Weekend Reading: RRSP vs. RRIF Edition

By Robb Engen | September 24, 2022 |

Weekend Reading: RRSP vs. RRIF Edition

One question retirees face when setting up their retirement income plan is whether to convert their RRSP to a RRIF or to make withdrawals directly from their RRSP. There are pros and cons to each approach, depending on your age, how much income you require, whether you have a spouse, and where your RRSP account is held.

About the RRIF

You’re required to convert your RRSP to a RRIF by the end of the year in which you turn 71, but you can open a RRIF at any time.

The key is that once you establish a RRIF you must begin minimum withdrawals in the following calendar year. The formula is 1/(90-age on December 31 of the previous year) x RRIF market value on January 1st. So, at age 60, with a $200,000 RRIF balance on January 1st, your minimum required withdrawal would be 1/(90-60) x $200,000 = $6,666.67. You can withdraw more than the minimum, but not less.

If you have a younger spouse, you can elect to have the minimum payment calculated based on your spouse’s age. This will reduce your required minimum payment. You must make this election when you first establish your RRIF. 

Your minimum required withdrawal is not subject to withholding tax, but of course is fully taxable as income in the year it’s received. If you withdraw more than the required minimum, income tax will be withheld at the source.

Also of note, you don’t have to transfer your entire RRSP to a RRIF prior to age 71. I’ll explain more about that in a minute.

If you are receiving RRIF income when you turn 65, you can split up to 50% of the income with your spouse. In addition, you may be eligible for a federal pension income tax credit of up to $2,000. Allocating $2,000 of your RRIF income to your spouse will also allow your spouse to claim the pension income tax credit (assuming you or your spouse are not already receiving eligible pension income).

About the RRSP

Alternatively, you can withdraw funds directly from your RRSP. This is often the simplest solution for withdrawals but does come with some issues to consider.

One, RRSP withdrawals are subject to withholding tax upfront from your financial institution. The percentage of withholding tax depends on how much you withdraw in a single lump sum withdrawal:

  • $0 – $5,000 = 10% withholding tax
  • $5,001 – $15,000 = 20% withholding tax
  • more than $15,000 = 30% withholding tax

Another issue is that, depending on the financial institution in which your RRSP is held, you may be charged a partial de-registration fee of between $25 and $50 per RRSP withdrawal. And it’s not just the big banks. While TD and RBC charge $25 per withdrawal, Questrade, the supposed king of low cost investing, charges a whopping $50 per withdrawal.

Finally, direct withdrawals from your RRSP, even at age 65 and beyond, are not considered eligible pension income and therefore not eligible for pension income splitting or the pension income tax credit.

RRSP vs. RRIF solutions

If you retire before 65 and require income from your RRSP to meet your spending needs then consider making direct withdrawals from your RRSP. You can get around the withholding tax issue by making smaller, more frequent withdrawals. Just keep in mind that the income is still taxable, so if your average tax rate is going to end up in the 20% range and you’re withdrawing less than $5,000 at a time, you’re going to owe taxes when you file.

But wait, wont frequent small withdrawals also attract those pesky partial de-registration fees? Yes, that’s true. My workaround would be to open an RRSP at a financial institution that does not charge these fees. EQ Bank’s RSP Savings Account is a no-fee account that does not charge fees for withdrawals. This seems like an ideal place to transfer a year’s worth of spending and then make monthly RRSP withdrawals.

Convert your RRSP to a RRIF at age 65 to take advantage of the eligible pension income, which can be split up to 50% with your spouse and allows you to claim the $2,000 pension income tax credit. Note you can do a partial conversion just to take advantage of the pension income tax credit from age 65 to 71. The idea would be to open a RRIF, transfer as little as $12,000 to the RRIF, and then withdrawal $2,000 per year until age 71.

Converting to a RRIF as early as 65 (if you’re retired*) is ideal for receiving eligible pension income, eliminating withdrawal fees, and avoiding withholding taxes on the required minimum withdrawal.

*One reason why I’d hesitate to recommend fully converting your RRSP to a RRIF if you retire before 65 is that you might go back to work or earn some part-time income – in which case you wouldn’t want to have a large minimum required (and fully taxable) withdrawal from your RRIF. Heck, you might earn enough income that you still want to make an RRSP contribution. So, leave yourself some flexibility there.

Retirees, do you have anything else to add about making withdrawals from a RRIF versus directly from your RRSP? Leave a comment and let us know!

This Week’s Recap

Framing has started on the new house! We’re fortunate to live nearby and can visit regularly on our daily walk to check on the progress. It’s exciting to start to see floors and walls and see the rooms take shape. We just need a roof, among other things, before they can get to the fun stuff inside (and before winter!).

Last week I opened the money bag and answered reader questions about creating retirement income, money resources for beginners, and comparing all-equity ETFs.

Many thanks to Nomadic Samuel at Picture Perfect Portfolios for the fun interview about how I invest my money. He titled it, Buy the Entire Market for as Cheap as Possible and then Move on With Your Life. I love it! Curious readers can check out the rest of the series here.

Promo of the Week

A good portion of my freelance writing comes in USD and for years I lazily accepted that money in USD via PayPal, which is subject to some absurd foreign currency conversion rates and fees, and then transferred to my Canadian business account.

A friend recently turned me on to Wise (formerly TransferWise) where I was able to set up a USD account to receive the funds from PayPal fee-free. Then I transfer the funds from Wise to my Canadian business account and pay a LOT less in fees. I’m talking hundreds of dollars in a few short months.

Wise has a referral link where you can get a fee-free transfer of up to $800 CAD when you sign up for an account. Check them out if you’re looking for a cheaper way to exchange money.

Weekend Reading:

Has the time finally come for reverse mortgages? A thorough look at this polarizing product in the latest ROB Magazine.

Portfolio manager Markus Muhs shared a terrific and timely piece called first aid for volatile markets. Read it now, and bookmark it for the next time Mr. Market gets in a mood.

Michael James on Money shares some good, but often ignored, investing advice – nobody knows what will happen to an individual stock.

I always suggest that my clients prepare what I morbidly call an. “in case I die file”. Here, the Blunt Bean Counter blog explains how to prepare such a file for your spouse.

The province of Ontario is set to regulate the title “financial advisor”, which sounds great in theory but has become a watered-down mess in practice as regulators bowed to industry pressure and allowed an industry lobby group to put forward its own low-bar title of Professional Financial Advisor for approval:

“Creating a system where the threshold to be a financial advisor is the same as someone who is able to sell a mutual fund means that any mutual fund dealing representative could become a financial advisor, essentially through a rubber stamp of the industry,” said Jason Pereira, President, The Financial Planning Association of Canada.

Want to take on the CRA? Jamie Golombek shares his own fight with the taxman over home office expenses.

Is it time to give up on global diversification? PWL Capital’s Peter Guay reminds us why global diversification remains a cornerstone of good portfolio management.

An interesting look at how advice-only planning exposes what’s wrong with asset-based fee models:

“When it comes to the fees, advice-only is about as transparent as it gets. Whether charging hourly, flat-fee, retainer or even a fee tied to net worth or income, the absence of an investment account to draw quarterly fees from forces a full and open presentation of an actual bill for service.”

Life doesn’t just move in a straight, linear fashion. That’s why online retirement or investment calculators are a less than reliable way to map out your future. Ben Carlson agrees, saying reality is messier than spreadsheets.

This Humble Dollar blog post neatly captures many of my own conversations with clients who have more than enough saved but who can’t even contemplate retiring.

Anita Bruinsma at Clarity Personal Finance smartly shares how not to compete with the investment professionals.

Millionaire Teacher Andrew Hallam agrees, saying don’t believe the hedge-fund hype – you’re better off in index-tracking ETFs.

Of Dollars and Data blogger Nick Maggiulli answers whether you should invest more after the market declines? I liked this part:

“My question is: where do you get this extra money from? Do you conjure it up with a spell? Do you print it at home? Do you raise it from friends and family?

All jokes aside, this is the primary issue with this “invest more during declines” strategy. It has to have money sitting on the sidelines waiting to be invested in order to succeed. However, as I have illustrated before, this will lead to less money most of the time.”

Finally, Erica Alini wrote this heartbreaking piece explaining that for Canadians with rare diseases, access to treatment can affect financial survival, too.

Have a great weekend, everyone!

Money Bag: Creating Retirement Income, Money Resources For Beginners, All Equity ETF Comparison, and More

By Robb Engen | September 14, 2022 |

Money Bag: Creating Retirement Income, Money Resources For Beginners, All Equity ETF Comparison, and More

Welcome to the Money Bag, where I answer questions and address comments from readers on a wide range of money topics, myths, and perceptions about money. No question is off limits, so hit me up in the comments section or send me an email about any money topic that’s on your mind.

This edition of the Money Bag answers your questions about creating retirement income from an asset allocation ETF, resources for beginners to learn about money, a comparison of all equity ETFs, and which credit card to use for your revenge travel.

First up is Paul, who wants to know how to create retirement income when holding a single asset allocation ETF. Take it away, Paul:

Creating Retirement Income With Asset Allocation ETFs

“Hi Robb. I like the idea of the total return approach to creating retirement income. Do you think that’s viable using a one fund approach like Vanguard’s VBAL?”

Hi Paul, I think it’s a really sensible solution for retirees. Many of my retired clients will hold VBAL (or XBAL) in their RRSP/RRIF. My one suggestion is to also open a high interest savings RSP (EQ Bank has one) and park next year’s required withdrawals in that account, while the rest of your RRSP stays invested in the all-in-one ETF.

Consider holding something like 10% of the total value in that RSP savings account, and the remainder in VBAL. In effect, that means your overall asset mix will be 10% cash, 36% bonds, and 54% equities. Each year, once you spend your RRSP cash, you’d sell off some VBAL units and transfer the cash into your RSP savings account and do it all over again.

This is a new approach to an excellent old idea shared by Canadian Couch Potato Dan Bortolotti many years ago, before the launch of one-fund asset allocation ETFs. Since the asset allocation ETF automatically rebalances, there’s no need to manually rebalance each year outside of selling off some ETF units and transferring the cash to your RSP savings account for the next year’s withdrawal needs.

Money Resources For Beginners

Next up is Mindy, who is looking for some money resources to share with her daughter to get her started on the right foot:

“Dear Robb, I have been reading your blog regularly for many years, and I have great respect for your financial wisdom. My 22-year old daughter has asked if I can suggest some reading for her. Of course I recommended your blog. I was wondering: do you have a collection of your blog posts suitable for someone like her—a concise and yet sufficiently broad set of articles for young adults who are relative beginners?”

Hi Mindy, thanks for this – I’m flattered you have suggested my blog, but outside of the odd post like this investing guide for beginners I worry my writing is typically geared towards an older audience. We need to meet people where they are and find resources that are more relatable to our age and stage of life.

I’d first ask your daughter, how does she like to consume her content? 

For video, I recommend Preet Banerjee’s YouTube channel, and Ben Felix’s Common Sense Investing channel.

They also have podcasts, which are excellent: Preet’s Mostly Money, and Ben’s Rational Reminder. I’m also really enjoying Ramit Sethi’s podcast, I Will Teach You To Be Rich.

On Instagram you can find more relatable lifestyle and finance content at Mixed Up Money, Ellyce Fulmore, and Bridget Casey. I also find Daniel Foch has really good takes on housing and real estate.

I’m not on TikTok, but from what I’ve seen I’d avoid most of the personal finance advice you’d find there!

For books, I really enjoyed Wealthing Like Rabbits by Robert Brown, and Alyssa Davies at Mixed Up Money has a couple of great beginner books as well. 

*Adding Dan Bortolotti’s Reboot Your Portfolio to the list of recommended books – thanks to a reader suggestion in the comments section.

I also think Millionaire Teacher by Andrew Hallam is an excellent book with a lot of great lessons on saving, investing and living a good life.

Blogs seem to be fading away, unfortunately, as content creators move to these other platforms.

All Equity ETFs

Here’s Tim, who wants to invest in an all equity asset allocation ETF and wants to know if one stands out above the others.

“Good morning Mr. Engen, amongst these ETFs — VEQT, XEQT, ZEQT, and HGRO — is there one that stands out, or are they comparable to one another? I am 40, and looking at long-term investing in my TFSA, RRSP, and unregistered accounts.”

Hi Tim, there isn’t a meaningful difference between VEQT, XEQT, and ZEQT. I invest in VEQT myself, but that’s because it came out first and I have an affinity for Vanguard and how they pioneered index funds and help investors.

This excellent video on asset allocation ETFs is worth your time and will give you a good comparison. It also might give you a sober second thought about using all equities versus a more conservative fund:

HGRO is a bit of a different animal. It doesn’t invest in underlying stocks directly – instead, it uses something called a ‘swap’ where another financial institution holds the stocks so that HGRO unit-holders aren’t hit with annual taxable income. This is only really advantageous in a taxable (non-registered) account, but it also comes with some risks.

I’d stick with one of the first three (Vanguard, iShares, or BMO) and hold the same one across all of your accounts for simplicity.

Which Credit Card For Travel Abroad?

Finally, Shawna asked about some missing details from my revenge travel post – namely which card I actually used while travelling abroad.

“Hello Robb, I hope you had a good summer! Regarding your European vacations, I have two follow-up questions:

1. What payment method do you use when travelling in Europe; cash or credit card?

2. Which credit card works best to minimize fees and exchange rates? Curious to hear your thoughts.”

Hi Shawna, great questions! I used the Scotia Passport Visa Infinite card in Italy and in the UK. It comes with no foreign currency conversion fees and what I liked was that immediately after a transaction I got an email with the total cost converted to Canadian dollars. Since I kept track of a loose budget while we were abroad, I found this really helped track spending and keep us in check. Otherwise it’s hard to mentally do the conversions all the time.

I used the credit card for pretty much every transaction outside of a few gift stands in Italy and a very expensive cab ride to the Rome airport when I couldn’t get an Uber. We brought $200 in cash for our trip to the UK, and returned with $200 in cash…

Don’t overthink it. A credit card with no FX mark-up, plus $100 to $200 or so in local currency should cover you, depending on how long you’re there.

Do you have a money-related question for me? Hit me up in the comments below or send me an email

Weekend Reading: Tax Loss Selling Edition

By Robb Engen | September 10, 2022 |

Weekend Reading: Tax Loss Selling Edition

Many of my clients and blog readers are looking to change their investing strategy to a simple indexing approach using a single asset allocation ETF. This can make a lot of sense if you want to reduce fees, improve diversification, and simplify your portfolio. Indeed, investing complexity has been solved with all-in-one ETF products.

Making this transition is fairly straightforward in tax-advantaged accounts such as RRSPs, TFSAs, RESPs, and LIRAs. If you’re already using a discount brokerage account you can simply sell off your existing holdings and then immediately buy the appropriate asset allocation ETF. Done.

The process is a bit more work for those moving from a managed mutual fund account. You’ll need to open a discount brokerage account (I’d recommend your big bank’s brokerage arm or an online broker like Questrade), open the appropriate account types, and then transfer your existing account over “in cash”, meaning your existing firm will sell all of your holdings and send the proceeds to your new brokerage account in cash. The process can take two weeks or more, but once the cash has landed in your account you can go ahead and buy your asset allocation ETF.

For those with non-registered (taxable) accounts, we have the added complication of taxes to consider. When you sell your existing holdings inside a taxable account, it triggers a taxable event where you will incur either a capital gain or a capital loss.

Sometimes you can get around this by transferring your existing assets “in kind” rather than “in cash”. But if the desired outcome is to simplify your portfolio with an all-in-one ETF then you’re eventually going to have to sell the existing holdings.

This was problematic when stocks were up big over the past few years. I’d work with clients to assess the current capital gain situation and we’d determine a plan to sell off individual parts over a few years to spread out the tax hit.

But here we are now in 2022 and both stocks and bonds have suffered double-digit losses. It’s time to take another look at your taxable account and see if it makes sense to speed up that transition.

Whether your taxable account is filled with individual stocks, mutual funds, or ETFs, assess each holding’s current market value and compare it to the book cost or original price paid. You may find some positions under water, others breaking even, and some still performing well. 

Time to break out your calculator. Add up all the total losses from individual holdings that are below your original cost. Add up all the total gains from individual holdings that are above your original cost. 

Let’s say your entire non-registered portfolio is in an overall loss position. It’s perfectly reasonable to sell the entire portfolio and immediately purchase your chosen asset allocation ETF. The sales will trigger capital losses, which can be used to offset any capital gains incurred that tax year. You can also carry capital losses back into the previous three tax years and/or carry them forward indefinitely.

This approach is also onside with something called the superficial loss rule, which states that you can’t claim the capital loss if you buy an identical security within 30 days of your sale transaction.

And, if you’re already happily managing an ETF portfolio, you can still engage in more traditional tax loss selling by identifying non-identical ETFs to pair with your existing ETFs so you can harvest a capital loss, immediately buy another ETF, and still stay onside with the superficial loss rules. For that, Justin Bender has you covered:

One silver-lining of a down market is it may provide an opportune time to reorganize your taxable investments and move to a low cost indexing solution more quickly and more tax efficiently than if we were still in a raging bull market.

Have you done any tax loss selling this year?

This Week’s Recap:

There’s finally some activity at the site of our new house after weeks of waiting for trusses to be delivered. We should see a lot of progress over the next few months before winter arrives. 

An early 2023 completion date means we need to start preparing our existing house to be put up for sale. We’re reasonably good at keeping the clutter out, but the house will definitely need some touch ups before it’s ready for prospective buyers to view.

In case you missed it, I looked at some sustainable investing solutions for DIY investors.

I also took a fun look back at my own investing multiverse of madness and the different choices I could have made when I started index investing.

Many thanks to Rob Carrick for including my post on the retirement risk zone in his latest Carrick on Money newsletter (subs).

Weekend Reading:

The Belle Curve blog explains why retirement is the biggest life event that no one talks about.

Jon Chevreau ponders whether it makes sense to retire when we’re still in a pandemic.

Is retirement possible for those who start saving and investing after 40? Yes, but you don’t have the luxury of making mistakes (subs).

This Morningstar article looks at the ‘Witch of Wall Street’ and the difference between wealth and well being:

“Although Hetty had objectively more money than almost everyone else in the world, she still believed she did not have enough. She believed it so strongly that she spent her life, and ruined her relationships, in pursuit of more.”

Moshe Milevsky and Guardian Capital unveiled a new retirement solution called a modern Tontine.

Retirement expert Fred Vettese has long advocated for deferring CPP to 70 while taking OAS benefits at 65. His rationale was more about psychology than math. It’s hard enough, he reasoned, to persuade people to delay their CPP to 70. The benefit for delaying OAS is also smaller than it is for CPP.

But Mr. Vettese didn’t expect the higher and more persistent inflation that we’re experiencing right now.

“If you believe that higher inflation is either (a) here to stay or (b) at least more likely to rear its ugly head in the future, then I strongly advise deferring both CPP and OAS pensions: pensions from these programs are fully protected from inflation, something that only the federal government can credibly offer.”

Keep in mind the usual caveats: if you have reason to believe you have a shorter than average life expectancy, or you simply don’t have enough personal savings to tap into while you wait for CPP and OAS, then it’s perfectly rational to take your benefits at 65.

Finally, looking for some personal finance book recommendations? Investment manager Markus Muhs has you covered with this impressive list.

Have a great weekend, everyone!

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