Entries from January 2014 ↓

Six cool things

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Judging from my inbox, a lot of people are blissfully unaware you don’t need money to make an RRSP contribution and score a tax refund. I wrote here yesterday about dithering Jenny and her dead-end GIC. When we shifted it into an RRSP, she lined up to get 30% of it back in cash, which could then go into a TFSA. It’s as close as we get to magic in this cold, depressing country full of ice and unrequited desire.

A contribution in kind is simple, effective and quick. It takes an asset you own which is taxable and makes it non-taxable, while the government pays you for doing so. The growth then happens with no tax consequences, until you collapse the RRSP at some point in the future. But if you do it in an intelligent fashion, that tax load can be minimal.

(One caution, of course. If you move a mutual fund or stock or ETF or anything into your RRSP which has risen since you bought it, a capital gain will be triggered. But fear not. Cap gain taxes are cheap since one-half of the gain is tax-free. For most people this will amount to 15% or the profit, while you get to keep 85%. The rest of life should be so fair.)

Well, it’s just a shame most people will make no RRSP contribution this year and sadder still that those who do will average a pathetic $3,200. This is an important little tool in your financial arsenal with some worthy applications. Remember you have until the third of March to put money in for a refund on 2013 taxes, and it can equal 18% of what you earned last year. And while I know on the Sexiness Scale RRSPs rank somewhere between cold sores and living in Saskatoon, here are six cool things to do with them.

1. Shift taxation within your life.
This is easy. During years when you are gainfully employed, contribute to an RRSP, deduct this amount from your taxable income, get a refund and invest that outside your plan. Then during those times of your life when you are fired, laid off, punted, outsourced, severed, displaced, rightsized or just general screwed by The Man, you can cash in the RRSP, live off the money it contains, and pay little if any tax while doing so. What you’ve done is build up your own emergency reserve, and at the same time shifted the tax burden from the years of employment to the period of freedom.

2. Split income with your spouse
Now, here’s an excellent use for your spouse. If you earn more than him or her, or your spouse plans on taking time off, or is older and due to retire sooner, or a babe still in school, then open a spousal plan. The law allows you to contribute into a plan for your spouse up to your own contribution limit. You get to deduct the funds from your own taxable income, but they become the property of the other person. After three years in there, the money can be accessed by your spouse (so choose carefully) and used for whatever, and is taxed at their rate – presumably lower than your. So, you have income-split. Just be careful no money is taken before the three years or it will be attributed back to you, and cause a giant, ugly domestic dispute.

3. Finance a kid
Speaking of a spousal plan, one of the best uses of RRSP money is to pay the household expenses during a mat leave. If a spousal plan is in place, your squeeze can cash it in (ensure each withdrawal is less than $5,000 to minimize the withholding tax), and use the money to replace lost income. Of course, to make this work efficiently, you will need to plan the pregnancy at least three years in advance with the mat leave commencing on January 1st. Piece of cake. Here’s a calendar.

4. Upgrade your skills.
Rules also permit you to raid your RRSP to go to school, or send your spouse there. The Lifelong Learning Plan allows $10,000 a year to be taken, to a max of twenty grand (or forty between two spouses). Then, after school’s done, you have 10 years to put the money back into your plan. If you don’t, it will be added to your taxable income annually. This sure beats paying a bank interest on a tuition loan. Plus, you can put money into your RSP, get a tax refund for doing so, then turn around and take it out for school.

5. Buy a house (dubious), and lever your downpayment (better).
Ditto for the Homebuyers’s Plan. Up to $50,000 can be taken from the RRSPs of you and your spouse for the purpose of buying your first home. Then you have 15 years to repay it, starting in the second year after the withdrawal. Don’t make the annual payments, and the bucks will be added to your income and taxed at your marginal rate. While buying a home is a bad idea right now in many cities, and while the HBP actually has no inherent benefit to it, it does allow you to lever a bit. For example, if you both took your $50,000 down payment and RRSP’d it, leaving it there for just 90 days, you might get a refund of $15,000 which can be used at closing to reduce the mortgage. But, knowing you, it’d go into a hot tub upgrade.

6. Generate a tax refund which you promise not to piss away in Aruba.
That should be obvious. Invest extra cash in an RRSP, get a refund cheque and put the money into investments inside your TFSA. This is called revenge. It tastes good.

Bonus thing to do with an RRSP: retire.
Yes, I know this is exactly why the thing was invented 60 years ago, and I’m quite aware the mama of all retirement crises is now just a few years away, since seven in ten people no longer have a viable company pension. But the TFSA is emerging for anyone under 35 as the retirement vehicle of choice – so long as you keep it fully funded each year, and invested for growth. Still, there is a role for RRSPs, since money can grow inside these suckers tax-free until you turn into a hideous wrinkly with glass ankles. Then you can bitch and moan about the tax you pay collapsing them.

At least it’s something to do.

Loaves and fishies

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Marketing Ploy of the Week Award: Goes to Upper 
Unionville developers, in the Arctic Circle of the 
GTA for 'warning' people not to line up to buy 
$1 million unbuilt homes this past weekend in -25 degree 
temps. It worked. They lined up in their cars.
Things to remember? 'All offers are firm.'

Stocks laid an egg late last week. Finally. After fat gains in 2013 a correction’s overdue. The cause is almost irrelevant, but you can blame uncertain corporate earnings and the US Fed shrinking its stimulus spending. That’s elevating bond prices and sucking money out of emerging currencies and into the safety of American debt. The ensuing chaos there, plus slower growth in China, is rattling equity markets.

Whatever. It was bound to happen after a 30% romp last year. And the correction will run its course before stocks stabilize and grow again. That’s because the US recovery is as real as it is slow. Anyone who bets against it will wish they’d never read that doomer web site about crashing stocks or economic collapse. No locusts are on the way. Just a better opportunity to buy stuff when it’s on sale.

Now what are you going to do about it?

Most people you know will do nothing. They’re slaves to their houses, over-extended with no disposable income, or they’re stunned. Like Jenny. I tried to help her get organized last week. She’s got a $35,000 GIC making 2% and a condo with a mortgage. She hates risk, but bought her sky box with five per cent down last year, and is already underwater.

Let’s start fixing this, I said. ‘But I have no more money,’ she quavered. Don’t need any, I replied.

So we opened a self-directed RRSP, and transferred the GIC into it. That, I told her, is called a ‘contribution in kind.’ You don’t need cash to fill up a retirement plan, you can use assets. Then we opened a TFSA. ‘But I have nothing to put in there,’ she said, biting her lower lip. You will, I explained. By shifting that GIC into the RRSP you’ll be getting a tax refund of about $10,000, which we’ll stick into the tax-free account. Now instead of having $35,000, you’ll have $45,000 – all thanks to the elfin deity, F.

Then, because the GIC is redeemable, we’ll redeem the sucker. We’ll put seven grand into an ETF owning a basket of real estate trusts, paying a yield of 5% annually. We’ll stick eight into an exchange-traded fund owning Canadian and US preferred shares, with a dividend payment of 5.4%. Two thousand each is earmarked for ETFs owning baskets of government and corporate bonds (yields of 3.7% and 3.9%) and grand for a fund holding real-return bonds which pace inflation. ‘But there’s no inflation,’ Jenny said. ‘I read that on your pathetic blog.’ True enough, which is why these are cheap, but when it returns, you win.

The last fifteen will go into growth assets – six into an ETF holding the 60 biggest companies in Canada, and nine into one owning the 500 largest corps operating in the US. Let’s wait a bit, I said, and see if this truly is the correction I’ve been expecting. If so, we’ll buy at the appropriate point. If it rebounds for a while, we’ll sit in a money market fund paying basically the same as your GIC.

I told Jenny once we’d finished putting the plan together she’d have 40% of her money in relatively stable assets that paid her regularly to own them. That’s called ‘fixed income,’ I said. The rest, about 60%, would be more growth-oriented, well-suited to a 29-year-old self-employed IT contractor with no pension plan. And when the TFSA money arrives, we’d add it into the mix.

Not only that, but the plan turns a $35,000 GIC making 2% which was 100% taxable into $45,000 which should yield at least 7% on a long-term basis, growing completely tax-free. If Jenny does nothing else other than fund her TFSA ($5,500 a year) for the next 35 years and enjoys similar growth in both tax shelters, at 64 she’ll be a millionaire.

Hard to believe? Figure it out. Moving the $35,000 into the RRSP and achieving 7% growth turns that into $337,818 by 64. If Jenny left the money in a GIC at 2% (although rates will edge higher), it would total just $70,046. The TFSA, meanwhile, with the $10,000 tax refund seeding it, plus $5,500 yearly, invested in a balanced and diversified portfolio, will be $867,068 when Jenny retires. Her total is $1.2 million, of which 72% is tax-free.

What can prevent this? Jenny listens to her mom and uses the $35,000 GIC as part of a downpayment on a diseased semi in a dodgy but ‘emerging’ part of town. She fears risk, listens to the doomsters and clings to GICs, only to discover at 60 she can never retire. Jenny stays stunned, failing to understand how a simple, maligned GIC can kickstart a portfolio strategy.

Or, she ignores me. Billions do.

But I’ll not stop trying.

Faux Chateau Update

MANSION SHOPPED

That over-sexed, over-hyped, 18000-square-foot Mississauga monstrosity (which doesn’t look like this photo) went to auction Sunday afternoon, with about 50 people paying $25,000 grand for the right to stand on marble floors in their socks and wave their paddles. After a few minutes, the thing was done. Once listed for $11 million, the whimsy sold for $6.2 million, about a million less than it cost the dingbat who built it.

As you know, we had a little contest to see which blog dog might come closest to the auction price. Cy said $6.88 while Marquis de Sale estimated $6.1. Penny Henny was close at $6.0 while Skube guessed $6.9 and Buy?Curious? offered $5.99. Shane suggested $6.5, but the guy who nailed it was KC, at $6.25. Thanks to all those who entered, and along the way heaped scorn upon the symbol of a suburban metropolis that taste passed by. If you email me, KC ([email protected]), you shall be rewarded. Unless you were the winning bid.