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November 25, 2019 | Dr. Garth

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.

So little time. So many questions. Here’s Patient One. Mackenzie.

“I can’t recall you ever giving blog advice on how best to set up an RESP,” he says, proving that he hasn’t paid attention in the past.

I know I should do it before year end for young Alexander, born last July. Any advice on the best way to set one up self-directed?

RESPs are free cash, Mac. Yes, you should make the first contribution before the end of the year in order to get the CESG – that 20% grant the feds will give you for contributing to your kid’s future educational needs. Like, where else can you score a guaranteed 20% return on your money? (Plus check with your province. Several, like BC, also throw free cash at RESPs.)

The max yearly amount to get the full grant is $2,500, but you can put up to $50,000 into the plan in a lump sum if you wish. The money grows tax-free and is eventually distributed to the beneficiary (Alex) to defray schooling costs. At that time it becomes taxable in his hands, but odds are that a low or nil income will mean nothing to pay.

Yup, a self-directed RESP is best. Open it with the bank, with an advisor, or through an online brokerage. Never deal with one of the baby vultures flogging an expensive, fee-laden, pre-packaged plan when you’re hopped up on post-birth hormones. That’s a decision you’ll regret.

Put your contribution into growth-oriented ETFs. No GICs. No mutual funds. The time horizon for Alex is probably close to 20 years – enough time for stock markets to double, then double again. You can always shift into a more conservative portfolio a decade or more down the road. If you miss making contributions, it’s possible to catch up – but only one year at a time. If there are multiple spawn, set up a family plan. That way if one kid becomes a social media influencer and makes billions, the accumulated plan money can be used to school a sibling. If nobody goes to post-secondary schooling, a good whack of the funds can be rolled into your own RRSP. Then you can get a Porsche.

“I discovered your blog about 3 years ago now,” admits Mary, “and your advice has helped tremendously with my own portfolio (all ETFs of course). Thank you so much for freely imparting the investment wisdom that you have no doubt spent many hours learning. And also for the daily laugh!”

I am curious to know your thoughts on my strategy for maxing out my RRSP & TFSA accounts. I am 43 yrs old, make $100k base salary and save about $30k/yr. However, I have no car payment right now, which enables me to save more (my car is only 8 yrs old, and I plan to replace it once my RRSP is maxed).

Let’s assume my marginal tax rate is 33.33%, and I have saved $30k. The way I look at it, I have 2 options: (1) I can put that $30k into my RRSP, and use the $10k refund to top up my TFSA. This will give me $40k invested in both accounts or (2) I can borrow an additional $15k to put into my RRSP, and use the refund to repay the loan. This option gives me $45k invested in my RRSP, but nothing in my TFSA (yet).

I am thus torn between having that additional $5k invested now (only in RRSP’s), but knowing that I am losing out on growth in the TFSA that will not be taxed when I withdraw. At my current savings rate, I do expect to have my RRSP maxed out in 2.5yrs or less; at which point I will continue to max it out and use the refund for my TFSA. Please, will you kindly give me your thoughts? And have fun poking holes at it 🙂

Hey, how can we make fun of somebody with a 30% savings rate when the average is less than 1%. You, Mary, are a financial princess. As for your question, investing in an RRSP to fund a refund which is then stuck in a TFSA is like mugging Bill Morneau in the alley behind his mansion. Taxes are deferred plus you get to load up two investment vehicles where there are no no sticky CRA fingers.

Borrowing to fill an RRSP is also sound when the refund’s used for loan repayment.  The best choice, though, is likely Option 1. RRSPs give tax-deferred growth. TFSAs give no-tax gains. If you have a defined benefit pension plan,  starving the RRSP in favour of the TFSA makes even more sense. The steerage section also wants to know if you’re single.

“Love your blog over the last 3 years,” says Bob, nicely sucking up, “and have turned many friends onto it. Need your trusted advise please..”

After working overseas for 12 years and repatriating to Canada my wife and I decided to rent here in Edmonton until we decide to buy a home hopefully in Victoria. We are looking in the price range of $650K to $950K.

We are both 62 years old collecting a monthly pension of $1200 from my previous employer plus our take of CPP.  Our total savings of over $1.6M is with a financial advisor Wood Gundy here in Edmonton generating a meager average of 4% per year over the last 5 years.

Realize we do not have that magic crystal ball but what are your thoughts on the present Victoria housing market?  I have been preapproved for a $450,000 mortgage at 2.56% and would like to use that cash with a down payment of $550,000 from my account towards the purchase of a house. Should we wait or should we buy?

First, get a new advisor. That is an abysmal rate of return over the last five, when balanced portfolios added at least 50%. Second, I hope you have been drawing income from the portfolio, since living on $1,200 a month plus government pogey is pathetic. That portfolio should be kicking out seven or eight grand a month. And if that were the case, moving to the Island would be a lot less painful.

This is not a question about the Victoria market, since it’s unlikely to bubble or crash, but about you. In your 60s and retired, do you really want to take on a fresh $450,000 mortgage? Also, by sucking more than half a million from your investment account you’ll materially reduce its ability to fund income. And according to my Rule of 90 (ninety minus your age = amount of net worth in a house) this is not a prudent strategy.

Best move is to fire the firm. Hire a new guy. Have the portfolio give you an unchanging monthly paycheque and lease far swishier digs than you could buy. Start acting like a millionaire,

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November 25th, 2019

Posted In: The Greater Fool

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