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February 28, 2018 | Who Knew?

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

People think they’re so smart, and aren’t. They buy crypto on credit cards (at least until this week). They roll the dice on weed startups. They flip individual stocks in companies nobody’s heard of. They buy condos with huge loans to rent out for negative cash flow. Or they stuff money into dodgy online banks which front for subprime mortgage lenders, just to get an extra half point in interest.

Sad. Because sitting right in front of them is a gift so powerful no government would ever offer it again, yet prays you will not utilize. And it’s over tomorrow.

Yup, the registered retirement savings plan. How else can you transfer $26,000 from one bank account to another and, for the simple act, save a potential $14,000 in tax? In the days of eat-the-rich liberalism, how did the RRSP slip through the cracks? After all, the more money you make, the greater the benefit. It allows 1%ers to contribute huge sums of cash, to write that off taxable incomes, then grow assets for decades without ever being taxed. Finally, if they’re crafty, they can retrieve a lot of that wealth without exit tax.

So the deadline to make a contribution deduct it from 2017 taxes is midnight tomorrow. The maximum amount possible is 18% of what you earned last year, to that limit of twenty-six grand. Plus add in all contributions you never made in the past. Plus an overcontribution of $2,000.

If you lack the money, borrow it. Banks will loan at prime (3.45%) and usually not require payments until your refund arrives. Use it to pay off a chunk of the loan. Now you’ve created instant equity. Or, as mentioned, transfer money (or assets) now owned into a self-directed RRSP – called a ‘transfer in kind’ – and the government will send a refund for selling yourself stuff you already owned.

If you earn more than your squeeze, open a spousal plan, stuff it up to your contribution limit and write it off your income. After three years s/he can withdraw it and pay tax at the lower rate. Presto. You’ve income-split. Ditto for a mat leave. Just plan to have a baby three years after you contribute (c’mon, let’s show a little discipline here…) and the plan can be collapsed to fund the time at home.

Sadly, most moisters don’t get any of this. Four in five, surveys indicate, have no intention of using an RRSP whatsoever – mostly because ‘retirement’ is a fuzzy, far-away, hazy thing and they’re cynical, suspicious little hipsters, anyway. What a fail. The biggest use of an RRSP is not for funding your wheelchair or boxes of KD in old age but rather for tax-shifting.

Get laid off? Use the cash in the RRSP to live on. You got a big refund when you contributed and pay little or no tax when you take it out. Sure helps.

Want a sabbatical between gigs? Then live off the RRSP money, travel the world and don’t stress about income.

Got pregnant? An RRSP is perfect for saving and growing money when you’re working, then using it to finance the pregnancy at little or zero tax.

There’s more. Like putting a mortgage inside an RRSP and make payments to yourself. Or (of course) using the RRSP bonanza to fund your TFSA. Or utilizing accumulated RRSP room to soak up the cash portion of a pension you’re commuting. Or making a contribution, getting a refund, then using both to buy a home with a bigger down payment – without triggering tax.

So why are RRSP contributions going downhill? (The average is under $5,000.) Why are so many people taking money out of their plan instead of putting it in? (As mentioned here a while back, one bank found 40% of us are raiding the plans, mostly to buy a house or pay for general living expenses.) And why are people so piteously ignorant of what this thing is, and can be used for. (Another survey found 60% of moisters think they can use RRSP money to pay for daycare.)

Simple. Nobody teaches this. Most people think an RRSP is a thing that you buy, not an investment vehicle to be filled with cool stuff that grows. (Thanks [email protected] for that.) But, mostly, real estate has sucked off so much cash flow that half of Canadians say they have no money to invest with. And many are already starting to regret it.

In summary: the RRSP is a tax shelter and tax-avoidance vehicle blatantly skewed to benefit higher-income earners. The TFSA, in contrast, is purely democratic and universal. And guess which one the government clipped?

Nice hair, though.

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February 28th, 2018

Posted In: The Greater Fool

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