This scenario came from regular reader Sam. He is a new graduate making a decent living, but has questions about his RRSPs. What makes his scenario unique is that he plans on using his RRSP to fund his MBA ambitions in a few years time.
I graduated a year ago and got a job. I’m working in Calgary Alberta, and my pre-tax income is 75K ($53k after tax). I’m single, with both my parents living in Asia, no house.
I have no debt (no student loans, no credit card debt). I plan my monthly spending and save $2K monthly. I am renting a place and do not plan to buy in near future because I am planning to do my MBA around 2012/13.
I currently have a company group RRSP account with $5K contribution for 2009. My employer will match 6% of my rrsp and give 1% bonus, and including my own 6%. I have a total of 13% pouring into my company group rrsp every year.
I have another $12K saved in my ING saving account reserved for RRSP purpose. My 2009 rrsp contribution limit was ~$12K.
I have used my tuition credits to prevent getting a RRSP before, but now that it’s all gone I need to start looking.
I’m planning to max out my RRSP contribution room for next couple years, and then withdraw all of my RRSP during my two years of unemployed MBA study terms. I expect my MBA tuition to be around 100K and the program will last 2-2.5 years. My parents can lend me some money, and I can also apply for gov’t loans, but these will be my final resources.
So, after my long story, my questions are:
1. Who would you recommend to get my RRSP with? I heard a few recommendations like Sunlife, CIBC, Scotia, Tradefreedom. Who do you find most convenient?
2. How should I pie my RRSP investments for my MBA goal?
3. I am planning to save in tax returns into my Tradefeedom TFSA for investment; I don’t do Options or Margins. I’m thinking to hold riskier stocks in my TFSA. Your thoughts?
4. Would you have any other recommendations? I have a 05 SUV (paid off) which I estimate resale value in 2012 to be around 4K. I have company insurance coverage and my parents also purchased private insurance on me so I don’t look much in insurance investment.
To answer the questions,
1. It depends. If you want to stick with index mutual funds, then the TD e-Series has the lowest fees around. If ETFs or stocks are the investment choice, then a discount brokerage account would need to be opened. For me personally, when I’m looking to open a new account, I like to keep my costs low which is why I have accounts with Questrade and Interactive Brokers.
2. As the MBA goal is only a few years away, I would recommend staying away from equities as capital preservation is the main goal. Perhaps look at fixed income and GICs (GIC ladder) with maturity dates coinciding with the time that you’ll need the funds. Even consider high interest savings accounts.
3. See answer 2.
4. Here is where is gets good. What stands out is Sam’s immediate cash need of $100k for your MBA in a couple years time. It may be a stretch to save $100k by 2012, but he should be able to punch a good dent in it.
First, Sam is doing a great job saving and contributing to his company RRSP. I would suggest maxing out his company matching RRSP, then contributing the rest to a self directed RRSP. Assuming that I’m following the email correctly, his work RRSP balance should increase by about $10k per year due to contributions (assuming very little growth with fixed income). The work RRSP, combined with existing savings, and monthly savings should work out to be about $60,000 by the time Sam starts school (more if he saves his tax refunds). As a side note, a TFSA may be a good choice for savings in excess of the RRSP contributions.
Now onto the withdrawals. As Sam mentioned, once he’s in school, he’ll have very little income thus the ability to withdraw from his RRSP while paying lower tax. One strategy he can consider as well is using the RRSP life long learning plan (LLP). That will enable Sam to withdraw up to $20k from his RRSP ($10k / year tax free) while in school.
Another tax he’ll need to account for is the RRSP withdrawal withholding tax which is up to 30% on withdrawals greater than $15,000. He’ll however get most of it back when he files his income tax (providing he has no other income). Since he has to get a student/personal loan to make up for the shortfall, to reduce the potential tax hit, I would tap into the LLP first, then TFSA/other savings, student/personal loans then use the RRSP for any shortfall when school bills are due.
That’s my two cents, do you have any suggestions for Sam?