1) Obtain an interest only investment loan and make the interest payments through RRSP withdrawls.

2) Invest in Canadian Dividend paying stocks and use the dividends to decrease the principal.

3) Every year, add additional funds to the RRSP account for obvious tax advantages. And since more funds are now available, have the loan amount increased accordingly and invest in additional Canadian Dividend paying stocks.

4) Due to dividend growth, hopefully the income stream from dividends should be enough to support an early retirement 15-20 years down the road. At this point, stop contributing any further to the RRSP and exhaust the remaining RRSP funds towards the loan interest.

5) In a few years when the RRSP has been depleted, the income should have achieved such levels where a retirement and loan interest should be covered. Any remaining income can be used to pay off additional principal.

6) Keep enjoying an increasing income and it is up to your discretion as to how much want to contribute towards the principal to pay off the loan faster or keep the loan and make interest only payments, similar to the Smith Manouver.

I have not run through the numbers but just wanted to throw this idea out there and get your input.

That’s right and in fact even the withholding tax is monitored for cumulative withdrawals. I had initially thought you could take out $5,000 amounts as often as you want and only have 10% withholding tax each time but it doesn’t work that way. That first dollar after $5,000 is taxed at 20%.

The withholding tax is not “in addition” to income tax, it’s only an “advance” — so the CRA gets their money sooner (or more accurately: to make sure they get it at all and you don’t simply run off with the money). When you file your return the CRA calculates how much tax you owe versus how much was withheld and then credit or debit you accordingly.

Your technique is flawed. There is something called witholding tax, which you pay in addition to income taxes when you withdrawal money from your RRSP. The taxes do not cancel out.

Best of Luck,

Matt Noel

[...] Meltdown: This is very similar to the RRSP meltdown that I’ve written about before, except now, the RRIF withdrawals are used to service the [...]

I have just sold my home and will be purchasing the rrsp off the “Canadian Tire One and Only Account” until completion on my home. I then intend to take a 2 year sabatical where my tax bracket will be lower. My question should I top up max (49,000) and withdraw at the lower rate now, should I set up a fixed rate sub account for this contribution and how do I find the dividend paying stocks?

In addition to this, if you are at the point of withdrawing from your RRSP, it’s most likely that you’re in a lower tax bracket anyways. So if you put your investment loan towards dividend paying stock, it will be taxed very little.

“…Most interest you pay on money you borrow for investment purposes, but generally only as long as you use it to try to earn investment income, including interest and dividends. However, if the only earnings your investment can produce are capital gains, you cannot claim the interest you paid. ”

url is http://www.cra-arc.gc.ca/tax/individuals/topics/income-tax/return/completing/deductions/lines206-236/221/menu-e.html

This is not MY strategy, it is a strategy that is well documented by financial experts.

so. your strategy is not working!!

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[...] FrugalTrader wrote a fantastic post today on “RRSP Meltdown Strategy”Here’s ONLY a quick extractNote that if you have a very large dividend based portfolio, it may affect your Old Age Security (OAS) payout. Dividends are grossed up (45%) which is counted as your income for OAS calculation purposes. When should you do this? … [...]

There are no panaceas. So, this would not work for you as you are not comfortable with borrowing to invest.

In my situation, I could start withdrawing from my self-directed RRSPs next year for example. I would continue to contribute to my work RRSP and, if it made sense, contribute to a new self-directed RRSP.

I would borrow a significant amount to invest (in my case it would be twice the size of my current self-directed RRSP holdings) and invest that in dividend paying stocks as you suggest. I would withdraw enough from my RRSP to pay the interest on the investment loan.

In 10 years, the situation would be:

- a non-registered portfolio probably 5 times the size of my original self-directed RRSP
- an investment loan about twice as big as my original self-directed RRSP
- no original self-directed RRSP
(the work and new self-directed RRSP should be unaffected by this strategy, although one could argue the investment mix might be different because of such a large non-registered portfolio. Let’s leave this aside for simplicity.)

If I didn’t go through this process, the portion earmarked for meltdown would be about double what it is now and I would have no investment loan.

I believe that the combination of a non-registered portfolio at 5x with the liability of an investment loan at 2x is worth more than a registered portfolio of 2x. In fact, I think a non-registered portfolio of 2x is worth more than a registered portfolio of 2x.

Here are some numbers from my calculator:

A $100k RRSP that grows at 8% annually will be worth about $215k in 10 years. But, you still would have to pay tax on the withdrawals.

On the other hand, if you take out a loan today at 6.25% in the amount of $230k, then the interest costs would be around $1,200 / month. So, you take $1,200 / month from your RRSP to pay that loan’s interest (we’ve already discussed the issue with withholding tax). Ten year from today your RRSP is gone, but you have a $230k loan and a portfolio which, at 8%, grew to almost $500k.

If for some reason, you decided you were going to take all of the money in either case to go buy that boat you’ve had your eye on, well in Ontario you would give up 46% of the RRSP and you would be left with $116k. In the meltdown case, after discharging the loan and paying capital gains taxes, you would have $205k – almost double the RRSP and in fact almost the same amount of the RRSP *before* taxes.

Let’s contribute to our RRSPs until we can’t anymore, use the tax refund to buy dividend paying stocks (or pay off a mortgage if you still have one). Boring I know.