year after year) and my income is $70K, wouldn't I get a tax refund as I would now be taxed as if I had earned $20K this year?

Sure the end product is taxable when you pull it out again, but isn't the whole point of an RRSP to defer the tax to when your income is lower?

Also, isn't there a limit of $5 or $6K on TFSAs?

Well it is true that if you put say $100k into an RRSP (assuming that you have the room) you could save $39k in taxes. Which is pretty sweet. Then you would pay that same $39k as you withdrew the funds when you retire (if you were at the same bracket) along with taxes on the growth. You are getting that benefit today, which is awesome, and the best time to pay taxes is always "later", so that works out.

Its just that you could invest in say the TFSA, and if you have a limit of $31k at this point if you haven't contributed, so thats a nice chunk of change. No tax break upfront, but then no taxes to be paid down the road either. This total limit carries forward like the RRSP, and at this point it increases by $5500 in January. There has been talk of the annual limit increasing to $10k, but this hasn't been passed yet and is still discussion topic. Maybe during the next election though when we get some goodies!

Of course investing in a non-registered account usually means taxes to pay along the way, so that part is the least tax-efficient on an immediate basis. The upside here though is that when you withdraw the funds you don't have the same tax hit as with an RRSP. So maybe you have some capital gains; but that is half of what the RRSP would be which means to do whatever you're doing with the money you can withdraw less, and make the money last longer. I guess what I'm saying is that $300k in non-registered money should last you longer than $300k in RRSPs. The other consideration is that you can withdraw these funds as you see fit, whereas with the RRSP you are taking a minimum at age 71 and every year thereafter, whether you need it or not. This might not seem like a big deal if you're young today, but there are plenty of 71-72 year olds today who aren't thrilled with that issue!

[Slava]

Originally Posted by Barbecue

I shouldnt have called it the "banking industry" but rather the Financial Services industry. Even though you dont work for a bank and get nothing out of a paid mortgage, the motivation is to obtain $150k in investments now instead of the significantly less $1k per month.

But what's to say they will get a 7.2% return and double up in a decade? That's just a predicion. Heck, they could very well lose 7.2% and end up with nothing and still continue to pay 3% on a mortgage. If there was any gaurentee the OP can be reassured, it would be a paid off mortgage and end up with zero debt

I have nothing against Financial advisors or planners, it's just this particular advice they collectively seem to agree on that makes no sense to the OP

As far as what the return will be over the next decade, who knows? Who knows what the value of that house will be? Its all something of a guess and prediction, but I would definitely take my chances with a properly built portfolio over a decade against a single house in a single city over a single decade.

[Locke]

Originally Posted by ken0042

Wouldn't you still get a major tax break this year though? For example if I had $50K in RRSP eligibility (because it carries over year after year) and my income is $70K, wouldn't I get a tax refund as I would now be taxed as if I had earned $20K this year?

Sure the end product is taxable when you pull it out again, but isn't the whole point of an RRSP to defer the tax to when your income is lower?

Also, isn't there a limit of $5 or $6K on TFSAs?

Yes and yes. But also this:

While you'll receive a tax refund on your earnings, I just went back and saw that we are to assume $120K/yr, you'd receive a refund on your marginal tax rate, at which point it only really makes sense to invest enough in RRSPs to get you to the top of the next-lowest bracket.

No sense saving money at the 15% bracket as thats likely where you'll be when drawing the money back out so the tax-savings and tax-cost at that rate are effectively a wash.

Then the growth rate of RRSPs isnt all that high compared to non-registered funds.

So, with small lottery winnings and a high salary it tends to make more sense, my experience with this is from individuals in low-salary ranges with large lottery wins and very little available RRSP room, and what they do have is only applicable at the lowest tax-rate anyways.

That said, the tax-savings at investment for the higher rate versus the tax-cost of withdrawal at the lower rate plus the lower Return on Investment from a Registered fund versus a higher RoI with a higher principle generally works out to a wash at best.

In this scenario it makes more sense than in other scenarios, but my general advice stands. Dont take tax-free money and make it taxable.

[codynw]

Your wife sounds like she's no fun, divorce her and spend the money on hookers and blow.

[Locke]

Originally Posted by codynw

Your wife sounds like she's no fun, divorce her and spend the money on hookers and blow.

Then you only get $75K.

[codynw]

Originally Posted by Locke

Then you only get $75K.

Damn, didn't think of that part. That's no fun.

[Sliver]

You can't discount the peace of mind from having no mortgage. If it helps you sleep at night, pay down/off your debts first.

[Locke]

Originally Posted by codynw

Damn, didn't think of that part. That's no fun.

Many fewer hookers and much less blow. Unless you downgrade the quality and instead of Vegas you go to....say....Edmonton.

[DoubleF]

Pay off all non-mortgage debts. Remainder takes a small shave for vacation and rest goes into dividend paying investments.

Overall, absolutely no change in lifestyle. Vacation would be taken normally anyways, just splurge extra once or twice.

[Locke]

Originally Posted by DoubleF

Pay off all non-mortgage debts. Remainder takes a small shave for vacation and rest goes into dividend paying investments.

Overall, absolutely no change in lifestyle. Vacation would be taken normally anyways, just splurge extra once or twice.

This is important, if the individual we're assuming is earning $120K/yr then all hes really earned is one tax-free year of salary, or a normal year and a bit.

Its awesome, but it isnt life-changing.

[Barbecue]

Originally Posted by Slava

As far as what the return will be over the next decade, who knows? Who knows what the value of that house will be? Its all something of a guess and prediction, but I would definitely take my chances with a properly built portfolio over a decade against a single house in a single city over a single decade.

Not sure when you said "against a single house" if you meant a built portfolio using leverage on the house or comparing a built portfolio vs putting all the money towards in the house...

in any case, when it comes to investing, i'd rather my break even point to be at 0% instead of 3% or whatever the mortgage rate is. Leveraged investments is risky and you always have to assume the risk tolerance for the OP is weak