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Discussion Starter #1
I have been thinking about this for a while. The facts: 60 years old, been retired for 4 years. RSP balance about $125k, non registered portfolio in low 8 figures, pension starts in 2 years and very, very generous, cash on hand good for 2 years expenses. I have about $40k rooom in my RSP. This arose recently due to post retirement comp. Question: Should I bother topping up the RSP or does this just complicate things more for a relatively small benefit? Will always be paying at the max tax rates (Alberta). Portfolio consists of 100% blue chip dividend paying Canadian equities. Dividends and pension will cover expected expenses. What do you think? I know how lucking i am to be in this position-please only helpful advice.
 

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don't contribute. That rrsp is going to become an albatross around the neck. It's useless for you.

plan to collapse rrsp while making max charitable donations. Donate enuf to offset tax otherwise owing on rsp withdrawals.

lobby for an exemption for donating entire rrsps during taxpayer's lifetime. Like spousal rollover, except donor would still be alive & would get whopping tax benefit. Your alma mater should help here. Or any big hospital.

to spice things up right now, join today's red-hot canadian campaign to end a) death by stoning and b) execution for adultery in the middle east. Stop obsessing over your 40k it's making you a dull man.
 

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Since you are not a typical member of this forum (8 figure portfolio), the only decision is to defer income tax from age 60 to age 72. Chances are the tax rate will be the same. You are already beyond the level of any clawbacks which are over by income of $105K.
 

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Discussion Starter #4
don't contribute. That rrsp is going to become an albatross around the neck. It's useless for you.

plan to collapse rrsp while making max charitable donations. Donate enuf to offset tax otherwise owing on rsp withdrawals.

lobby for an exemption for donating entire rrsps during taxpayer's lifetime. Like spousal rollover, except donor would still be alive & would get whopping tax benefit. Your alma mater should help here. Or any big hospital.

to spice things up right now, join today's red-hot canadian campaign to end a) death by stoning and b) execution for adultery in the middle east. Stop obsessing over your 40k it's making you a dull man.
Why an albatross? Not obsessing-just wondering. RSP consists of blue chip dividend paying equities similar to non registered portfolio. I thought of collapsing it but why pay tax now? Thanks.
 

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I am a little confused as to how you could acumulate an 8 figure non registered portfolio, yet you only have 125K of RSP investments and 40K of unused room. I would have thought you would have had more RSP contribution room. But maybe you inherited it. None of my business.

Nonetheless. Agree with humble, you don't really have to worry that much about a decision. Charitable donations are an option.

If it bugs you, and you really want to use it, then use it to offset some of your dividend income. $10million in dividend payers at 4% would give you an income of 400K a year, so claiming all of the 40K against that won't make a difference.

Also, if the RSP tax bothers you, when the time comes to cover some of your taxes owing upon collapsing the RSP, you could get an investment loan, that the interest owing, would equal the taxes payable on collapsiing the RSP.

Although, I am sure that your accountant will be able to help you with these matters for further tax efficiency.
 

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glad you're wondering. I didn't mean collapse now, believe i said "plan to," no ? Mandatory withdrawals from that rsp will be 100% taxable when they commence. Take those appealing blue chip dividends that would, if not locked up within an rrsp, be generating valuable tax credits for you right now. But because of the rsp all such credits are lost. And it's a multiplier thing, as i see it. Favourably-taxed dividends w tax credits now, held in non-registered or even tax-free accounts, can be utilized to purchase other tax-favourable investments. Rinse & repeat. Whereas the same dividends in an rrsp will eventually get taxed at 100%.

pro-rrsp planners will argue that the compounding effects of such dividends banked up in rrsps outweigh their inevitable & dismal tax consequence. But i for one don't buy that argument, because frequently the non-registered portions of high net worth taxpayers' portfolios are compounding positively as well. It's in that sense that i view an rrsp as an albatross-in-waiting. More accurately one might say a pregnant albatross, one that's going to lay an unwanted egg.

there is a great deal to be said for tax-offsetting charitable donations to be made during the rrsp withdrawal years by high net worth taxpayers who don't need their rrsps in the first place. In addition, i don't know whether the likely beneficiaries of largesse - schools, hospitals, big social agencies like red cross & salvation army, etc - are currently lobbying also for special tax benefits associated with donation of entire superfluous rrsps, or a healthy portion of such rrsps, during a taxpayer's lifetime; but i think they should be doing that, or at least discussing how to do that.
 

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Discussion Starter #7
Cal/Humble Thanks for the thoughtful responses. I agree that getting the dividends outside RSP are good-max rate in Alberta on divs this year under 16%. Donations also a good idea. By the way my RSP contribution limit while I was working was almost nil because my pension adjustment amount was so high. Recent room came after I stopped contributing to pension. In any event small numbers in the overall scheme of things.
 

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It's in that sense that i view an rrsp as an albatross-in-waiting. More accurately one might say a pregnant albatross, one that's going to lay an unwanted egg.
When you run the math, you have to take the time-value-of-money effect into account. i.e. you are comparing a near term tax hit against a far term tax hit. Also, the tax rate goes down as you get older.... tax brackets are indexed, age credits pop into play.... I find it very hard to justify an RRSP-RRIF meltdown strategy for the average client (not SQRT!) when you subject the plan to a proper 'needs-based' analysis.
 

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cal taking out an investment loan whose interest would be sufficient to offset rrsp withdrawals is not a good idea during the current prolonged low-interest period, imho. The amount of $$$ that would have to be borrowed would be prodigious. They would have to be invested in dividend payors paying higher than the loan interest rate, so automatically there is risk. Now taxpayer not only has an additional substantial portfolio - which is generating taxable income of its own, please keep in mind - but also suddenly he's vulnerable to a 20-25% downward market correction or worse.

if taxpayer's secondary or loan-based portfolio is not as well-chosen as his original non-registered accounts or even his real estate, this would also add to the risk. Taxpayer would have enough margin to prevent margin calls thanks to his non-registered portfolio; however, if taxpayer were to pass away estate would likely be required to repay the loan; and this could occur during an unfortunate market period when executors would be reluctant to liquidate sound securities at low prices. All in all this is not a scenario you'd choose for a 75-year-old.

to steve - i never wrote anything about an rrsp meltdown. In fact, the above will show that i oppose them. I mentioned only the wisdom of increased donations during rrsp withdrawal years for high net worth individuals. There's a powerful and creative psychosocial benefit to this kind of activity that i don't believe your money maps are capable of perceiving, let alone measuring.

and i don't believe the tax rate goes down as today's citizens age. Whether through inheritances or lump-sum retirement benefits or fat govt-type pensions or sale of the appreciated & valuable but outgrown family home, incomes often actually increase in retirement, as maverick US actuaries were predicting decades ago. During the same phase of life outlays are often decreasing, while tax bites from all levels of government are increasing. So it makes sense to look ahead & analyze just how much that rrsp will mean & what role it will play in the grand scheme of things.

one detail that's never mentioned in this forum, which should give everyone pause if not stop them cold turkey, is that final 100% taxation of an rrsp balance at the time of the death of the survivor in a couple. This means that actual capital itself gets taxed, a system not unlike that in the US. On the other hand, only the final capital gain or loss in a security held In a non-registered account gets taxed as a deemed disposition under the present canadian system.
 

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$10 million plus portfolio? Wow.

Deferring income tax in an rrsp won't help you much. Maybe using the rrsp room to shelter fixed income if you have any?

I wouldn't lose any sleep over it either way.. ;)
 

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I have been thinking about this for a while. The facts: 60 years old, been retired for 4 years. RSP balance about $125k, non registered portfolio in low 8 figures, pension starts in 2 years and very, very generous, cash on hand good for 2 years expenses. I have about $40k rooom in my RSP. This arose recently due to post retirement comp. Question: Should I bother topping up the RSP or does this just complicate things more for a relatively small benefit? Will always be paying at the max tax rates (Alberta). Portfolio consists of 100% blue chip dividend paying Canadian equities. Dividends and pension will cover expected expenses. What do you think? I know how lucking i am to be in this position-please only helpful advice.
As someone above suggested, you should perhaps talk to an estate planner, or at least look at it from an estate planning point of view. If you have a spouse, she can inherit the RRSP without collapsing it, so that may be a consideration.
From a pure investment point of view, you don't need to make withdrawals until age 71, so you are looking at possible 11-year tax-sheltered earnings in the RRSP, with graduated withdrawals afterward taxed as straight income. In the meantime you will have received a significant tax rebate in the year of contribution. So it might still be worthwhile.
 

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Discussion Starter #13 (Edited)
Most of the points you make have previously crossed my mind and therefore I think status quo will continue in regard to the RSP. (ie no more contributions-collapse if opportunity arises) and thanks for the help. In response to a comment:I have no advisors and generally don't pay MER's. I feel qualified to manage my own affairs (CA, MBA, CFA) although one could make the case I have a fool as a client. Have received estate planning legal advice as a reirement perk. Do appreciate your comments though. Over the last few months I have read many useful posts on this site. Thanks again.
 

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Discussion Starter #14
As someone above suggested, you should perhaps talk to an estate planner, or at least look at it from an estate planning point of view. If you have a spouse, she can inherit the RRSP without collapsing it, so that may be a consideration.
From a pure investment point of view, you don't need to make withdrawals until age 71, so you are looking at possible 11-year tax-sheltered earnings in the RRSP, with graduated withdrawals afterward taxed as straight income. In the meantime you will have received a significant tax rebate in the year of contribution. So it might still be worthwhile.
Thanks. Deferral will only make a difference on the dividends as investments in a non registered account will attract tax only when sold. I trade very infrequenty both in or out of the RSP. Dripping in the RSP.
 

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believe it goes like this: a lawyer who has himself as a client is a client who has a fool for a lawyer.

we should all be such fortunate fools. And good household help is so hard to find these days.
 

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Discussion Starter #16 (Edited)
believe it goes like this: a lawyer who has himself as a client is a client who has a fool for a lawyer.

we should all be such fortunate fools. And good household help is so hard to find these days.
Yes. But I think investment advice isn't quite the same as legal representation. I would never represent myself legally. I think I could anticipate most of what I would hear from an investment advisor so the cost and aggravation wouldn't be worth it. We are doubly lucky that I will receive such a large pension and only need a 3% yield or so on the portfolio to continue with our current lifestyle.
 

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Just to reiterate... tax rates go down as we get older... for the same level of income, Tax on $50K is currently $8750, in 40 years, at 3% inflation, it will be just $3000. In addition, age tax credits kick in at 65. Tax rates are lower as time advances.

For the average "saving for retirement, living off those savings, passing on zero estate at some advanced (90-95-100) age" financial plan, tax rates are lower post retirement.
 

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Discussion Starter #18
Just to reiterate... tax rates go down as we get older... for the same level of income, Tax on $50K is currently $8750, in 40 years, at 3% inflation, it will be just $3000. In addition, age tax credits kick in at 65. Tax rates are lower as time advances.

For the average "saving for retirement, living off those savings, passing on zero estate at some advanced (90-95-100) age" financial plan, tax rates are lower post retirement.
Yes but I expect income to keep pace with inflation as dividends go up. Dividend tax rate is going up slightly in next few years in Alberta. Age tax benefits will be immaterial. Have resigned ourselves to paying fairly high taxes right to the end. Our way of giving something back:D
 

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As I said, you (SQRT) are not normal. Unless you have an obscenely expensive life style (a fleet of corporate jets, a crushing drug habit, a bevy of fashion models hanging on your arm and an expensive 'posse' to maintain) you aren't in the live well-die broke category. You will be passing on a very sizable estate.... at least as large as it is currently. (ie... no return of capital)

As mentioned. your situation is an estate planning issue.
 

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Just to reiterate... tax rates go down as we get older... for the same level of income, Tax on $50K is currently $8750, in 40 years, at 3% inflation, it will be just $3000. In addition, age tax credits kick in at 65. Tax rates are lower as time advances.

For the average "saving for retirement, living off those savings, passing on zero estate at some advanced (90-95-100) age" financial plan, tax rates are lower post retirement.

Steve, you've often said that the marginal tax rate decreases for most seniors after retirement. I can see how this applies to couples because of the income splitting provisions but am confused how it applies to singles.

I just ran 2 scenarios for myself in Quicktax. One supposed a retirement age of 60 with a total of $51,000 of income that included CPP and the Disability Tax Credit was claimed. The second scenario also included $6203 OAS at age 65. The marginal tax rate for both is 35% - the same as now while working.

I'm not sure what I'm missing. The only thing I'm sure of is that singles pay more tax in retirement than couples but have many of the same base costs.
 
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