A
Contrarian View on RRSP/RRIF Investing
Author:
Don Beach
Traditionally,
financial advisors will counsel a conservative course when you invest the
funds in your self-directed RRSP or RRIF, and say if you want to take any
chances do it outside your registered accounts. This is presumably done primarily
on the basis that you shouldn't gamble with your retirement funds and risk
being left in penury in your old age. It is also partly because the tax preferences
usually connected with equity investing- the dividend tax credit and the
50% reduction in capital gains taxation-are lost if they are realized in
a registered account. Financial advisors and even some tax experts will also
say that management fees paid in connection with investments in RRSPs and
RRIFs are not deductible. I want to discuss these conventional notions.
My
view is that, if you are in the high tax bracket, you should take your investment
risks on the money in your registered accounts and husband your other resources
more carefully. This is because almost have the untaxed money in your registered
accounts belongs to the government and why not have some fun doing any gambling
you want to do partly with their money.
My
approach applies mainly to people who have accumulated a sizable RRSP or
RRIF account but could survive retirement without it. Usually, they have
the RRSP or RRIF because they made RRSP contributions for many years primarily
to save tax, but they managed to accumulate some other assets as well. Now,
they have reached the usual retirement age and find the mandatory RRIF withdrawals
they are facing are really going to mess up their future tax and financial
planning. They will be pushed into a higher tax bracket and lose their Old
Age Security and some of the other government benefits for seniors, and when
they die their children will have to pay the top tax rates on anything left
in the registered account.
Some
financial planners counsel buying life insurance to pay the tax on bequeathed
RRIF balances. In my view that is just buying more insurance; the rational
is moot. Buying life insurance is logical if it is done to pay the taxable
capital gain on an illiquid asset at death, like a family business or cottage,
but it doesn't make the same sense to cover taxes on a usually liquid RRIF
account. The kids can just pay the tax with some of the money they get out
of the unused balance in the RRIF account.
So,
if you want to take some investment chances, a flyer on a good looking mining
exploration stock, say, or that hot new software company you heard about,
why not let the tax man underwrite have the risk? The downside is that if
your luck holds you make a killing, the big win will be untaxed money in
your registered account. The capital gain treatment will be lost but so be
it. No tax will be payable when you realize your windfall and some of your
winnings will have to be used to pay the tax eventually when the funds are
drawn out. But the best part is that if your flyer doesn't work out well,
the tax man loses too because they will be less to pay full taxes on in the
future.
In
my own case I slaved at a day job for decades and faithfully contributed
the maximum amount to my RRSP every year, mainly because I hated to pay tax.
In the last 15 years or so the contributions have gone to a spousal account.
At the time most of the contributions were made, retirement seemed a long
way off and I didn't give it much thought. But I was fairly lucky with my
RRSP investments over the years-mainly bond strips in the 1980s, stocks in
the 1990s and more recently dividend-paying blue chips-and now have a fairly
handsome sum in the registered accounts. So I have been giving all of the
matter discussed here some careful thought.
I
think both the financial market and I are at the stage now where I want to
take some risks. So I have decided that Uncle Jean and I are going into partnership
with my RRSP stake. Only thing, it is much too risky yet to tell you what
I am going to do.
Earlier,
I mentioned the usual advice given that management fees in connection with
RRSPs are not deductible. But if you want to invest in some high MER mutual
funds and similar things, the management expenses will be deductible in effect
if, as usual, they are charged against the income and gains earned by the
fund within the registered account, because the money there is not yet taxed.
High MER funds are sometimes a way to invest aggressively if you don't want
to do it yourself.
About
the Author
Donald Beach, FCA CBV, CFP, 2555 Highway 7, Greenwood, ON L0H1H0 (905)
683-8513 [email protected]
