All posts by Jonathan Chevreau

Retired Money: How retirees can lower RRIF tax shock by taxing “at source” wherever possible

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My latest MoneySense column takes a look at the supposed “tax nightmare” new retirees sometimes face on the forced annual (and taxable) withdrawals of Registered Retirement Income Funds or RRIFs. Click on the highlighted headline for the full article: How to avoid tax payment nightmares when the RRIF withdrawals start.

It’s a simple idea really. Salaried employees take for granted the automatic deduction of income taxes “at source.” They receive their regular paycheque with “net” or after-tax deposits that go directly into their bank accounts.

RRIFs are famously taxable: once you reach the end of your 71styear, you are required to pay an ever-rising minimum percentage withdrawal, all fully taxed like earned income or interest. However, notes Aaron Hector, a financial planner with Calgary-based Doherty & Bryant Financial Strategists, there is no mandatory withholding tax on RRIFs, unlike the 10, 20% or 30% tax that must be withheld at source on RRSP withdrawals (which rises with amount withdrawn.)

Fortunately, you can ask your financial institution to deduct tax at source every time you make a RRIF withdrawal. Alternatively, new retirees or semi-retirees may wait till 71 to start a RRIF but choose to withdraw money from their RRSP whenever they need it during their 60s. Here, the problem is the minimum withholding required can prove to be inadequate if you take out chunks of RRSP cash that are too small. Take them out in $5,000 chunks or less and the 10% (5% in Quebec) withholding tax is unlikely to be sufficient once you file your annual return.

Try and take out at least an amount between $5,000 and $15,000, which results in a 20% withholding tax (10% in Quebec.). Better yet, make the withdrawals $15,000 or more and pay the 30% withholding tax (15% in Quebec). Don’t fret that this may be “too much” tax: if so, it will be rectified once you file your next tax return. You can find a summary of RRSP withholding rates at this Government of Canada website.

Hector says RRIF withdrawals in excess of the minimum annual required payment are treated the same as regular RRSP withdrawals for withholding tax. So if your minimum RRIF payment one year is $50,000 but you withdraw $100,000, the extra $50,000 will be taxed at 30% on withdrawals and come tax time, you’d pay tax on the entire $100,000. You can elect to have taxes withheld at source on the minimum RRIF payments as well: Hector estimates a third of his clients do just that. Others may end up making quarterly tax installments instead.

This situation is aggravated by the fact non-registered investment income is typically taxable.             Fortunately, you can choose to deliberately overtax yourself as you go on many common sources of retirement income: if you receive pensions from former employers and/or the Government (CPP, OAS), you can set things up to mimic the “taxed at source” setup salaried workers have. While not mandatory, pension administrators will deduct whatever percentage of tax you wish to arrange with them, whether a minimal amount or a near-confiscatory 50%, or somewhere between those extremes.

In my case, I set 30% as my withholding tax on corporate pensions, 25% on OAS and eventually the same amount for CPP. You may feel small pensions don’t have to be taxed at source if they are less than the Basic Personal Amount that is tax free to everyone: $11,809 in 2018, $12,609 in 2019.

The alternative is quarterly tax installments. Retired advisor Warren Baldwin says theCRA sends notices for payments based on simple arithmetic applied to the previous year’s taxes. “So if, for example, 2017 was a high-income year and you had a high tax liability on filing, CRA will request large payments in March and June of 2019. If income and the liability declines in 2018/19, then you might have overpaid and need to wait until spring of 2020 for the refund.”

Ideally, things will balance out when it comes time to file your taxes: if you went overboard in taxing yourself at source, you may end up with a refund; if you underestimated your taxes due, you may end up having to cut yet another cheque to Ottawa. Some object to giving the CRA an “interest-free” loan but personally, I’d rather receive a small refund than have to pay still more at tax time.

The Pros and Cons of Dividend Investing

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My latest MoneySense Retired Money column has just been published, which you can retrieve by clicking on the highlighted headline: The Pros and Cons of Dividend Investing.

As with most of the Retired Money articles I write for the site, the piece looks at dividend investing from the perspective of someone in their 60s who is nearing retirement or semi-retired, as well as full retirees in their 70s.

It notes there are two major schools of thought on income investing.

In his book, You can retire sooner than you think, author and financial planner Wes Moss makes the case for retirees 60 or older having 100% of their portfolio in income-generating vehicles: whether interest, dividends, rental income from REITs or other securities: “Everything should be paying you an income from age 60 on.”

But there is a “total return” camp that argues total returns are what counts, whether generated by capital gains or cap gains combined with a growing stream of dividend income. In his series of “Stop doing” blogs, Toronto-based advisor Steve Lowrie argued investors should Stop chasing dividends.

One of the most romanticized ideas in personal finance?

Also in the total-return camp is PWL Capital portfolio manager Benjamin Felix, who tackled this in a Q&A column where a young Gen Y investor asked how he could create an all-dividend portfolio so he could retire early. Felix has said dividend investing is “one of the most romanticized ideas in personal finance”—citing a 2013 study by Dimensional Fund Advisors (DFA) that found 60% of U.S. stocks and 40% of international stocks don’t pay dividends, plus the fact that Warren Buffett declared dividends should not matter in making great investments. So, he concluded, an all-dividend approach would lead to “poor diversification.” Felix also dispelled the misconceptions that dividends are a guaranteed source of returns, offer protection in down markets, and that companies that grow their dividends necessarily beat the market. Continue Reading…

Theranos’ Elizabeth Holmes and Wolff’s new Trump book: parallel cautionary tales?

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Theranos founder Elizabeth Holmes and the book exposing the scam

Being a frugal kind of guy in Semi-Retirement, whenever possible I like to get books out from the library, whether old-fashioned physical books, e books or audio books. The main problem with this, however, is that you usually have to wait several weeks or even months to get to the head of the line for the latest bestsellers.

On a recent long weekend (the one before this one!) two bestsellers arrived the same day, which meant the pressure was on to read them in the three weeks allotted. Neither was likely to qualify for renewal, since there was a long queue of other readers waiting for their return.

The first, which arrived in e-book format, was Bad Blood, a book I had ordered several weeks earlier and has only recently slipped off the bestseller list. The other one was brand new: Michael Wolff’s followup book on Donald Trump, entitled Siege: Trump under Fire. On this one, I got really lucky, just happening to be in the library a day or two after the local branch’s local copy went on display.

Still, suddenly I had two books to read at once, which meant that anything else I either owned or was more likely to be renewable had to be put aside. No one said being frugal was easy!

I ended up reading both books over a long three-day weekend by adopting a strategy of reading a chapter in one, then switching to the next chapter in the other. Which is how I realized there were some fascinating parallels between the two books. It was something of a surreal experience, as I’m sure no one else on the planet would have read these two books simultaneously in this fashion.

Billionaires, or Thousandaires?

Both involve supposed American billionaires, although this point is debatable about both subjects. Trump’s billions are often supposed to be fanciful, which is why one New York Times columnist once earned Trump’s ire by dubbing him a “thousandaire.”

The other was a billionaire for awhile, at least on paper but these days she may not even be a thousandaire. I’m referring to Elizabeth Holmes, a young Stanford dropout who hero-worshipped Apple’s Steve Jobs and started a blood-testing company in California called Theranos.

The only problem, as Bad Blood recounts at length, is that apparently Theranos supposed ground-breaking technology didn’t work. Google Elizabeth Holmes and you can find a bunch of short videos that describe the sordid tale if you missed it the first time around and don’t wish to join the library queue for the book.

Blinded by ambition and the quest for fame and wealth, it appears Holmes and her much older partner/lover (Ramesh “Sunny” Balwani), cut numerous corners and forgot the first rule of health care is to first do no harm. They raised billions from investors, in the process fooling such retail giants as Walgreens and Safeway. Holmes had founded the firm in her early 20s and used her influential rolodex to suck in many investors who should have known better.  She also was famous for emulating Jobs and his attire of a black turtleneck sweater. And finally, as any number of Google searches will demonstrate, she pitched her voice a few octaves lower so as to impress prospects and investors with a deep baritone she must have felt would allow her to be taken more seriously.

Will Trump’s reign also end in tears?

Wolff’s Siege was released just a year after his previous Trump bestseller, Fire & Fury, and relies just as much on input from Steve Bannon. As I read and alternated chapters between the two books, it was fascinating to watch the unravelling of Holmes and to wonder whether Wolff was describing a similar unravelling of the Trump presidency. Certainly, Wolff depicts an isolated and desperate president and has predicted it will all end in tears: not necessarily ours but of Trump’s. Continue Reading…

No surprise: living beyond our means is why 38% are in Debt

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Talk about cause and effect: 38% of Canadians admit that living beyond their means resulted in their being in debt. That’s according to a survey being released this week by Manulife Bank of Canada. It also found a third of Canadians aged 20 to 69 with a household income of at least $40,000 say their spending growth outpaces their income, and 19% of those who went into debt cited not being able to break the debt habit. Almost half (49%) on indebted Canadians between the age of 20 and 34 and a majority of those aged 35 to 54 report carrying credit cards with a balance.

No surprise then that one in ten (9%) admit to being “clueless” about how much they are spending each month on average.

Blame YOLO and FOMO

Apparently cultural attitudes like “You only live once” (YOLO) and “Fear of Missing Out” (FOMO) are starting to take their toll on indebtedness. Apart from the 38% who admit their debt arose because of living beyond their means, 12% directly correlated their indebtedness to the outcome of too many costly outings with friends or family.

While 19% of debtors say they can’t break the habit, the survey also reveals that seeing debt paid off can result in joy, which is what 36% of Canadians say.

Manulife CEO Rick Lunny

And once again (see yesterday’s post on the HSBC study), Canada’s high housing prices are seen impacting this country’s Millennials. Millennials are now at the age many want to get on the property ladder and start families, two areas where Manulife is seeing expenses grow. “Housing affordability remains at near-historic highs across the country and child-care costs have risen faster than inflation for Canadians,” said Manulife Bank president and CEO Rick Lunny in a press release, “We have a financial wellness crisis in Canada.”

Obviously debt can limit one’s social life but the survey quantifies this. it found that debt limits activities with family and friends (22%), makes it impossible to spend money on entertainment (18%) and negatively impacts mental health (in 17% of cases.)

Manulife says Boomers feel less affected by debt: one would hope so since any Boomer contemplating retirement should by now have a healthy positive net worth rather than a negative one! In which case, they will be less constrained in spending on entertainment or meeting with family and friends.

Manulife finds that those under 55, women, and those with high levels of debt are most likely to feel stressed by these circumstances. It also found a “gradual yet significant” decline in the proportion of Canadians with mortgagers who express comfort with the payments. “There has been a sharp year-over-year decline in the proportion who claim to feel very comfortable about both the payments (28%, down 8 from Spring 2018) and the amount owing (21%, down 9) on their mortgage.”

The Joy of getting out of Debt

Asked to rate the perceived joy they would get from various financial accomplishments, two thirds of Canadians put getting out of debt (“escaping”) first or second overall, with having a hefty retirement nest egg a distant third.

Of course, reducing debt is easier said than done. Manulife suggests a clear “area of opportunity” is making adjustments to non-essential spending but there are demographic differences. Millennials are much more willing to sacrifice dining out compared to those who are over 35. Women are twice as likely as men to stop shopping for non-essential goods and services. Men and those who are 35 or older are most willing to give up travelling (which I’d say is certainly a non-essential spending activity!)

There are some positives in the survey. it found that three in ten say their debt is under control and they don’t need any help to control it. Others believe there are more effective ways to track debt and curb spending. Manulife cites its own Manulife All-in Banking Package, which includes Saving Sweeps that automatically moves excess funds into savings accounts each night. For more on the Debt Survey, click here.

Millennials value property more than looks when it comes to dating: HSBC study

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HSBC.com

It seems Canada’s soaring real estate market has started to affect Millennial dating patterns. According to a survey coming out today from HSBC Bank Canada 61% of Millennials feel anxious about buying a property, so much so that shared financial (39%) or property (33%) goals are considered more important than looks when daters are considering a potential future partner.

HSBC adds that this obsession with shared property has a downside for Canadian millennials: “They are far more likely to say they had stayed in a bad relationship due to property (16%) than Canadians on average (6%).” Sounds like a possible basis for a new Millennial situation comedy!

All this is contained in Beyond the Bricks, an HSBC-sponsored annual global survey of almost 12,000 adults in ten countries, including 1,077 in Canada.

HSBC says that getting on the property ladder can be both exciting and stressful for Canadian millennial once they’ve found their perfect partner.  Most (62.8%) Canadian millennials said financial considerations drove their last house move, and the top two reasons for the move were getting more house for their money (25.5%) or a lower cost of living (23.4%). And the biggest source of tension was accepting money from parents for the purchase (in 14% of cases.) Continue Reading…