Jen makes big money. “Between four and five a year,” she tells me, “depending on billings.” She’s a anesthesiologist. I had no idea. She has $1 million in cashable short-term GICs at the Royal Bank (paying 0.7%). Phil’s at home (which is worth $2 million) on paternity leave for another five months. He earns a quarter of Jen’s take as an IT guy. No TFSAs.
In their forties, they’re rich by all measures, but financially clueless. Separate bank accounts. No joint assets. Two kids, no wills. Most family wealth is stuck in the name of the person in the 53% tax bracket. Huge income. No pensions. Success in spite of their best efforts to make mistakes.
Yeah, financial planning is hard, like math. But unlike the latter, nobody teaches you about tax shelters, investment assets or income-splitting. You have to pick it up in bank washrooms or on dodgy websites. It’s an interesting society we’re in when people can buy a two-banger house, make five times the average income, hold an esteemed professional position, and know diddly about money. That’s the mission of this pathetic blog. Saving Canada, one confused medical professional and IT dude at a time.
So it’s January, which is a good time to begin. I gave Jen & Phil some lessons in TFSAs (“First, never pronounce it ‘tiff-sa’… so embarrassing… ”) as well as what to do about RRSPs. The first thing to remember is the first place to put money – the tax-free accounts. The full limit has reached more than $100,000 per couple now, which means these are serious vehicles. If this couple keeps theirs topped up for 25 years with growth assets, they should have $1.26 million by the time thirsty underwear days arrive. That will provide an annual income of almost $90,000, which can be withdrawn 100% free of tax. That’s equal to almost $180,000 in earned income – and it doesn’t even mean a clawback of the government OAS/CPP pogey.
“So I should put the GICs in there?” Jen asked. After I recovered, I said no. Never ever waste a great tax shelter on interest-bearing assets. You are anaesthetizing your money, I said. (She got it.)
They also had no real idea of the difference between their TFSAs and RRSPs. Many don’t. They foolishly believe what the names imply – tax-free savings accounts are for saving and registered retirement accounts are for retiring. Silly people. In reality TFSA are for heavy-duty, growth-oriented investing while RRSPs are for tax-shifting – reducing the burden by moving taxable income from one phase of your life to another.
For example, Jen might have pumped money into a spousal plan in Phil’s name years ago, so he could draw it out while on paternity leave. That way she would receive a massive benefit (thanks to her tax bracket) while he could cash the plan in when not working, at minimal cost. Voila. Income-splitting and tax trashing.
Likewise, Jen has a big paycheque now but no assured income after retirement. So instead of drawing dividends from a medical corporation (like her misguided friends), she should take salary, earn RRSP room, then smash her maximum $25,370 annually into plan contributions. In retirement, in a lower tax bracket, she can retrieve the money at a fraction of the benefit she received investing it. Tax-shifting.
Of course, Jen needs to redeem her GICs and have a balanced, diversified, Trump-friendly portfolio put together for predictable long-term growth. She and Phil need to tear down the border wall between them and co-mingle their finances. With a joint non-registered account they can not only attribute at least half the gains to the lesser-taxed spouse, but also protect their family. That’s because with a joint account all assets automatically become the property of the other partner if one person walks in front of a streetcar. Or whispers ‘climate change’ near a Trump supporter.
And if Jen finds she messed up and got locked-in GICs instead of the cashable type, she can always make a ‘contribution in kind’, sliding the existing brain-dead assets themselves into her RSP (or Phil’s spousal). So for moving stuff she already owns into the plan she’ll get a fat refund cheque sent to her by the government. That’s because RRSPs favour the rich, and the more you make, the more you benefit. But don’t tell the deplorables.