The Next Tax Bracket Myth

By Robb Engen | January 25, 2022 |
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The Next Tax Bracket Myth

Let’s bust a myth about working overtime. Some employees incorrectly believe that when earnings from overtime, a bonus, or salary increase pushes them into another tax bracket they’ll actually take home less on their paycheque than before.

Some employees even refuse to work overtime because they believe they’ll pay more taxes and earn less money in the end.

I’m sure you’ve all heard of the next tax bracket myth.

Next Tax Bracket Myth

Here’s an example. An employee makes $50/hour and works 37.5 hours per week for 50 weeks per year. That works out to $93,750 per year before taxes.

Living in Alberta this employee pays $21,736 in taxes and takes home $72,014 after-tax for an average tax rate of 23.19% and a marginal tax rate of 30.50%.

The marginal tax rate is important because it’s the amount of tax paid on an additional dollar of income.

Here’s where the next tax bracket myth comes into play.

The employee is asked to work 20 hours per month of overtime and earn time-and-a-half for those hours – or $75 per hour. Over the course of a year the employee earns an additional $18,000, pushing their total salary earned to $111,750.

How does this affect the amount of taxes paid? Let’s take a look:

The employee now pays $27,851 in taxes for the year but takes home $83,899 – an increase of more than $11,800. The average tax rate is 24.92% while the marginal tax rate has jumped to 36%.

Problems with overtime earnings occur depending on how much tax the employer withholds at the source. This can work one of two ways:

  1. Source deductions are applied as if the employee remains at an average tax rate of 23.19%. The employee earned an additional $1,500 from overtime work but the employer only withheld $347.85 in taxes. This results in more money in the employee’s pocket every month; however there will be a tax-bill owing at tax time, resulting in an unhappy employee.
  2. Payroll can, however, withhold a greater amount of tax at the source in the case of a bonus or overtime earnings. For this example let’s say the employer withholds 36% of the overtime wages, or $540 per month in taxes.

In the second example, the employee is now upset because $1,500 in overtime earnings resulted in just $960 in additional take-home pay. Extrapolate these deductions over 12 months and the result is a fairly significant overpayment in taxes.

The good news is that the employee will get a refund at tax time.

Origin of the next tax bracket myth

My gut feeling is that the second scenario is more common and employees see more taxes deducted at the source when they work overtime or get a bonus.

Related: 5 myths about insurance

Some back-of-the-napkin math shows that the employee’s actual hourly rate for the overtime worked was just $48 (before the tax refund).

Employees might look at this and determine that picking up overtime is not worthwhile because they’ll earn less than their regular hourly rate after taxes. Enter the next tax bracket myth.

But this is simply not true. You can’t take the after-tax hourly rate and measure it against a pre-tax hourly rate. You have to compare apples-to-apples.

The employee’s regular hourly rate after taxes is $38.41. The actual overtime hourly rate is $48. Sure, it’s not exactly time-and-a-half. But the employee is clearly making more money working overtime regardless of the shift into the next tax bracket.

Final thoughts

Some people are confused about the difference between their average tax rate and marginal tax rate. Your average tax rate is simply the amount of tax paid divided by your income.

Related: 9 money myths experts wish you’d stop believing

Since Canada has a progressive tax system your average tax rate will always be lower than your marginal tax rate.

So just because a raise or another source of income bumps you into the next tax bracket doesn’t mean ALL of your income is now taxed at that rate.

Consider this myth busted.

Why We Ditched Our Endy Mattress And Went With Novosbed

By Robb Engen | January 24, 2022 |
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Why We Ditched Our Endy Mattress And Went With Novosbed

This is the story of why we ditched our Endy mattress and chose Novosbed for our remodelled bedroom.

Four years ago, my wife and I wanted to replace our 12-year-old Sealy Posturepedic mattress. We heard about the bed-in-a-box trend – dozens of brands were selling foam mattresses online and shipping them directly to consumers – and so we decided to investigate. We pored over countless reviews and comparisons before testing out three different queen mattresses: one from Endy, Casper, and Bear. Ultimately, we chose the Endy mattress and slept comfortably on it for the next three-and-a-half years.

We remodelled our bedroom late last year (because who hasn’t renovated something during these times) and decided to upgrade to a king bed. That meant we needed a new mattress and, naturally, Endy was our first choice.

We paid $950 for an Endy king mattress and received it within a few days. After unboxing the mattress and letting it form to size, we laid down and something didn’t feel right. We had a horrible sleep that night! The mattress was not as firm and did not feel like the same material that was used in our old Endy queen mattress.

Of note, Endy was purchased by Sleep Country in November 2018. I reached out to Endy’s customer care team, and they confirmed that something had indeed changed:

“Yes, we did change the materials from a few years ago to now, we use air capsules whereas before we were using a cooling gel.”

In addition, the quality did not seem the same. It wasn’t as firm, or as thick as our previous mattress. The Endy ‘specs’ said the mattress was 10” thick but ours didn’t even reach 8” thickness after 48 hours. Also, the corners of the king mattress didn’t lie flat, they curled up.

Endy mattress

Novosbed Review

Disappointed with our new king mattress we returned the Endy and started the shopping process all over again. We heard great things about Novosbed, which is another Canadian-owned and operated company selling mattresses online.

In fact, Novosbed launched the world’s first risk-free sleep trial back in 2009. They expanded their line-up of mattresses over the years to include brands like Douglas, Logan & Cove, Recore, and Brunswick to name a few. Now rebranded as GoodMorning.com, they’re one of Canada’s largest independent online-only mattress retailers.

What we liked immediately about Novosbed is that they offered three choices of firmness instead of a one-size-fits-all choice like Endy and most other foam mattress retailers offer.

Novosbed soft medium firm

To select the appropriate firmness option Novosbed has a handy questionnaire and recommendation tool online. It includes the following questions:

  • Do you sleep by yourself or with a partner?
  • Height and weight of you and your partner
  • Are you a side, back, or stomach sleeper?

Novosbed recommendation

My wife and I prefer a firmer mattress and so we chose The Novosbed – Firm.

Novosbed Pricing:

Novosbed describes itself as an affordable luxury mattress. It’s made of premium, high-density memory foam and is made in North America. Their mattresses come in the following sizes and price points:

Size Price
Twin $999
Twin XL $1,099
Full / Double $1,199
Queen $1,399
King $1,599
California King $1,599

Shipping is free and usually takes 1-7 business days within Canada. Each Novosbed comes with a machine-washable cover. Shoppers can choose from three ‘firmness’ options (soft, medium, or firm) and the mattresses are 11” thick.

Sleep Trial

Novosbed has a generous 120-night sleep trial, one of the longest in the industry. If you don’t like your Novosbed mattress you can return it within the 120-night sleep trial and Novosbed will issue a full refund and make arrangements for the mattress to be picked up (typically gets donated to a local charity).

Novosbed also lets you fine-tune the firmness. After 30 nights, if you’re not in love with your mattress, Novosbed will send you a free Comfort+ kit to make your mattress firmer or softer.

Our experience with Novosbed

We ordered our Novosbed King mattress through GoodMorning.com and received it within three business days. The mattress-in-a-box is heavy and took two of us to lug it up the stairs and into our bedroom.

We unboxed it, removed the plastic wrap, and rolled it out onto the bed frame. The mattress decompresses within about 30 minutes but takes around 24 hours to reach its full intended comfort.

Novosbed unroll

It can take some time to adjust to a foam mattress if you’re used to sleeping on a spring mattress. For us, since we had slept on a foam mattress for four years, we knew after the first night that this mattress was “the one”.

We’d say the Novosbed firm mattress is slightly firmer than our old Endy queen mattress, but not as firm as the Bear mattress that we tested out years ago. The Novosbed mattress provided the firmness we were looking for with a comfortable ‘sink’ that hugs you while you sleep.

We’re thrilled with our Novosbed king mattress and are now enjoying our remodelled bedroom. If you’re looking to make a mattress change or upgrade your sleep experience, I’d highly recommend checking out Novosbed.

Novosbed set up

*GoodMorning.com provided product in exchange for my honest review. All opinions are my own.*

10 Years Later: Vanguard’s Impact On Canadian ETF Investors

By Robb Engen | January 21, 2022 |
Posted in

Vanguard’s Impact On Canadian ETF Investors

It’s hard to put into words the impact Vanguard has made on the investment industry and for individual investors. Perhaps Warren Buffett described it best when he paid tribute to the late Vanguard founder Jack Bogle in 2019:

“Jack did more for American investors as a whole than any individual I’ve known.”

Vanguard brought its famous low-cost investing products to Canada 10 years ago. To say they’ve made a positive impact north of the border would be a tremendous understatement.

Since 2011, Vanguard Canada has launched 37 ETFs that have attracted nearly $47 billion in assets under management (AUM). They’re the third largest ETF provider in Canada by AUM and have captured nearly 14% of the ETF market. This, despite offering fewer than 4% of the total number of ETF products on the market.

More impressively, since Vanguard’s entrance into the Canadian market, the average MER for its ETFs in Canada has gone down significantly– from 0.27% to 0.17%. And the average MER of all ETFs in Canada is now at 0.37%. This is known as the Vanguard effect – where competitors take notice of Vanguard’s low-cost approach and tend to reduce their fees accordingly.

Clearly Vanguard has been a catalyst for change and has helped transform the Canadian investment landscape for the better.

Vanguard Canada highlights

Vanguard’s most popular ETF is the Vanguard S&P 500 Index ETF (VFV), which has attracted more than $6.5 billion in assets. It’s the sixth largest ETF in Canada overall (as of December 31, 2021).

That’s followed closely by Vanguard’s US Total Market Index ETF (VUN), which has $5.3 billion in assets and is the 10th largest ETF, then Vanguard’s FTSE Canada All Cap Index ETF (VCN), with more than $4.7 billion in assets, and Vanguard’s Canadian Aggregate Bond Index ETF (VAB), with more than $3.6 billion in assets.

Vanguard launched a game-changing suite of asset allocation ETFs in 2018 (VCNS, VBAL, VGRO), followed by the addition of VCIP, VEQT, and later VRIF. These unique products have proven to be enormously popular among DIY investors, led by Vanguard’s Growth ETF Portfolio (VGRO), with nearly $3.3 billion in assets (as of December 31, 2021).

Imitation is the sincerest form of flattery, and Vanguard’s main competitors have all launched their own line-ups of asset allocation ETFs, giving Canadian investors even more choice when it comes to building simple, low cost, globally diversified portfolios.

Tim Huver, Vanguard Canada’s head of intermediary sales, told me that the firm is pleased with the interest in VRIF, Vanguard’s Retirement Income ETF. This fund invests in a balanced portfolio of 50% global stocks and bonds and targets a 5% annual return with a 4% annual distribution.

I asked Mr. Huver how VRIF has performed, and he said the fund returned 7.56% in 2021 and met its target payout of 4%. Vanguard increased the per unit distribution on VRIF by 3.65% for 2022.

With niche ETFs such as space innovation, clean energy, and cryptocurrency proliferating across the landscape, I asked Mr. Huver if Vanguard plans to launch any thematic or sector specific funds in the near future:

“We’re focused on providing core building blocks for investors at a low cost. There are no crypto ETFs on the horizon for Vanguard.”

Good to know.

Vanguard’s Impact On My Investing Journey

My own investing journey has been positively impacted by Vanguard’s entrance into the Canadian ETF market.

Prior to 2015, I invested in Canadian dividend paying stocks. ETFs started becoming more and more popular among DIY investors, but a globally diversified portfolio required an unwieldy number of ETFs. I recall some of the Canadian Couch Potato model portfolios including 8-12 individual products.

Then in mid-2014 Vanguard introduced its FTSE Global All Cap ex Canada Index ETF (VXC). This product gave investors exposure to U.S., international, and emerging market stocks with just a single ETF. It was the catalyst for me to switch from dividend investing to index investing.

In January 2015 I sold all my individual stocks and set up my two-ETF portfolio of VCN (Canada) and VXC. I called it my four-minute portfolio.

Four years later, Vanguard launched the all-equity VEQT. I sold my two-ETF portfolio and consolidated into VEQT. That’s exactly how I invest to this day, holding VEQT inside my RRSP, TFSA, LIRA, and Corporate Investing account.

Investing in a single-ticket ETF has simplified my life for the better. VEQT holds more than 13,000 global stocks and rebalances regularly to maintain its target asset mix.

I can honestly say I pay little to no attention to my portfolio or even to broader day-to-day market movements. Contrast that with my individual stock portfolio, which had me tracking the daily ups-and-downs and stressing over company-specific news. Or even with my two-ETF portfolio, which had me tinkering over the appropriate home country bias.

Readers and my fee-only financial planning clients have asked me why I chose Vanguard products over other comparable ETFs. The answer is that I’ve always admired Vanguard, from their founder Jack Bogle’s folksy wisdom to its ownership structure (the parent company Vanguard Group is effectively owned by its mutual fund investors), to the Vanguard effect on reducing mutual fund and ETF fees in whatever market they enter.

Yes, some competitor-launched ETFs may cost slightly less than Vanguard’s offerings. But Vanguard is not known for being the second lowest cost investment provider. Fees on core products will continue to decrease in the coming years as Vanguard continues to grow and their products scale.

Thanks to Vanguard Canada for the insight into its impact on the Canadian ETF market over the last decade. Their success means that their investors, including me, have also succeeded in reaching their investing goals.

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