The above as mentioned in Blake’s post, is it possible to invest in your RRSP under your child’s name, if yes how does this actually work?

Have been contemplating on SM but haven’t reached the comfort level yet. I am in a similar situation like Blake wherein after pension contributions very little room is left for RRSP contributions, same goes for my wife, so looking for ways to maximize on this and minimize taxes.

I have been following this blog for long and have got enlightened time and again by articles and suggestions made by various participants.

Thanks,

Sanjay

Leveraging or the SM is your best bet. You must have a governement of teacher’s pension. They usually leave you only about $2,000/year of RRSP room. It’s a generous pension but leaves you little extra.

Preet’s interesting analysis shows that you can use leverage to get a similar but greater benefit than RRSP’s. You get tax refunds now and can defer most or all tax on income until after you retire. Leveraging has advantages though, since you can have far higher amounts invested by paying interest only than with a similar RRSP contribution.

We have quite a few clients with pensions like yours. Leverage is a perfect way for them to invest more, get tax refunds now, and have some tax-efficient money to access after retirement.

Your other option may be to look for ways to split income. You do have an opportunity if you spouse has no income. If your only income is your salary, though, you can’t really split that.

If you leverage or do the SM, you should claim the deduction and any investment income, but you can systematically move the amount of any taxable investment income into your spouse’s name. This can allow you to build up investments in your spouse’s name to split future income.

Ed

Blake:

Consider leveraging. If you compare RRSPs to leveraging you will see that you get the same tax deductions and your capital accumulation will be about the same. The difference is in taxable income. Your leveraged account will give you at least twice the after tax income in retirement. Plus, you have reduced your risk of clawbacks, may recieve more tax credits and can maybe plan for some government benefit programs.

Also consider only making RRSP contributions up to the point of employee matching. Save your RRSP room for the day you sell your leveraged investment. Then make a good sized RRSP contribuion with the taxable portion.

Remember that an RRSP is ok for income but lousy if you want to make a lump sum purchase (Car/trip)in retirement.

The leverage will give you the tax deduction. Can you get enough of a deduction to drop you to the next Marginal Tax Rate – That is your aim.

Example:

RRSP contribution will be $10,000 for the year.

$10,000 / 50% MTR = $20,000 in interest payments (to produce $10,000 refund to be put into RRSP)

$20,000 in interest payments / 6% prime rate = $333,333 in a leverage.

So your out of pocket is $20,000 for the year, but you get $10,000 back for writing off the interest, and then another $5,000 back for making the RRSP contribution.

You can get it all done in one year by applying for an RRSP loan with a 90 day deferred payment to beat the deadline so you have the $15,000 coming to you starting after the first year.

So you pay $20,000 out of pocket, get $15,000 back in refunds. Closer to $14,000 in reality, but using 50% for math’s sake.

That’s a big honking loan, so you want to wait for a correction and to be real sure, you should go with a loan half that size for a $10,000 interest payment/year, and PAC the other $10,000. If the market goes down again, you can trigger the “other half” of the $333,333 loan and “double down” as it were.

If you did a straight PAC and arrived at Value X after 15 years and assume this to be 100% confidence baseline for a monte carlo simulation, that the full on leverage with piggy-backing refund will provide roughly 1.7x in value, with 76% confidence. BUT by going the “hybrid” method (half leverage and half PAC for 5 years, or until market correction) the numbers become 1.5X and 98% confidence.

If market growth is very high for the first 5 years you collapse the leverage and start over (locking in your gain).

I will post in detail with monte carlo support on my website – probably 3 or 4 more articles to go in that series before I get to that concept though.

Cheers,

Preet

If you make 50k/year with a 6% pension contribution you’re already putting aside 3k/year. Given your numbers that means that your boss is likely matching the number (another 3k) and CRA is limiting your contribution to 6% (or 3k) for a total of 18%/year (the current max).

It’s worth noting here that you’ve effectively maxed out your retirement savings! That’s 9k out of 50k every year! If you’re making more than this, then of course maxing out retirement saving means that you have even more money going into the savings.

If you can max out retirement savings with 3k/year of contributions and not “feel the pain”, then you’re doing really well. Once you’ve maxed out the spousal RRSPs, then it may be time to take a different tack and start saving for a rental home or some other line of potential income.

By the way I re-read your debt swap articles and now that I can see an actual example where it can be applied (Blake’s situation) it looks quite interesting.

The capital gains in his current non-reg stocks would have to be factored in as well – ie if the acb is very low then it might not be worth doing.

Mike

Blake/Gates, I have the same problem with my pension. I have about 2-3K a year left for my rrsp contribution. I guess it comes with the fact that my future pension income is defined which is much better than defined contribution. I would definitely suggest you do a debt swap as a first step.
Cheers,
FB.

Once again, thanks for the responses.

Labour Sponsored Funds also have extra tax advantages which don’t even come close to making up for the fact that they are horrible investments.

Mike

The other, oft-forgotten investment is you!

Higher education usually comes with tax breaks and is also a great differentiator over the course of a long career. This means that not only do you get a tax break on the money you spent, but you’re increasing the value of your future time which means more money in the future.

Last I checked, part-time students get Tuition fess and $200/month tax free, “off the top”. You may not net a benefit, but you may be close to breaking even on the deal, which is like free training.

I have taken advantage of RESP. Because I don’t have room in my rrsp’s a spousal rrsp won’t work. Also with income splitting in retirement is it really necessary now?

I had “heard” that you can reduce your taxes by setting up RRSP’s in your childs name, you add to your RRSP’s then transfer them to the child. Obtaining the tax credit, then cashing out the child’s portion paying a lower tax. Seems a bit odd to me.

Thanks for everyone’s comments & contributions, this is a fantastic forum.

Therefore, I think it should be counted as it does decrease your taxes.

This might be just semantics, but with leveraged investing you are really just lowering the cost of the leveraging (ie interest) by using a tax write-off which isn’t really the same thing.

He mentions having an rrsp – if he’s not maxing it out then that’s the easiest way to lower his taxes.

Mike

http://www.thefinancialblogger.com/debt-swap-part2/

Blake, as you already have non-registered investments, your financial situation will not changed and there is not more risk involve (the debt swap implies you have already debts anyway!). You will only save more money in taxes!

Hope this helps!