This edition of the money bag answers your questions about tax-free RRIF withdrawals, transferring investment accounts in-kind or in-cash, getting out of a group RESP contract, and how early retirement affects your CPP benefits.
First up is Bert, who heard about a way to withdraw $2,000 from his RRIF tax-free and wants to know how to do it. Take it away, Bert:
Tax-free RRIF Withdrawals
“Hi Robb, I understand that I can withdraw about $2,000 almost tax free from a RRIF. Does “tax-free” mean no withholding tax, or does it truly mean “no tax”, as in it’s not counted as income?”
Hi Bert, thanks for your email. You’re referring to the pension income tax credit, or pension income amount. It allows those age 65 or older to claim a federal non-refundable tax credit on up to $2,000 of eligible pension income (including RRIF withdrawals).
Note that you’ll have income tax withheld on your RRIF withdrawal, but then at tax time you’ll be able to claim the Pension Income Tax Credit, which eliminates 15 percent in federal tax.
Regardless of your tax bracket, the maximum federal tax savings available is $300 ($2,000 × 15 percent).
Transferring Funds In Cash or In Kind?
Here’s Harrison, who wants to know how to transfer his existing investments to the robo-advisor Wealthsimple.
“Hi Robb, I read your article about transferring an RRSP to WealthSimple. I was planning to do the same but I have some questions. I have a mutual fund RRSP account with TD and was wondering if i should transfer it to WealthSimple ‘in cash’ or ‘in kind’.”
Hi Harrison, great question! You’ve correctly identified the two ways to transfer your investments from one institution to another.
An in-kind transfer means that the transferring institution sends your existing investments (mutual funds, ETFs, individual stocks) over to the receiving institution exactly as is.
An in-cash transfer means the transferring institution will liquidate your existing holdings and then send the entire amount to the receiving institution in cash.
You can also do a partial in-kind or in-cash transfer. How to choose really depends on four factors:
- Your current holdings and whether you want to retain all or a portion of them
- The receiving institution’s ability to manage the incoming holdings (for example, a proprietary fund like Tangerine Investment Funds can only be bought, sold, and managed in a Tangerine account)
- The tax implications of liquidating investments in a non-registered account
- Whether or not you’ll be charged fees (deferred sales charges) for selling the mutual funds
Note there are no tax implications for transferring funds within an RRSP or TFSA, whether in cash or in kind. The funds stay in the same tax-sheltered cupboard, they just move to someone else’s kitchen.
Harrison, in your case you’d most likely want to make the transfer “in cash”, meaning TD will sell the mutual funds and send over the funds in cash. Wealthsimple will then implement your portfolio.
One final note about Wealthsimple. When you create your in-kind transfer request, you’ll have the option to not sell your holdings and schedule a conversation with a portfolio manager to explain know how to manage your holdings. Wealthsimple will hold any assets with a Deferred Sales Charge or a significant Capital Gain or Loss (in a taxable account ONLY) you’ve asked them not to sell, however, they will not monitor or trade these assets with the rest of your portfolio.
Melissa wants to know how to get out of a group RESP plan without penalty.
“Hi Robb, my daughter and her husband recently bought a group RESP plan through CST (Canadian Scholarship Foundation). She received the prospectus about a month ago. I see from an article you wrote that if she is under the 60 day point, she can get out of the plan. How can she go about doing this?”
Hi Melissa, she’ll need to contact CST directly and cancel the contract. I’d advise that she do so immediately to avoid any chance that she’s reached the 60 day period. View the prospectus and find the ‘cancellation within 60 days’ clause. Find out if she’ll need to do this in writing, or if a phone call is sufficient. Assume nothing, other than that CST will likely look for any way to keep her in the plan.
There’s a very interesting study on Group RESP subscribers and how these plans are sold. I’d advise her to open an account instead at a bank and contribute only what she can afford. That’s the biggest knock against group RESP plans or scholarship trusts is that they lock you into a pre-determined monthly contribution and the subscriber has no flexibility to reduce or cancel their payments without penalty. With a bank, she can contribute as much or as little as she’d like.
How Early Retirement Affects CPP
Wayne is retiring early but delay taking CPP. He wants to know how his zero-contribution years affect his CPP benefit.
“Hi Robb. I’ve been a faithful follower of your advice and articles. I read with interest Taking CPP at Age 60. I’m planning to retire this year (I’ll be 61), with 41 years service with the provincial government. Here’s my question. I plan to take CPP at 65, but naturally I will stop making contributions this year. Will I get CPP at 65 without a reduction, even though I will not contribute from ages 61 to 65?”
Hi Wayne, thanks for your email. Here’s how I understand it:
You will not lose anything by waiting until 65 and having the last four years of zero earnings, provided that you have at least 39 years of max earnings (which sounds like the case for you).
If you have fewer than 39 years of max earnings, then your “calculated retirement pension” will decrease with the four extra years of zero earnings. This means that you’ll get a larger slice of a smaller pie by waiting until 65.
Check out this free CPP calculator to run your own accurate CPP calculations, or if your situation is more nuanced or complicated then I’d highly recommend getting in touch with Doug Runchey, who, for a small fee, will run some calculations for you.
Interest rates on variable rate mortgages and lines of credit tied to the prime lending rate should also fall by 0.50 percent. I can confirm that the interest rate on my five-year variable rate mortgage fell from 2.95 percent to 2.45 percent, while the interest rate on my prime + 0.60 percent home equity line of credit fell from 4.55 percent to 4.05 percent.
That’s a mild surprise from the big banks, given that they did not pass on the full rate cut on previous occasions when the Bank of Canada lowered its key lending rate.
Now for the bad news. Interest rate cuts hurt savers. Immediately following the Bank of Canada announcement, Wealthsimple said it would be lowering the interest rate on its new Wealthsimple Cash account from 2.4 percent to 1.9 percent.
As of this writing, LBC Digital still offers a 2.8 percent interest rate, EQ Bank still offers a 2.45 percent interest rate, and Motive Financial still offers a 2.4 percent interest rate on savings deposits.
Of bigger concern to the overall economy is Canada’s 10-year bond yields, which are in a free-fall. Canada’s five-year government bonds are also near record lows. Lower yields in the bond market can be a strong indicator of economic trouble ahead.
As for the stock market, the TSX had an up-and-down week but ended up slightly lower than where it started the week. The S&P 500 also had a roller-coaster of a week, but ended the five-day period flat.
I added $1,000 to VEQT inside my TFSA (regular monthly contributions) and that portfolio finished the week up by 0.19 percent. On the year it is down about 9.3 percent.
I haven’t made any changes to my RRSP (also invested in VEQT), and this all-equity portfolio is down 9.38 percent on the year.
As I’ve said before, this is well within the range of potential short-term outcomes. Nothing to get excited about. Stick to your plan, and this too shall pass.
This Week’s Recap:
A busy week of financial planning meant no new posts from me on Boomer & Echo last week. I did manage to recap our February vacation on Rewards Cards Canada and looked at how much it costs to go to Maui.
From the archives: Here’s a sensible RRSP vs TFSA comparison.
For Globe and Mail subscribers: Travel expert Barry Choi interviewed me for his latest piece on travelling to Italy.
I’m excited to announce a new partnership with Scotiabank where I will be using the Scotia Momentum Visa Infinite Card over the course of the year to earn cash back on my spending. This includes an incredible 10 percent cash back for the first three months:
#Ad The Scotia Momentum Visa Infinite Card is the king of cash back rewards in Canada. I am beyond thrilled to use this @Scotiabank card again and take advantage of the limited time 10% cash back bonus for the first 3 months (up to $2k in total purchases). Conditions apply. (1/3) pic.twitter.com/n4rwO829Wy
— Boomer and Echo (@BoomerandEcho) March 4, 2020
Promo of the Week:
Travel might be the furthest thing from your mind these days with the coronavirus spreading around the world. Still, it might be a great time to catch some deals on trips for the summer or fall.
We’re big fans of Airbnb when we travel with our family. We like having an entire place to ourselves, along with a kitchen to prepare our own meals.
When you sign up for Airbnb with a referral link, you’ll get up to $62 off your first trip. How it works is you’ll get $45 off your home booking, and then another $17 to use towards an Airbnb experience worth $63 or more. An “experience” is an activity hosted be a local expert.
Our friends at Credit Card Genius share the latest TD credit card offers to earn Aeroplan miles, flexible travel points, and cash back.
Topical today – Money We Have blogger Barry Choi explains how trip cancellation insurance actually works.
Hannah Logan shares the best budget-friendly winter getaways for Canadians.
Here’s a truly ridiculous news segment that claims failed Democratic candidate Michael Bloomberg could have given every American $1M instead of spending $500M on his political campaign. Math is hard.
PWL Capital’s Ben Felix digs into the incredible story of Renaissance Technologies’ Medallion Fund, which has returned 66 percent per year for 30 years:
Morgan Housel says he doesn’t know anything about coronaviruses, but he does share some excellent thoughts about how people view risk.
Rob Carrick shares eight dos and don’ts to protect your finances in these uncertain times.
Fiscally fit at 40? Author Bryan Borzykowski shares what he’s learned about life and investing in the past decade.
Jason Pereira and Alexandra Macqueen explain a unique tax planning opportunity involving the use of a dead spouse’s unused TFSA room. Interesting.
Alexandra Macqueen again, this time on Morningstar, explaining why a life annuity could help close the retirement income gap.
Here’s an absolutely epic post on the Million Dollar Journey blog about withdrawing from your RRSP, TFSA, and non-registered accounts. Must read.
Jason Heath explains how to ensure your inheritance goes to your children and not the taxman.
Anxious about the markets? Robin Powell explains why worrying about the coronavirus is a waste of time and energy:
“You have no control over the coronavirus or the markets. Unless you’re a professor of epidemiology, don’t kid yourself that you have any unique insight into how the virus might develop. Moreover, from here, markets could go sharply up or down for reasons totally unrelated to COVID-19.”
Nick Maggiulli offers three compelling reasons why you should own bonds in your portfolio.
Another terrific story by Andrew Hallam, who wonders if these are the toughest conversations John Bogle’s son has?
Finally, the great Morgan Housel again on death, taxes, and three other inevitable things.
Have a great weekend, everyone!
My own RRSP shed $15,000 – or 8.18 percent. Fear and speculation was rampant in the media, with several pundits predicting further losses and that the worst is yet to come. On the other side we had the ‘buying opportunity’ crowd. You know, the ones who endlessly crow about stocks being on sale and going bargain hunting. So annoying.
Then there’s me, sitting here with no bonds to sell and no unused RRSP contribution room. Sad.
Me right now with no bonds to sell and no RRSP room. pic.twitter.com/nCfqAGnc4X
— Boomer and Echo (@BoomerandEcho) February 28, 2020
A market sell-off of this magnitude has a real psychological effect on investors, no matter their age and stage. Retirees, or soon-to-be retirees, are undoubtedly concerned when their nest-egg takes a 10 or 15 percent hit. Investors still in the accumulation stage might be re-thinking their investment strategy as they watch their portfolio decline in value.
Let me remind you that a 10-15 percent correction is well within the normal distribution of returns. It happened in late 2018, and in August 2015, and again in August 2011. This is not new, so ignore any headlines that claim to say ‘this time is different’.
Coronavirus and the Markets
So what’s an investor to do? This is a good time to remind investors that the money invested in their portfolios should have a time horizon greater than 3-5 years (ideally 10+).
It’s a good time to remind investors that their asset allocation should reflect their actual risk tolerance, not just their perceived tolerance when markets are performing well.
Finally, it’s a good time to remind investors that timing the market is incredibly difficult and so the best course of action in these volatile times is to stay the course and stick to your plan.
What that means is tuning out both the bearish pundits and the annoying ‘stocks are on sale’ investors. I say that about the latter because normal investors can get a serious case of FOMO or just feel plain dumb if they don’t have a sensible way to add to their investments during this sell-off.
Let me be the first to tell you that it’s perfectly okay to stick to your regular contribution schedule, or to not contribute at all (just stay invested). All of the great buying opportunities in history come at times when few investors are truly in a place or frame of mind to double down on their stock investments. You’re not missing out.
Here’s some perspective to consider. North American markets have basically retreated to October 2019 valuations. Ask yourself how you felt about your portfolio in October of last year? Probably pretty darn good.
How did you feel about your investment portfolio in October last year? Things were pretty good, right?
— Boomer and Echo (@BoomerandEcho) February 29, 2020
Now ask yourself if markets were completely flat for four months between October and February would you still feel this sense of fear and dread? Likely not. After all, investors have been fortunate to participate in 10+ years of nearly uninterrupted gains. You’d forgive the markets for going sideways for a few months.
Instead, we got a steady climb of investment gains for four months, followed by a fast and furious tumble in the past week or so. That’s just the markets doing what they do.
It’s also another good time for a reminder of an age-old fallacy: the idea that investors can get out of the market and wait for things to settle down. When exactly have markets been calm and consistent? How about never.
Now for some more advice and perspective on investing, market corrections, and avoiding emotional panic selling.
- Ben Carlson for Fortune Magazine on resisting the urge to panic.
- Ben Carlson again in the A Wealth of Common Sense blog on the art of not panicking.
- The Humble Dollar’s Jonathan Clements telling us not to lose it.
- Servo Wealth Management on avoiding an irrational response to irrational markets.
Coronavirus and Travel
A more pressing concern, at least for me and my family, is how the coronavirus affects travel plans. More specifically, we’ve planned a trip to Italy in April, a country that has reported the largest number of coronavirus cases and deaths in Europe.
While areas such as Rome and Florence, which are on our itinerary, have not been affected, we planned to stay in Venice for three nights to cap-off our trip. Areas and towns in Northern Italy have been placed under quarantine, which has caused heightened security alerts for anyone travelling to the region.
We’ve been closely following the Government of Canada’s official travel advisory notice board, which says to take normal security precautions when travelling to Italy. However, there is a heightened advisory (level 2) for northern Italy, which tells travellers to exercise a high degree of caution when travelling in northern Italy due to the spread of a novel coronavirus disease (COVID-19).
For now we have no plans to cancel or alter our trip. All indications on the ground in Italy is that it’s safe to travel and live in Italy, with just 0.05 percent of the country being affected by “extraordinary measures of temporary isolation of some Italian cities”.
To be clear, we’re not concerned about contracting the virus when we travel to Italy. Of greater concern is how airlines and other countries will react to passengers and tourists going to Italy and returning from Italy.
We have flights on United Airlines (Calgary to Rome via Newark), and returning flights on Lufthansa (Venice to Calgary via Frankfurt). That means closely monitoring not only Travel Canada advisories, but also U.S. advisories, German advisories, Italian advisories, as well as watching for news from United Airlines and Lufthansa.
A lot can change either way in six to eight weeks, so for now we’re planning to travel but we’ll wait and see what happens.
This Week’s Recap:
Earlier this week I asked if you should pay off your partner’s debt, and shared my experience in doing so.
From the archives: Here’s a more realistic retirement income target.
On Rewards Cards Canada: Here are the best Aeroplan credit cards in Canada.
Promo of the Week:
I’ll admit that the price of admission is pretty steep ($699) for what’s widely considered to be the top travel rewards credit card in Canada. But the American Express Platinum card comes with a host of points and travel benefits that more than make up for the annual fee, at least in the first year of card ownership.
The incentive is even sweeter to sign up for the card right now because you can get 70,000 Membership Rewards points when you sign up with a referral link (it’s just 50,000 points on the Amex website). Check out this review by travel expert Barry Choi, who explains the new Amex promotion and its benefits.
Bottom line: You’ll get a minimum $950 worth of travel rewards with this card, which more than makes up for the annual fee. Couple that with a Priority Pass membership, which gives you and one guest unlimited airport lounge visits, plus automatic hotel status upgrades at Hilton, Marriott, and more, and you’ve got a fantastic travel rewards card.
Our friends at Credit Card Genius have a terrific (and free) $100 Amazon gift card offer when you sign up for the Scotia Momentum Visa Infinite card – this card pays an incredible 10 percent cash back in the first three months!
There are changes coming to CDIC deposit insurance and Barry Choi has all the details, plus a chance to win a $500 Air Canada gift card.
An interesting post on the gambler’s fallacy and the simple math error that can lead to bankruptcy.
Pension expert Alexandra Macqueen on why bad pension planning advice could cost you your retirement. Watch for my own collaboration with Ms. Macqueen on my pension decision coming soon.
Here’s Michael James on Money explaining why behavioural biases are in all of us:
These rules of thumb have served us well throughout human evolution, but they sometimes give us the wrong answer to modern questions such as “should I save some of my windfall or just go blow it all on a wild trip to Las Vegas?”
Rob Carrick says, ‘this is a hell of a time to tell people they need to take more risk with their retirement investing’. But that’s exactly what long term investors should be doing – stocking up on more stocks if they want to retire earlier. Indeed, Canadians are notoriously conservative when it comes to investing.
I love this video by the Prince of Travel explaining some hard truths about credit cards and travel points:
What happens next in the stock market? Nick Maggiulli offers a historical examination of short-term market declines.
Mr. Maggiulli also takes a deep dive on when to invest your money with the definitive guide on dollar cost averaging vs. lump sum investing.
Financial advisor Jason Pereira looks at what the Globe and Mail missed in its assessment that Wealthsimple (and the robo advisor business) is a flop:
“Or consider what happens in the next market correction – when the parents’ old-school, stock-picking broker, who doesn’t implement Modern Portfolio Theory and thinks he can “time the market” – fails to deliver on downside protection?”
Finally, digital nomad and Canadian expat Andrew Hallam shares why adventurous, cost-conscious retirees should consider Costa Rica.
Have a great weekend, everyone!