September 25, 2019 | Dr. Garth

Impeaching Trump. Trudeau buying homeowners new furnaces. The Greens sucking off $15 billion a year taxing your RRSP transfers. Conservatives encouraging more debt. It’s a mad, mad world out there. But in the warm, wet womb of this pathetic blog, you can curl up on the Doctor’s couch and let those worries hang out. We won’t judge. Much.

Bring in the first victims.

Mandatory Suck Up: Thanks again for all the information, tips and recommendations you do for us non-financial people. Over the years you’ve helped me sound like the ‘smart, educated person who has her financial sh** together.’

We have 2 toddlers and I use the child benefit $ the government provides with some of my own money to fill their RESPs (enough to receive the maximum grant amount annually). So, each child has accumulated around $7,000 over their short time here from gifts for various occasions. How can I help grow this money so that when they’re adults, they can have a bit of a head start? Youth accounts, GICS and all that junk are pathetic.

My 2 ideas: Option 1: My husband has some room in his TFSA, we could put it in there, buy one ETF each and let it sit and grow? Option 2: Add more to the RESP – which I don’t exactly want to do because it’s stuck there. Or option 3, Garth?

Thanks so much…from my 2 bambinos who will hopefully grow up with some good money sense. Just call me Lola.

Silly, Lola. You’re supposed to use the Canada Child Benefit to finance a new quad or replace the pool liner, like most folks. However if you insist on helping your kids, there’s no better option than the RESP. As you know, $2,500 per kidlet annually earns you a federal grant. If you missed a year of free money, you can make that up over time. How can you not want a 20% ROI?

Now, the RESP is just like a tax-free savings account or an RRSP – it can hold a ton of different assets within it. All gains are untaxed until the money is taken out by the students, at which time it is taxed (or not) in their hands. The fact you’re asking these questions suggests you don’t have a self-directed RESP, but instead fell victim to one of the baby vultures selling a packaged plan – full of fees and crappy low-T investments.

If so, get out. Open the correct RESP (a family plan) with a non-bank advisor or an online brokerage, transfer the funds, and invest in equity-based ETFs. Given the long timeline for most education savings plans (at least a decade) you can ignore market volatility and skew more towards growth than safety. A return of 6% on maxed annual deposits will give you more than $70,000 per child in 15 years. Then they can be dentists and anesthesiologists and let you retire early.

Next, Ken in Calgary, with a new job.

I have been reading your blog posts while enjoying my morning cup of coffee for over five years now. Thanks to your sage wisdom I sold my house in Cowtown (early 2015) and managed to minimize my loses. In hindsight this was a great move not only financially but also mentally, as it enabled me to rest easy at night. Having to deal with the stress of potentially losing one’s job at any moment and still being on the hook for hundreds of thousands of dollars to the man was too much.

I recently moved from a medium sized midstream oil and gas company to a super major that still offers a Defined Benefit pension (fully funded). My previous employer had a RRSP matching program and I was able to save $80,000, sitting in Sunlife Group Funds that have low management fees. I must do something with these funds within 90 days.

What should I do with my RRSPs!? I still have room and plan to continue to contribute until they’re maxed. I made an appointment with a bank advisor but left being less than impressed. I had to tolerate some guy in a bad suit trying to sell me several GICs that would be lucky to return 1% after inflation. I could stay with Sunlife and move to similar funds but will see my management fees increase from 0.5% to 1.5% (which seems decent as most bank funds seem to charge nearly 2%). I want as little involvement as possible and have no plans for these funds prior to my retirement (which won’t happen for the next three decades). A little guidance or advice would be greatly appreciated.

Sure. First, forget any new RRSP contributions. At least for now. The DB pension will be providing a guaranteed monthly income stream in retirement (unless you commute it), which means at age 71 you’ll be forced to start liquidating RRSPs and could end up in a higher tax bracket. That would suck. So concentrate on maxing the TFSA and ensuring it’s brimming with growthy assets. All income from that pot in retirement will not be added to the DB cash flow, no tax impact.

As for the unused RRSP room, it will actually become more valuable later in the career when your income rises. Also, if you can commute the pension down the road, having a boatload of available room will help cut down drastically on the tax payable on the cash portion.

The SunLife funds? You could robo them for a 0.5% fee, but leaving them where they are is a valid option, too. The fee may be higher but the outfit is a helluva lot more stable.

Now to Mike and his dear squeeze, Catherine.

My wife and I have been enjoying your blog for more than a decade. We very much value your great efforts to financially educate Canadians. You have addressed the topic of early retirement several times in the past. However, it would be even more helpful for us if you can share your thoughts for this specific scenario.

My wife is 58 and decided to quit working this year and help our daughter with her three young kids, our grandchildren. I will continue working, and should be able to support both of us. She has $200k in her RRSP account. I have been contributing to a spousal RRSP account in her name for a few years, and currently it is valued at $100k. I will continue contributing to this account until I retire. Our plan is to start draining those RRSP accounts starting in 2020. Our question is what is the optimal amount(s) to withdraw from these RRSP accounts in her name annually? And also should she apply to receiving CPP in 2020 or wait? She is not planning to work any longer, thus no future contribution to her CPP will be made. We would much appreciate if you discuss this topic in your blog.

Glad to hear you have the freedom and resources (and guts) for Catherine to pursue this path. It sounds like she will be out of the workforce for good so (a) if you don’t need the cash flow, leave the RRSPs intact. After all, assuming they’re properly invested and plumping tax-free – and C has another 30 years of life – then there’s no reason to forego the growth. But (b) if income is an issue, drawing down the registered plans when she has finished getting money from her employer is a viable plan. Taking $20,000 a year (in Ontario) will result in a lowly 8% tax rate, so she nets more than $18,300.

Or, (c) how about your daughter paying your wife to look after her kids, since she’d be footing daycare costs without the family help. Why should C work for free? Three daycare spaces in a big city costs a total of about $45,000 these days, so if Catherine makes just half that it beats cashing any of the RRSPs. Plus daughter can use her government kiddie pogey to help do it. Then Justin pays!

As for the spousal contributions, good on you. The deduction and tax saving goes to you and the money becomes Catherine’s property. But be aware that at least 36 months need pass between contributions and withdrawals, or the funds will be attributed back to you and taxed as regular income. Finally, CPP – she should take it at 60. Everybody should. When the government gives you money, stick your hand out. If you don’t need it, plunk it in your TFSA. Never gamble on how long you’re going to live, nor how capricious government can be.

Garth Turner September 25th, 2019

Posted In: The Greater Fool

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