A case study using Tax reducing programs that will save you thousands this year and next year in income taxes that when combined with our Wealth creating strategies will significantly increase your cash flow.
When people read our articles on the RRSP tax time bomb, they often will ask, how can I prevent this?
One of the best ways that I used for our clients was to incorporate a loan program funded by the original RRSPs.
We want to start taking money out of the RRSPs so that the earnings do not compound over time and create the Tax Time Bomb. We also want to do this without paying taxes on the withdrawal. Taking money out of the RRSP is 100% taxable and will incur a withholding tax from 10% up to 30% depending on how much you take out. But the interest on the loan is also 100% tax deductible as interest on loans that can create income are tax deductible. So one washes out the other.
In our previous example our 45 year old client has a $150,000 income to go along with his $200,000 in RRSPs that he has accumulated.
So in this case he borrowed $200,000 with an annual cost of $8,400 or $700 per month, which is paid by the withdrawals from the RRSPs. The $700 per month withdrawal is then used to pay the interest on the loan.
Note this loan is interest only and with no marginal calls. The best part is that the actual money from the loan is the collateral for the loan.
Once the money is invested, the contract is then assigned to the lending institution as the collateral.
So no loan against your home or any other assets you own.
The only obligation is the monthly interest cost, which is being funded by the RRSP withdrawal.
This money should also be invested into segregated funds because of the Guarantees of principal that they offer, which takes most of the risk out of the investments.
Segregated funds can have a guarantee of 75% of the principal at maturity and can also have a reset option to adjust this as your funds grow.
Note Mutual funds have no guarantees and are not credit proof.
If you are earning 10% on your existing RRSP’s, your total earnings for the year for the year is $15,000 and your loan payments are only $8,400. So you are not touching the principal and you are still adding 6.4% in growth, which is still better than what the banks are offering and we have achieved our goal of slowing down the growth of your Tax Time Bomb.
Our goal was to also make 10% growth on the new loan of $200,000 which would create $20,000. But the real bonus comes when you invest this money using Demographics and the GDP as guides for these investments.
This past year the funds created $48,700 of profits. The added benefit is that the RRSPs are 100% taxable while the segregated funds are taxed as Capital Gains at 50%.
We then looked at the clients’ accumulated unused RRSPs to create what we have called “the ultimate RRSP” by withdrawing $38,200 from these profits and buying up the clients’ unused RRSP room.
This will save the client an additional $15,280 in taxes if they are in the 40% tax bracket.
So this past year the $8,400 transfer of cash out of the RRSP has generated not only the $48,700 profit but a tax savings of $15,280 for a total return of $63,980.
The reason we call it the “Ultimate RRSP” is that you can do this every year when profits are generated using our consistent Demographic approach. In fact, the average rate of return using the Nasdaq has been 18% for the last ten years.
HOW THE ULTIMATE RRSP WORKS:
First you use up all your unused RRSP room using profits from the loan every year and to purchase your new RRSPs and never have to take out money from your income again going forward.
This is what we have done for over a decade with great success for all our clients.
So is $8,400 vs $63,980 worth looking at?
Now we have added a new tax strategy that creates huge tax savings. Using the Proposition Life new gifting arrangement, at an initial cash cost of $10,500 (which happens to be the balance of the profits that was not used to buy the unused RRSP room) you can make a Charitable Donation of $70,000 and receive a tax credit of $28,000.
You can pick up $70,000 tax deduction for Charity Giving.
Now the RRSP that you just purchased can be deregistered and rolled over into a TFSA or Tax Exempt Insurance policy so that this money can grow 100% tax free.
Our tax plan was to buy the RRSP to get the $15,280 tax refund which is not only guaranteed but also tax free. Then use the new Tax program to eliminate the taxes on cashing out the RRSP.
The $70,000 tax credit not only offsets the new RRSP deregistration but still has a further $31,800 deduction for next year’s taxes. If this person is in the 40% tax bracket, that is a further $12,720 in their pocket that can be added to their Tax exempt Insurance policy.
So now their original RRSPs without putting more of their own cash into them (using a combination of Tax strategies and investment strategies) has created $76,700 that will grow 100% tax free for the rest of their lives.
If you are looking to create wealth then this program is for you! Now the choice between you retiring in comfort or struggling from week to week is up to you. You now have the knowledge that there are better ways to invest your money. Isn’t it time you stopped worrying about your finances?