November 23, 2020

Welcome to an excerpt from my new MasterClass, The 6 Secrets: What Every Business Owner Must ALWAYS and NEVER Do With Their Corporate Cash Flow: Click here to watch!

That’s right, business owners:  NEVER pay into an RRSP!  The only one who wins is the federal government.


I do not want you to fall into the RRSP trap – like so many business owners do.


RRSPs are not a tax-deduction strategy.  They are a tax-deferral strategy.


Let me explain. 


Let’s assume we have a husband and wife who are both 45 years old and they are 20 years away from retirement.  Let’s also assume they want to contribute $30,000 annually to an RRSP, and they are in a 30% tax bracket.  This means that in order to get $30,000 of cash free and clear from their corporation, they would need to actually withdraw $42,900, upon which they would pay $12,900 of personal income tax. 


Depending upon their tax situation, when they complete their income tax return, they might get some of the taxes back in the form of a refund, true.  But let’s be serious:  most people spend that refund.  They do not reinvest it in an investment account.


Let’s assume that the husband and wife follow this RRSP plan for 20 years.  From age 45 to age 65, every year they take out $42,900 from their corporation and contribute $30,000 to their RRSP.  If we assume a 6% average annual rate of return, then at age 65 their RRSP would be worth $1.2-million.


Let’s assume that at age 65, they stop contributing to their RRSP, but they want to let it grow until they reach the age of 71, when they must convert it into a RRIF.  At that point, they must start to take income out, even if they don’t need it.


So, the $1.2-million at age 65 will have grown to $1.7-million by age 71.


In 2019 the RRIF minimum withdrawal rate – the minimum percentage of the RRIF that you must withdraw each year – was 5%.  Due to Covid-19 in 2020, the federal government reduced the RRIF minimum to 4%.  But longer term, it will probably revert back to the 5% minimum, so let’s use 5% in our example.


So, the husband and wife must take out $85,000 ($1.7-million x 5%) per year.  This is 100% fully taxable income!  So, if they are in a 20% tax bracket, $17,000 of that $85,000 goes back to the government in taxes.


RRIFs are designed to be depleted by age 90, so the annual minimum withdrawal rate will go up each year until age 90.


What happens when either spouse passes away?  Here are the scenarios.


If one of the husband or wife were to pass away, the RRSP/RRIF will rollover on a tax-free basis to their spouse (but if you happen not to have a spouse, they will be 100% taxable income on your terminal tax return).  When the second spouse passes away, the remaining money inside the RRSP/RRIF is, you guessed it, 100% taxable on their terminal tax return.


For example, let’s say you have a $1-million RRSP and you pass away.  100% of it will rollover, tax-free, to your spouse.  And if you have no spouse, $500,000 in taxes will go to the government on your terminal tax return. Then, when your spouse passes away, the $1-million will be treated as 100% taxable income, leading to a 50% tax bill – $500,000 – on the terminal tax return.


That’s why it’s called the RRSP TRAP!  Because you have no control!


·      Because you must start taking the income out at age 71

·      Because the income is 100% taxable

·      Because when both you and your spouse pass away, the remaining amount inside the RRSP/RRIF is 100% taxable on your terminal tax return

·      Because in the example above, over $500,000 in taxes will go to the federal government


No wonder the federal government wants you to have an RRSP!


Here is the good news. You can AVOID the RRSP Trap.  I have a terrific solution for you, coming soon in a new blogpost, the link to which will be posted here.  Stay tuned!

Business owners:  want to see a live illustration of this secret and the 5 other big secrets?  And get some great bonuses?  Just watch my new MasterClass.  Click here.

John Moakler, BMath, CFP, CLU
President and Senior Executive Financial Planner
Moakler Wealth Management
1 416 840 8544