Painful

This is ridiculous. Seriously. Four posts on RRSPs? I must be losing it.

However, my mailbox is brimming. The masses cry for direction. So before we move on from this deadly topic, here are some answers.

“I have around 1,000 ounces of silver bullion,” says George. “Am I able to somehow put that sliver into my RRSP without selling it?”

First, why would anyone want $16,000 worth of silver? The metal pays no interest or dividends, costs money to store and is 27% lower in value than it was five years ago. Given central banks’ tight grasp on monetary policy and inflation, it’s hard to see why silver would appreciate. So why own it? And why inside an RRSP where gains are not taxes, where you’re better off holding other assets?

Anyway, the answer’s yes. You can hold it in your retirement plan. But in order to qualify the bullion must be 99.9% pure, from a recognized refiner and be certified by a bone fide, third-party, credible organization. Of course if you’ve made any money on it, tax is payable on the capital gain going into the RRSP. But, George, why?

Now over to Tyler, who sounds a tad insufferable:

“Great blog! Partly thanks to you (good enough of a suck-up or would you like full credit?) we were able to get from $200k to $1.2M in the past 6-7 years: TFSA (200k), RRSP (700k). LIRA (100k), and some non-registered (200k). During that time my wife hasn’t worked for the past 3 years and I am about to go on my second unpaid parental leave of 14 months (the first one was 8). We’ve been “throwing our money away” on rent this whole time.

“Now comes the question: You have written about using RRSPs to finance parental/maternity leaves. But I think a couple of years ago the child benefit rules changed and the amount is now dependent on family income (from prior year). Is the advice still the same? I have other sources that I could tap (e.g. non-registered investments that were purchased relatively recently so not much gains there). At some point we will start taking sabbaticals (or just retire early) so would it not be better to use the RRSP money later when we’re not receiving the child benefits?

“P.S. We’re pension actuaries in our mid/late 30s by the way.”

Is the tax-free Canada Child Benefit really meant for millionaire couples who have more than quadrupled their net worth in a handful of years and where dad wants to stop working for 14 months? Just asking. Maybe I’m paleo.

In most marriages mom takes a mat leave and foregoes some or all of her income during that time. By planning for this in advance, a spousal RRSP can be built up, then collapsed during the leave period, helping to replace lost income. With a spousal plan one spouse funds it (and benefits from the tax reduction) while the other is the beneficiary who can withdraw the money after three years. If s/he is in a lower tax bracket (or on mat leave) this can effectively split income and finance the time off. Of course making big RRSP contributions also lowers net family income and potentially increases the tax-free moolah from Ottawa. It’s now worth over $101,000 per child from birth to age 17. As mentioned, it costs the country $22 billion a year. Chew on that.

Sheila quoted this from yesterday’s blog: “Money taken from an RRSP to pay an advisor’s fee is tax-free and does not need to be repaid.”

“I pay approx. $1100 a month for advisor fees on all my Non Reg, RRSP and TSFA accounts,” she says. “My Master Card gets charged monthly as per my request and as a small perk I collect some cash back rewards. If I understand correctly I could pay this $1100 a month by pulling from my RRSP account without any tax implications even though I am paying fees for Non Reg holdings ? If so would this be a better solution ?”

As stated, advisor fees come out of an RRSP account and are not counted as income when that happens – so the feds actually pay a chunk for you (since it’s pre-tax money). This is the only instance in which RRSP money can be sucked off, tax-free since withdrawals for a house downpayment or education need to be repaid, or are added to taxable income.

But don’t push it. The CRA will not allow you to raid your RRSP monthly to pay for fees on others kinds of accounts, using untaxed dollars. Besides, the fees on your non-reg account are 100% deductible from taxable income. Finally, I hope you pay your CC bill in full every month, or you’re giving the bank 19% interest. Ouch.

Here’s, John, who is easily excited. “I think I discovered a beautiful thing today! I was reading your blogs over the last two days and thought of spousal RRSPs. Not entirely sure on how they work, but slowly starting to understand they are a Godsend.

“Turns out my wife hasn’t been contributing to her RRSP as I thought. I was mixing it up with her pension. She makes 75k a year and owes 500 bux back to the CRA in taxes. Our total income is 150k. We got married in 2018 and according to CRA rules, we can use a spousal RRSP contribution for the whole year rather than prorated. Right?

“Now here comes the tricky part. Because we have over 50k total in RRSP contribution room together, can she dump this money into the Spousal RRSP and bring her income down to 25k? Or will it reduce both our incomes? Because no sense in reducing my income since it’s already down to 0.

“If she does this, she will get like 9000 back on her taxes rather than paying the 500. When we want to buy a house, we can take the 50k out of our spousal RRSP? 25k each is the rule for first time buyers right? Thanks Garth, got me excited about RRSPs haha.”

You’re right about being able to fund a spousal RRSP in the year of marriage, but take some time to understand how a spousal plan works. RRSP room cannot be combined between spouses, no matter how much you adore each other. It’s earned individually, and remains the property of each taxpayer. However, you can open a spousal plan, fund it up to your own contribution limit and claim that against your own income. After three years the money may be withdrawn by the beneficiary – your squeeze.

In your case spouses make the same amount, so a spousal plan won’t income-split. If you plan on kids down the road, it could help finance the mat leave. But you can’t take your room and give it over to reduce her tax bill. There are limits to chivalry.

Helpful tip: be excited about her, not an RRSP. Better returns.

 

The finale

Once upon a time my father was a high school principal. He always drove white Buicks, had a legendary moustache and eventually made $10,000 a year. Huge deal or, as a child, I would not have been informed of the achievement. In the early 1950s my parents bought a house in the Toronto burbs – two stories, deep lot, garage, leafy street – for $18,000. Big mortgage. Fourteen grand. They took in a boarder to help pay it.

Anyway, as an educator he had a pension. The majority of employed people did back in 1957, but benefits were small. On my birthday in that year the federal finance minister, Walter Harris, delivered a budget speech which created a shiny new thing – the RRSP. A few months later the government of Louis St. Laurent was punted by voters in favour of the populist, Canada-first firebrand John Diefenbaker. Dief, in his wisdom, kept the retirement thingy, which at that time let people shelter $2,500 a year, or 10% of their income.

Blah, blah, history, blah, blah. I get it. But here’s the key point: retiring somewhere other than under a bridge has always (since 1957) been built on three pillars. A small public pension. A corporate pension. And your own savings – made easier by the RRSP.

These days 70% of people have no corporate pension. None. Zilch. For many who do it comes in the form of a half-baked, low-energy group RRSP stuffed into the lifeless mutual funds of a moribund, no-pulse insurer with a peppy logo. The public pension plan is anemic, at an average of $7,500 per year, plus another seven grand in OAS when you hit geezer status. And RRSP contributions have dropped off a cliff particularly among millennials many of whom – with the attention span of tropical fish – prefer TFSAs. For them retirement is not only in the remote, hazy future, but likely impossible given a gig economy. Besides, they can raid a tax-free account at any time.

Yes, this is the third and final time for an entire year that this pathetic blog will focus on RRSPs. They have become maligned, misunderstood and unsexy over the past decade with our accumulated room growing wildly. Canadians are paying hundreds of millions a year in income taxes that could be deferred for most of a lifetime while failing to reap the benefit of tax-free growth.

Why?

Sure, TFSAs have sucked off a lot of the investing energy but the real reason is property. My old man spent less than 2x salary to buy a detached house in a demand area. Today the same house is valued at $2 million and the average high school principal earns $120,000. Do the math.

For the record, the deadline for making a contribution (to get a 2018 tax break) is next Friday. You can contribute up to 18% of your income, to a max of just over $26,000. Look on your 2017 Notice of Assessment to see the room you have available from all past years. The contribution can be deducted from taxable income, so the more money earned (and the higher the tax bracket) the bigger the refund or tax reduction.

As mentioned here, a spousal plan will help split income within your family or finance a mat leave. A contribution in kind lets you use existing assets to contribute. An RRSP loan actually creates money out of nothing when you use the refund to repay it. You can use an RRSP to reduce the withholding taxes on your paycheque. Money taken from an RRSP for a house down payment is tax-free, but must be paid back. Money taken from an RRSP to pay an advisor’s fee is tax-free and does not need to be repaid. You can borrow from your plan for schooling – also repayable and triggering no tax. Your house mortgage can be put into an RRSP, so you make payments to yourself. Money can stay growing in an RRSP until age 71 when it’s converted into a RRIF – also a tax shelter, but with tiny annual withdrawals. However both an RRSP or RRIF can yield tax-free payments if melted down carefully. In short, this is a complex, flexible, modern vehicle for tax avoidance, tax deferral and tax-free growth which just gets better the more money you make.

Even if you never plan on retiring, this allows tax to be shifted from a year in which income is good to one in which life sucks or you decide to do nothing. As mentioned the other day, it also shields your wealth from creditors – something a TFSA can’t do.

So only a few more days. Use it, lose it. Your choice.