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Discussion Starter #1
Just want to bounce this off you guys.
When I retire assuming I don't die or have a stroke I will receive a sizeable retirement payout.

I currently max out the RSP so when I receive the payout I will be taxed big time.

So I am not even sure if I should be worrrying about this.

I am thinking of stopping the Rsp all together and build up contribution room.

In the mean time I can do a loan with interest equal to the rsp contribution.
This way I can still invest and not get taxed to death on the payout.

Sound plan or not?

Ps mortgage will be paid off by retirement. No hurry to pay it off.
 

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When I retire assuming I don't die or have a stroke I will receive a sizeable retirement payout.
I am not certain, but I always understood that such a retirement payout went direct to your RRSP. Tax happens on the future withdrawals.

Just a guess.
 

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It will be taxed by your employer before you get the money unless it's directed to your rrsp.

In my our case we have spousal rrsp, money outside rrsp, plus our house.

If your company sends it to your rrsp you don't get that big tax return.

Now if I put my company buy out in rrsp in my name it would be 46% tax to with draw money.

My thinking is 19% to withdraw spousals, 23 % for outside money. We will never withdraw 46% money and I don't like my heirs that much.

I took buy out in cash payed the tax.
 

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Look up Retiring Allowances" in Chapter 5 and Chart 8 of CRA T4040. There is a calculation to determine how much of your allowance you are allowed to transfer to RRSP, depending on when your years of service were. When you retire, your pay & Benefits should also be able to tell you how much is transferable.

Although CRA's documentation says it should be transfered directly, it doesn't always work out that way. I worked for the federal government, and even though I gave them all my account information, they still issued the check to me (and with no tax deducted by the way.) They issued me a T4A, with the amount in Box 26 - "Eligible Retiring Allowance". If a portion is ineligible it will be shown in Box 27. The total is reported under Other Income on line 130 of your tax return. But you can contribute the amount in Box 27 to your RSP, and if you do you can deduct it in Line 208.
 

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Discussion Starter #5
Payout will be a cheque and tax witheld or owed. It would be nice to be able to dump it all into an rsp to offset the tax and with draw it on my own terms and pay tax accordingly.
 

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My employer (the federal government) had no problem paying it without taking any withholding tax, even though they wrote the cheque to me.
 

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You would also be missing out 10 years growth holding back your rrsp contribution. Don't think that would worth the tax savings.
 

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Discussion Starter #8
This is why I am suggesting a leveraged portfolio to still get growth plus deduction, and accumulate rsp room to "hide" the payout.
Leveraged account will be identical to rsp.
 

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Your tax planning is sound.

Your investment planning will depend on your temperment to deal with the leverage. Obviously if the stock markets or your investments go up, you will be way ahead with the leverage strategy and the tax savings on your severence will simply feel like a tip.

The leverage aspects of leveraging, far outwiegh its tax benefits. This can be easily observed by using a spreadsheet. As you lower the interest paid on the loan, you will see your net benefit go up, but of course your immediate tax savings are going down. The reason I point this out is the reverse is also true. If the investments go down, the lousy tip you receive from the tax savings almost seems insulting compared to how quickly you are losing money. If the plan is significantly underwater by the time you receive the severence, you will quickly see how dissappointing it was to move in this direction.

You probably know that, but I thought I would add it anyway. As I said, great tax strategy and you will win tax wise from it. 10 years from now, I can update you on the merits of the investment strategy. If it is a small amount of borrowing compared to your assets, income and possibly your retirement income (if it falls apart you may need to take it into retirement, since time fixes most blunders, even leveraged blunders).

Good luck to you.
 

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Discussion Starter #10
eagle the plan would be to leverage into DN stocks with a solid history of dividend growth.
Currently i could invest and receive a dividend stream that would cover the interest payment, and then some. 15 years later with dividend growth, and stocks that *should go up in value in line with the dividend increases, I will have a portfolio with positive cash flow.
I am thinking of keeping the loan forever. The interest deduction would be the only one I would have when retired.
The only problem is that to me risk is not what you own, but how much you pay for it, and everything is overvalued IMO.
I am confident that i could dump a lump sum right now, and remain cash flow positive, but buying at a better price will give me a better yield, and greater margin of safety.
Once I buy the stocks, price is a non issue as i focus on growing income. The interest deduction and capital appreciation are icing.

Even with 100% dividend cuts across the board (a very unlikely event) I could still cover the interest payment as i would not be making monthly rsp contributions. I would borrow an amount so that if interest rates doubled, I could cover interest payments with zero dividends coming in.

I suppose i COULD pay the mortgage off quicker by using former rsp contributions. Once it is paid off I could then chip away at the investment loan.
 

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My 2 cents

Bean, the strategy you've described has been advocated in the past by people like Derek Foster. I'm not advocating for or against this strategy. Doing something like this depends your risk tolerance. A spreadsheet alone won't be enough to tell you what to do; the computations are awfully complex, and no one can predict the future.

For example, you won't get the same tax deduction from an investment loan as the same size RRSP contribution. A $1,000 RRSP contribution at a marginal tax rate of 40% gives a $400 deduction. A $1,000 loan (for eligible investments) at 4.25% (prime + 2%) yields a deduction of only $42.50 - not much of a deduction. To get the same deduction as the RRSP contribution, your investment loan (assuming a 4.25% interest rate) would have to be almost 10X larger.

However, there may be some long-term advantage to holding some investments outside a RRSP. Eligible dividends and capital gains are treated as interest income when withdrawn from an RRSP. Therefore, a non-registered account may pay less tax over the long-term if one receives a long stream of dividends. The point at which the favourable tax treatment outside an RRSP outweighs the higher initial tax deduction is awfully complex to calculate. Also, it's difficult, if not impossible, to forecast future tax rates, dividend payouts, etc.

So if you intend to do this, how can you lower your risk? One way would be to try to "fix" your interest costs at the lowest rate possible. You could use the equity in your home to get a fixed rate home equity loan. Or you could get a variable rate HELOC. Before the financial meltdown I got a HELOC for prime minus 0.5% (1.75%). It's awfully difficult to get that sort of rate now. The Bank of Canada has already signalled that rates will rise, perhaps as soon as this summer. You may pay more for a fixed interest rate loan, but it may also make planning easier. For example, you may be able to buy a bond with an interest rate higher than your fixed rate loan. That lowers your risk, but also lowers your gain because interest is taxed more heavily than dividends.

You've mentioned that you want the same sort of investments in your non-registered portfolio as your RRSP. I'm not sure that's a good idea. If you did pursue this strategy, you may want to consider it part of your whole portfolio and asset allocate accordingly. For example, if you decided that you wanted 40% fixed income, then it makes sense to hold as much of that in your RRSP as possible. It would also make sense to hold tax-advantaged assets out of your RRSP.

You may want to consider something like CPD for your non-registered portfolio. It's a Claymore ETF of preferred shares. You won't get capital gains from it, bit it's unlikely (but not impossible) that the ETF will plummet. Also, it's been falling recently in anticipation of rising interest rates. CPD is yielding ~ 5% now. Please note that CRA does have rules limiting deductibility of interest when purchasing preferred shares (CRA allows deduction on interest only up to an interest rate equivalent to the preferred dividend rate "grossed up"). XDV is a dividend paying ETF comprised of common shares of dividend payers. You're more likely to get capital gains or losses with this. It's yielding about 3.6%.

This strategy can be risky, but there are definite benefits too. It's up to you whether the benefits outweigh the risks. Good luck either way!
 

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Discussion Starter #12
I already have a HELOC @ P-.5 ready to go.
The interest payments will be equal to my rsp contribution, so the deduction will be the same.
I will hold the identical investments as I would in my rsp because the leverage is in lieu of an rsp.
Besides, i always invest 100% equitites. EMT and MPT is garbage, and risk is in the price you pay, not what you own.

Even if I did concede to MPT, I have a DB pension that is the fixed income, or bond component of my retirement portfolio.

I am just trying to plan so that I can be tax efficient, and not give up my pay out to the gov't.
 

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Another 2 cents

I forgot that you have a DBP. Didn't we have a discussion about that? :) So your interest payments (1.75%) are equal to your RRSP contributions? That must mean that your investment loan will be several times larger than your usual RRSP contribution. If you're comfortable with that, then you really need not ask the advice of anyone on this forum. It sounds as if you've already made up your mind.

I would disagree with you on risk though. Those who bought Lehman shares prior to its collapse would say that what they bought was important, not just the price.

If you're really interested in paying less to the government, then look at My Blue Haven, by Alex Doulis.
 

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Discussion Starter #14
I still believe risk is the price you pay. Of course junk is no bargin at any price.
By risk I mean that a portfolio of 100% equities is not risky to me in terms of "stocks are riskier than bonds".
I have read my blue haven and his other book(s). Good reading.
Yes the loan will be huge but not big enough that I could not cover the interest payment out of pocket.
This would be unlikely.
 
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