Tag Archives: RRSPs

The case for early RRSP withdrawals

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Fram Oil Filters: “Pay me now or pay me later.” (YouTube.com)

My latest MoneySense Retired Money column was published earlier today: click on the headline Retirement Tax Tips for full version.

As I say at the end of the column, after decades of the RRSP contribution habit, I admit it goes against the grain to start decumulating.  And even more so, it’s counterintuitive to pay taxes on investment funds before you HAVE to.

However, to paraphrase the famous Fram Oil Filters TV commercial, you can pay me now or you can pay me more later — much more later. (For the famous 1972 “Pay me now or pay me later” Fram Filter ad, click on this YouTube link.)

Since tax is one of the biggest, if not THE biggest expense in retirement, I’d rather pay a little tax now prematurely than a lot of tax later.

Live on early RRSP withdrawals and defer CPP benefits

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Emeritus’s Doug Dammer

So what has this got to do with RRSPs and taxes? As the column points out in detail, citing Emeritus Retirement Solutions’ Doug Dahmer, at some point those great tax refunds from decades of RRSP contributions eventually come back to haunt you. Usually that’s when you turn 71 and are forced to start making annual, and taxable, withdrawals from Registered Retirement Income Funds or RRIFs. (you can opt instead to annuitize or to cash out and pay a ton of tax upfront).

In practice, most will choose to take RRIF withdrawals starting at the end of the year you turn 71, but if you also have a good employer pension, the usual government pensions and other income sources, there’s a good chance some of those withdrawals will be at or near the top marginal tax rate, which these days ranges from 46% to more than 50%, depending on your income and the province in which you reside. And as the MoneySense column mentions, if you’re in the OAS clawback zone, you may have to add a further 15% to the government’s haul.

But if you’re semi-retired and “basking” in a relatively low tax bracket in your Sixties, you may be able to start withdrawing RRSP funds earlier than necessary, which may make sense if it’s only being taxed at 20 or 30%. Plus, as Dahmer suggests, by living on some of this relatively low taxed early RRSP funds you can defer the receipt of Canada Pension Plan (CPP) benefits and possibly Old Age Security benefits to as late as 70.

Every year you can defer taking CPP by living instead on early RRSP withdrawals, the CPP benefit will be 8.4% higher. Dahmer poses the rhetorical question whether your RRSP can generate an annual return of 8.4%. These days you certainly can’t generate that return with fixed-income and after all, we’re talking about people who by now should have a good percentage (perhaps 50%) in fixed-income. You may or may not get 8.4% from stocks but if you do, you’re also subjecting your portfolio to possible capital losses.

For one of Dahmer’s decumulation blogs published here at the Hub, click on Timing of CPP Benefits: Get both a bird in the hand and two in the bush.

How to invest in gold, including in your RRSP

Closeup silver ingots and golden bullions in bank vault. Finance 3d illustrationAt TSI Network, we recommend that if you are looking at investing in gold that you stay away from buying gold bullion, coins (unless you collect them as a hobby) or certificates representing an interest in bullion.

That’s because gold investing in bullion does not generate income. Instead, bullion and coins come with a continuing cash drain for management, insurance, storage and so on.

Instead, that’s why we recommend that you limit your gold investing to gold-mining stocks. Unlike bullion, gold-mining stocks at least have the potential to generate income.

However, if you do want to hold physical gold or silver in an RRSP, here’s how to do it:

More than a decade ago, the 2005 Canadian federal budget made investment-grade gold and silver coins, as well as gold or silver bullion bars, eligible to be held in an RRSP.

To be considered investment grade, gold coins must be at least 99.5% pure, and silver coins must be at least 99.9% pure. As well, only legal-tender coins produced by the Royal Canadian Mint are RRSP-eligible.

Bullion bars are also eligible for RRSP gold investing, as long as they are produced by a metal refinery that is accredited by the London Bullion Market Association. Accredited metal refineries include the Royal Canadian Mint and Johnson Matthey.

However, to hold the coins or bullion bars in your RRSP you need to find a third-party custodian of your coins or bars who will verify that you indeed hold the amount of bullion claimed, and report that to the Canada Revenue Agency on your behalf.

Investing in gold: a practical way to hold gold bars and coins in your RRSP

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Robb Engen’s 4 biggest Investing Mistakes

Learn from your mistakes - motivational words on a slate blackboard against red barn woodI was 19 years old when I first started investing. I diligently set aside money every paycheque, starting with $50 every two weeks and eventually increasing that to $200 per month, to save for retirement inside my RRSP. Sounds like I was off to a great start, right? Wrong!

 

Even though my intentions were in the right place, my first attempt at investing was a complete disaster. Here’s why: I didn’t have a plan

It’s good practice to save a portion of your income for the future, even at a young age. The problem for me was that I was still in school and didn’t have a plan – I had no clue what I was saving for.

I had read The Wealthy Barber and The Millionaire Next Door and so I knew the earlier I started putting away money for retirement, the longer I’d have compound interest working on my side, and the bigger my nest egg would be.

Unfortunately, I was saving for retirement at the expense of any other short-term goals, like paying off my student loans, buying a used car, or saving for a down payment on a house.

I didn’t have any short-term savings

Speaking of RRSPs, what was a 19-year-old kid doing opening up an RRSP when he’s only making $15,000 per year?

There were no real tax advantages for me to save within an RRSP when I was in such a low tax bracket. I’m sure I blew my tax refunds anyway, so what was the point?

Granted, the tax free savings account hadn’t been introduced yet, but I would have been better off using a high interest savings account for my savings rather than putting money in my RRSP.

I didn’t have a clue about fees and tracking performance

Like a typical young investor I used mutual funds to build my investment portfolio. I was encouraged by a bank advisor to select global equity mutual funds because, as I was told, they would deliver the highest returns over the long term.

What the bank advisor didn’t tell me was that the management expense ratio (MER) on some of those mutual funds can be 2.5 per cent or more, and high fees will have a negative impact on your investment returns over the long run.

Bank advisors also don’t tell you which benchmark these funds are supposed to track (and attempt to beat) so when you get your statements in the mail it’s impossible to determine how well your investments are doing compared to the rest of the market.

I drained my RRSP early

I didn’t have a good handle on my finances in my 20s and often resorted to using credit cards to get by. Without a proper budget in place, and no short-term savings to fall back on in case of emergency, I had no choice but to raid my RRSPs to pay off my credit-card debt and get my finances back on track.

Taking money out of my RRSP early meant paying taxes up front. Withdrawals up to $5,000 are subject to 10 per cent withholding tax, while taking between $5,000 and $15,000 will cost you 20 per cent, and withdrawals over $15,000 will cost you 30 per cent.

Your financial institution withholds tax on the money you take out and pays it directly to the government. So when I took out $10,000 from my RRSP, the bank withheld $2,000 and I was left with $8,000. In addition to the withholding tax, I also had to report the full $10,000 withdrawal as taxable income that year.

While I can’t argue with my reasons for selling, my dumb decisions beforehand cost me a lot of money and left me starting over from scratch.

Final thoughts

We all make investing mistakes – some bigger than others. If I had to do things over again today I would have done the following:

  1. Create a budget – A budget is the foundation for responsible money management. Had I used a budget and tracked my expenses properly from an early age I would have lived within my means and kept my spending under control.
  2. Open a tax free savings account – Yes, the TFSA wasn’t around back then but for today’s youth it makes much more sense to save inside your TFSA instead of your RRSP like I did. You can put up to $5,500 per year inside your TFSA and withdraw the money tax free. You contribute with after-tax dollars, so you won’t get a tax refund, but you’ll likely be in a low tax bracket anyway, so contributing to an RRSP won’t give you much of a refund either.
  3. Make a financial plan – We all have financial goals and even at a young age I should have identified some short-and-long term priorities to save toward. I’d take a three-pronged approach where I’d use a high interest savings account to fund my short term goals, my TFSA to fund mid-to-long term goals, and eventually open an RRSP to save for retirement. No doubt I’d be much further ahead today if I took this approach earlier in life.
  4. Use index funds or ETFs – Now that I understand how destructive fees can be to your portfolio, I’d look into building up my investments using low cost index funds or ETFs. The advantage to using index funds is that you can make regular contributions at no cost while achieving the same returns as the market, minus a small management. Some brokers also offer free commissions when you purchase ETFs.

Did you make similar mistakes when you first started investing? How did you overcome them?

 RobbEngenIn addition to running the Boomer & Echo website, Robb Engen is a fee-only financial planner. This article originally ran on his site on August 7th and is republished here with his permission.

 

Switching your RRSP to a RRIF is best for those retiring soon

Portrait Of Smiling Senior Couple Saving Money In The Pink PiggybankConverting your RRSP to a RRIF is clearly the best of three alternatives at age 71 and there are four ways to make sure you get the maximum benefit from the RRIF (Registered Retirement Income Fund).

If you have one or more RRSPs (registered retirement savings plans), you’ll have to wind them up at the end of the year in which you turn 71. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors.

You have three main retirement investing options:

• You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.

• You can purchase an annuity.

• Proceed with the RRSP to RRIF conversion

RRIFs are the best retirement investing option for most investors

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Optimizing CPP: the later you start taking it, the better

rpcvr-cppyr-engHere’s my latest MoneySense Retired Money blog, which looks at the perennial topic of when to take the Canada Pension Plan, or CPP. Click on the highlighted text that follows: The best time to take CPP to maximize payouts. (It may be necessary to subscribe to get full access to the piece after a certain limited number of monthly views to the site).

In an earlier blog in the series, I revealed why personally I planned to take Old Age Security as soon as it was on offer, at age 65.

In this followup, I come to the diametrically opposite conclusion that the longer you commence deferring the onset of CPP benefits, the better — assuming normal health and longevity expectations.

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Doug Dahmer

I consulted three major sources for the piece. One is Doug Dahmer, founder of Burlington-based Emeritus Retirement Solutions. You can also access a useful CPP tool he runs at www.cppoptimizer.com. Run Dahmer’s name in the Hub’s search engine and you can find a number of guest blogs on the topic of decumulation.

In a nutshell, Doug thinks most of us — including me and my wife — should defer CPP as late as 70, choosing instead to start withdrawing from RRSPs in our 60s, assuming the money is needed on.

Another useful source I consulted is Doug Runchey of Victoria-based DR Pensions Consulting. For a small fee, Runchey — who used to work with the CPP — will take your government-issued CPP contribution statements and crunch the numbers to tell you how to optimize your benefits.

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