The benefits of saving for retirement are obvious – you can support yourself financially in your elder years or when you are no longer actively working.
The registered retirement savings plan (RRSP) and registered retirement income fund (RRIF) are great ways to save money. The benefits include RRSP tax deductions and investment income tax deferrals, making these accounts a great way to build wealth for many Canadians.
But as we all know, nothing in life is perfect. Unfortunately, any withdrawals from RRSP/RRIF accounts are fully taxable as regular income and subject to the prevailing tax rates.
Let me introduce you to the RRSP/RRIF meltdown strategy. This strategy allows you to move money out of your registered accounts and offset the taxes payable with an investment loan interest expense.
The meltdown strategy works by taking out a loan and using the proceeds to purchase eligible investments. You can then pay the interest on this loan by making withdrawals from your RRSP/RRIF. As interest on investment loans is deductible for income tax purposes, this completely offsets the income that you must recognize from the RRSP/RRIF withdrawal. The only stipulation from the CRA is that the investments purchased with the loan must yield income such as interest, rental income, or dividends and be held in a non-registered account or tax-free savings account. These eligible investments may include mutual funds, exchange-traded funds, dividend yielding stocks, bonds, and income yielding business or property.
Using a very simple scenario, if you take out a $100,000 loan at 5% interest to invest in dividend stocks, you will make a $5,000 interest payment for the loan. You can withdraw $5,000 from your RRSP/RRIF to pay this interest. An added benefit of the RRSP/RRIF meltdown strategy is that you move your money into a more flexible non-registered account without all the withdrawal rules that come with the RRSP/RRIF. To minimize the risk of owning more volatile investments than you would have without implementing the meltdown strategy, you may want to de-risk your RRSP/RRIF to avoid compounding the possible impact of declining markets. It may also be an opportunity to further diversify your holdings.
In any case, the RRSP/RRIF meltdown strategy can be complicated, and there is no one-size-fits-all solution for everyone. Your Foster advisor will help ensure you make optimal tax decisions for your finances. Speak to them today.
Disclaimer: This article is for general information purposes only, and is not legal, financial, or tax planning advice. Everyone’s situation is unique, and this article cannot apply to every person. The reader should not take any action, or refrain from taking any action, as a result of this article without first obtaining legal or professional advice.
