There are seven reasons to RSP. None of them have anything to do with retiring. Besides, the Boomers already took all the money. Thanks to our obsession with real estate, retirement is pretty much screwed for most people now under the age of 60. Every day more money goes into housing, and less into liquid assets. Too bad.
Many Boomers will probably cash out in time to save their wrinkly asses – since their offspring are still hot and foolish enough to swallow debt and buy their homes. Not so much the next generation. It’s why I keep warning you not to keep the bulk of your net worth in this asset. Soon there’ll be no exit strategy.
Nobody listens, of course. So let’s change the channel.
RRSPs bore the hell out of most people and (as I’ve detailed before) are dubious things to try and retire on. The odds taxation will rise over the next two decades, turning these into tax bombs, are close to 100%. But as tools to avoid tax now, they have no equal.
Here are seven strategies to do just that.
One. Use an RRSP to finance a baby. Or just income-split with an unemployed spouse. The rules allow you to contribute to a retirement plan in your spouse’s name up to your own contribution limits. You get to write if off your taxable income and after three years the money becomes the property of your spouse. They can suck it off and pay household expenses, and do so without tax, if not working. Or on mat leave. This way you have effectively split income, since you got a tax break and the feds financed the kid.
Warning: Stay married.
Two. If you’re so house-horny you shun me and buy, then at least let F help. Say you have a down payment of $50,000, and an equal amount in unused RRSP contribution room (check last year’s Notice of Assessment to find out). You and your partner are allowed to suck fifty grand from a retirement fund under the Home Buyer’s Plan – money that comes out tax-free and doesn’t need to be fully paid back for 17 years. At least three months before you start looking, put the deposit money into two RRSPs. This will get you a combined tax refund (in the 40% bracket) of $20,000. Now you have $70,000 as a down payment and a lower mortgage.
Three. Of course, you can also claim an RRSP deduction twice. Contribute $20,000 to your (or spousal) self-directed RSP (the only kind of have) and in the 40% tax bracket, get a refund of $8,000. Now put this into the RSP as well, netting you an additional refund of $3,200 from current-year taxes. This means your twenty grand returned you $11,200. Now, wait two years and get pregnant.
Four. So I’ve written a few times about an RSP mortgage, and the thought of making loan payments into your own retirement fund instead of the bank sure cranks a lot of people. But remember because it costs a lot to set up and must be done at market rates, this doesn’t work so well at times like these when mortgages are cheap.
But we have an app for that.
Start with a rental property. Of course, interest on any money borrowed to buy income-producing real estate is tax-deductible. This includes an RSP mortgage. So, you could use cash inside your retirement fund to replace a conventional loan, for example, then make payments into your RRSP, and still be able to deduct this interest from the rents collected. Apparently there is a god.
Five. I keep beating on you to have a balanced portfolio, like 40% fixed income (various bonds and preferreds) and 60% growth (including a mess of ETFs and a few REITs). Dividends and capital gains are taxed minusculely but the bond interest is nailed. So make sure you stick the fixed income inside your RRSP, and move the equities and preferreds outside. This means the bonds are tax-exempt. Remember, keeping cap gains and dividends inside an RRSP is like sending me into the priesthood. Tragic.
Six. Don’t fall for this make-an-RSP-contribution-before-March thing. That’s just a big financial industry guilt trip, and the wrong way to invest. Much better to set up a monthly contribution (like with a pre-authorized debit) then collect the tax refund every pay period. Do this by filling out form T1213 from the CRA site and sending it in to the tax guys. They will notify your payroll department, which will reduce the withholding tax on your cheque. Now you have more cash flow – a raise.
Seven. So, you decide to retire at 38 with a fat RSP. What now? How do you avoid being taxed when you take money out, after enjoying all the tax breaks when you put it in? Simple. Melt your RSP down.
Borrow a pile of money at prime (on a LOC secured by your house, for example) and invest it in a solid, balanced, managed non-registered portfolio. Now make the interest-only loan payments by withdrawing an equal amount from your RSP. Those withdrawals are taxable, but the loan interest is tax-deductible, canceling each other out. Each month, in effect, you’re transferring wealth from your registered (taxable) plan into your non-registered (after-tax) portfolio.
Finally, if you talk to [email protected] about some of these strategies, beware. She’ll collapse.