A Case Study Review and Results After Just One Year
We will call this case study RR.
RR was referred to us by an existing client who was very happy with what he had done with us in a short time period.
RR who is 35, was a self made investor who had accumulated $100,000 in his RRSPs.
He was doing well in getting decent returns, on average of 12% per year.
So in his mind he felt he really did not need a financial planner.
Until he saw what his friend who referred him to us was doing.
What RR wasn’t doing was looking at the Tax liabilities that he was creating each and every year as he was putting all his money into RRSPs and accumulating nothing which was tax free.
He also was not using a plan that included strategies that maximized his returns and reduced his personal income tax at the same time. He thought he was building wealth but forgot he was also building wealth for his partner CRA.
So for the first step of our journey I needed to explain that if he continued to invest the same way he has been doing that this would happen for the rest of his life.
First he needed to know the Rule of 72.72 times an interest rate will tell you when your money has doubled .So our example is using an interest rate of 10%. Therefore money would double every 7.2 years.
So at 35 he has $100,000
at age 42.2 he has $200,000
at age 49.4 he has $400,000
at age 56.6 he has $800,000
at age 63.8 he has $1,600,000
This does not count into the fact that he would add any more RRSPs to the original $100,000. This is the projected growth on the money that has already accumulated to date only.
You can imagine the compound effect of continuing buying RRSPs each year and how much more the CRA will take.
Now if you knew you would have that amount in RRSPs at age 64 most people would be very happy. So when I pointed this out to RR, he was and now he was more convinced he was doing well and did not need a Financial Planner .
Until I told him every cent he would have is 100% taxable and now he had a partner who had a 50/50 partnership with him.His eyes glazed over.
At the age of 64 and retired he could now start taking out an income of 10% a year from his $1,600,000 RRIF which would be $160,000 a year. He would of course have claw backs to his government benefits,because of his high taxable income.
So those Benefits would be lost .Even though he may have put in up to $150,000 in payroll deductions over a lifetime.
He would also have to now pay tax on this income he is receiving from his RRIF.
$160,000 would put him in the highest tax bracket.
For our example we are just going to round it down to 50%.
Which means he could pay up to $80,000 per year every year for the rest of his life.
So you have to ask yourself,.Is that a good investment?
If that is not enough, Now let see what happens when he dies?
Well since he is still making 10% per year and that’s all we are taking for income, the principal remains at $1,600,000 and even though, if he has a spouse you can transfer this to her 100% tax free.
You need to know about 40% of RRSP holders are married at death, leaving 60% estate exposed to Taxes,right away.However when the spouse dies there is no more tax free transfers available.
All this money becomes 100% taxable.
Therefore 50% will go to CRA. THAT’S A LOSS OF $800,000 TO THE ESTATE before it goes to your children.
So again, was that a great investment? Giving half your life long savings to CRA .
This is where good tax planning can save you hundreds of thousands of dollars.
So going forward you can continue to save for your partnership with CRA or you can fight back and use my 35 years of experience to help you to create a Tax free income at retirement and leaving an estate Tax free and end your partnership with CRA.
The first part of the program is to slow down the growth in Tax liabilities and start creating a tax free program.
To do so I explained we need to move money from the RRSPs to a100% tax free investment without paying tax.
The best way to do this is to have an equal tax deduction to offset the amount of tax you would pay on any money withdrawn from the RRSP.
At the same time we want to enhance the growth so that the compounded multiples can create wealth over time.
The best way to do this is to borrow money. Businesses do this all the time and so do countries, the only person who does not do this is you, because you never thought of how easy it is… and no one wants to get into debt.
But this is an investment loan,where the investment itself becomes the collateral for the loan.Your getting an investment to offset the loan debt so your net worth does not change.
At any time you can cancel the loan and repay using the funds minus your profit.The only thing you need to concern yourself with is the monthly interest only payment.
The number one reason we use a loan is because the interest on the loan when used to create income is tax deductible. Now we have a Tax deduction to offset the taxes of the money you are pulling out of your RRSPs. Which we use to fund the loan.
So RR borrowed $200,000 and invested the money into a segregated fund sold only by Life Insurance companies, because of their 75% guarantee at maturity on the principal and therefore reducing the risk significantly. The investment is also credit proof again only because it is a product sold by a Life Insurance company. Not even CRA can touch it.
The cost per month on an interest only loan was $600 per month and we started a monthly withdrawal plan from his RRSPs of $600 to pay the cost. So no money was being taken from RR’s pocket.
The money we are using was the future tax he would have paid CRA if he continued with his old plan.So there really is no cost to RR.
WE ARE USING THE TAX SAVINGS TO FUND THIS PROGRAM
The next step is to create the Tax exempt investment where we want all money to go eventually. There it will grow 100% tax free.
But let’s go back to the borrowed money and see what happened one year later.
His profit for last year was $38,000 as he made 19% return.
He was very happy his total cost was the $7,200 he used to pay for the cost of his loan and that netted him $38,000. When I pointed out if he took the $7,200 out of his RRSP without the Tax deduction he would have lost 30% of this to CRA. So 30% of his $38,000 was created by CRA and therefore he has CRA creating his wealth. Isn’t that better than what you were doing, creating a 50/50 partnership before. I then pointed out that his money will also compound a lot faster as the multiplier is working in his favour.
Then I decided to give him a surprise. A strategy that I created only two years ago,that makes this program even better. I asked him how much unused RRSP room he had left?
I told him we needed at least $38,000. To our delight he had more than enough.
So we then took profits of $38,000 and purchased $38,000 in RRSPs. His tax savings will be roughly about $13,000 in taxes.
So have you done the math? $38,000 profit plus $13,000 tax refund is $51,000 and the cost was $7,200 of which CRA was paying.
So his real net cost was about $5,000 and his return was 10 times that. Could RR done this with what he was doing before? Of course the answer was No.
While buying the RRSP will add to his original RRSPs which if left there, would create more taxes down the road. Once we have caught up on his Unused RRSPs, this will slow down the growth of his registered money.
Adding guaranteed 20-30% return by purchasing a RRSP is a no-brainer.
After all I can not guarantee that return on his investments. Because of his age I want him to grow the money fast and then address his taxes as we monitor his investments each year.
So we take that now, to compound our rate of return for last year even further to the $51,000.
The Tax refund is also re- invested into the TAX EXEMPT INVESTMENT so it can grow 100% tax free.
Also one more thing, the profits from the loan are capital gains, but only a portion because whole units are sold that also includes a portion of his principle. He had a capital loss to offset the gain. In the future he could use the RRSP deduction to offset further Capital gains. All money not used to buy RRSPs in the future can go into the 100% tax free investment .
This is how you move RRSP money to tax free money. You cannot do this without a Financial planner with a Life license regulated by FSCO.
For those of you that are concerned about the rates of return, I ask my clients three questions and if you answer no to any of these situations then you need to use Demographics as a guide for all your future investments.
- Do you believe Technology will slow down over the long term?
- Do you think the demand for health care will slow down over the long term?
- Do you think the growth in the standard of living in both India and China will slow down?
If you answered no to these questions and your not investing there, why not?
Both the NASDAQ and Health care funds have averaged around 20% returns for the last 5 years so you can see how when I say our average rate of return for the last 11 years is the same.
The Asian Pacific Segregated fund we used last year returned 27%. Still think the results are too high? Then look at what has happened in only two weeks:
- Asian Pacific is up 3.67%
- Emerging Markets 2.42%
- Global Health care 3.045%
- Nasdaq is up 4.43%
So while you’re saying it can not last, other people are making the money you could be doing.
All my clients knew this was going to happen as we predicted once the Tax cuts go through a massive rally will occur.
Later in the year I expect a positive outcome from Brexit which will create an even more positive outcome on equities.
Visit our web site to see more out of the box thinking and also see the testimonials on what clients are saying . Have a wonderful day and thank you for reading.