Set Priorities and Limits for Deposits and Withdrawals
Quick-Start: Not optional. You will be asked to review your priorities any time there is a change to an ACCOUNT or to a LOAN. You may also have to set up priorities in a future year if you have LOANS, RESPs, RDSPs or FHSAs that are set up to start in the future. The tables allow drag-and-drop to reorder the deposits and withdrawals priorities. You can set a Spending priority limit (of 100% to 0%), such that the proportion of excess money is spent. It is very important to click Submit for the tables to be saved correctly.
The TIME MACHINE (and the CRA) considers you and your spouse’s finances separately, so there are seperate Deposit and Withdrawal PRIORITIES tables for both spouses.
CCPC's are also seperate, and If you have more than one Account + Loan in a CCPC, they will also appear as seperate tables here in blue.
To find an optimal withdrawal strategy in retirement, you can run the TIME MACHINE WITHDRAWAL OPTIMIZER which will override your Withdrawal PRIORITIES after retirement if it finds a better solution.
Order of PRIORITIES .Despite their name, PRIORITIES are applied last in the TIME MACHINE. PRIORITIES are applied only after all INCOMES (including calculated incomes like OAS and CPP and mandatory RRIF withdrawals), all EXPENSES (including calculated ones like LOAN payments and taxes), and all AUTOMATIC savings and withdrawals, are calculated.
The TIME MACHINE is left with a net income amount for the year, that is positive or negative. If the amount is positive, that amount has to be deposited somewhere, and if it is negative, then the amount must be withdrawn from somewhere. This is why we need you to set deposit and withdrawal priorities.
For a CCPC, Retained Earnings serves as the Wallet. It is what is left after salaries, dividends and loan payments are taken out of REVENUES. If it is positive, it will deposit to accounts or prepay loans as per your PRIORITIES. If it is negative, the TIME MACHINE will draw from the investment accounts or borrow as per your PRIORITIES.
The PRIORITIES form allows you to decide on the priority for each deposit account if you have excess cash, and for each withdrawal account, if you have a deficit. If you have a spouse, their accounts and loans will be displayed with yours, but the excess or deficit used will be their own. It is possible for one spouse to have a deficit and the other an excess.
You can set the priorities with drag-and-drop functionality on the web site. The tables display the average yield or interest rate of the loans from each account. It is better to pay off high-interest loans and deposit to high-yielding accounts, for example. It is also better to withdraw from low-yielding accounts. Note that you should also consider if and how that yield is taxed when setting priorities.
For these deposits or withdrawals, any changes to taxable income and any resulting taxes will be applied in the following year.
Deposit priorities.
The first table indicates your deposit priorities if you have excess cash.
Your priority, for example, could be to pay down a mortgage or to fund your RRSP. In this table, the option to spend any excess cash is automatically added. Just drag-and-drop the accounts and loans to put your highest priorities for deposit at the top.
Withdrawal priorities
The second table indicates your withdrawal priorities: if you need cash, which accounts should be drawn from first?
Just drag-and-drop the accounts to put your highest priorities for withdrawal at the top.
They work just like the Deposit priorities. At the top are the accounts you want to withdraw from first if you need money.
Although locked-in accounts such as LIRAs and DCPPs appear in the table, the TIME MACHINE will not withdraw from those accounts until it is allowed to do so by law (when the account is converted to a LIF or age 65 for example), and only up to maximal withdrawal limits.
Limits on priorities
You may also want to set limits for how much can be spent, deposited to, or withdrawn from particular accounts. Limits are set as percentages of your left-over balance as you go down your list of priorities. The limit is imposed on any remaining funds, sequentially. This is best explained with examples.
Deposit examples.
Let's say that you have $10,000 at the end of the year (after all expenses and automatic savings). Your priority of deposit is to pay down your mortgage (and let's say the bank would allow you to prepay up to $20,000), your second priority is to fund your emergency non-registered account, your third is to invest in a brokerage account, and so on. If you don't set a limit to your priorities, the whole of your $10,000 will go to your mortgage, since the bank would allow it, and there would be nothing left for your emergency fund or any other priority.
Say that you want a maximum of 50% of what you have at the end of the year to prepay your mortgage; that puts $5,000 towards the mortgage and leaves $5,000 for the remaining priorities, starting with the emergency fund.
But what if you don't want to put a whole $5,000 in the emergency fund? What if you wish to invest 20% of what you have left (after paying the mortgage) into your brokerage account?
- Set your mortgage limit to 50% to put $5,000 (50% of $10,000) into your mortgage. $5000 remains.
- Set your emergency fund limit to 80% to put $4,000 (80% of $5,000) into your emergency fund. $1,000 remains.
- Set your brokerage limit to 100% to put $1,000 (100% of $1,000) into your brokerage account. $0 remains.
It is most important to correctly set your order of priorities. This is especially true if you have accounts/loans without pre-imposed limits; you may want to impose some of your own in order to leave a percentage for accounts further down the list.
You would probably want to set limits only on the first few accounts and leave the rest set at 100%. The TIME MACHINE will always make sure that pre-imposed limits (i.e. prepayment limits, RRSP and other registered account limits) trump your personal limits.
If your mortgage prepayment limit was at $4,000, for example, this is what would happen: Let's say that you set your mortgage limit at 50%, and you have $10,000. 50% x $10,000 = $5,000. However, the pre-imposed limit only allows you to prepay $4,000, and therefore you'll have $6,000 left. If you set your emergency fund limit at 80%, you'll deposit 80%x$6,000 = $4,800 in emergency funds, and have $1,200 left.
If you set your brokerage limit at 100%, you'll thus have $1,200 deposited to your brokerage account.
If you still have money to be deposited after you've gone down the list of deposit priorities, the excess will be deposited into to Wallet account. It'll be added as income the following year and you will get a Warning. This positive cash-flow situation indicates you may want to add an account to receive the funds or increase your spending.
Deposit Spending limit.
You could also decide to increase your Spending instead of depositing any excess.
For example, you could put your TFSA and RRSP at the top of the list with a limit of 100% each, then have a Spending limit of 100% as the next priority.
The result would be that the TIME MACHINE would max out your TFSA, then if there is still money, max out the RRSP, then spend the rest. Any accounts or loans below Spending, given Spending's limit of 100%, will never be funded by this mechanism until you change the priorities and limits.
You can see what your maximum spending would be by putting Spending at the top of the list and setting its limit to 100%. You can set priorities for any year, so this is particularly useful to do after retirement if you are planning on no more savings.
If you never want to increase your spending beyond what you entered in EXPENSES, then set the limit for Spending to 0% (that is the default).
You will see the yearly Spending in the output of the TIME MACHINE.
Withdrawal limits.
If you have a deficit at the end of the year, withdrawal limits work the same way as deposit limits. Accounts are drawn from in order of priority, with the percentage limit applied to the remaining deficit in sequence. For example, say you have a deficit of $1000 at the end of the year and your top priority for withdrawal is your checking account, it'll take from that source of funds first. If you set a limit of 50% it'll take out $500 if it can. The remaining deficit would be taken from the next account down the list until the deficit is gone.
If a deficit remains you will see a Warning. Which Warning you see depends on the how the TIME MACHINE resolved that deficit. The TIME MACHINE allows spouses to help each other out to resolve each other’s deficit. If there is no spouse, or if a deficit remains for either one, it will try one last time to resolve the deficit by ignoring any account withdrawal limits that you have set to less than 100%. This way all funds can be then accessed freely (still imposing external CRA rules), still following the Withdrawal Priority order. If a deficit still remains, then it will then be resolved by withdrawing from the Wallet account. The balance of the Wallet account will be added as an expense in the following year as it needs to paid back.
Changes in priorities.
If you wish to switch priorities and limits in later years (after your children reach adulthood, for example, or after your retirement), you may do that after setting your present limits. Priorities persist until they are changed.
The PRIORITIES page will indicate in which years you need to set priorities and limits.
You will have to set priorities and limits for any year that you have set a future LOAN to begin, and any year for which you have set a future RESP, RDSP or FHSA to begin.
Remember that the TIME MACHINE will follow your PRIORITIES as the last thing it does to zero Wallet accounts after all income, spending, taxes and automatic savings. If you get surprising results in the TIME MACHINE where a particular account is more funded, or more overdrawn than expected, or a loan is paid off too early, check your PRIORITIES. You may want to reorder or change the limits for an account or loan after a certain year.
Again, the WITHDRAWAL OPTIMIZER can be used to optimize your withdrawal priorities after retirement and will ignore your set withdrawal priorities for those years if it can do better than what you set to optimize your after-tax legacy.