Hey there, Canadian Wealth Secret seekers. It’s Kyle here for another Friday edition of our Secret Sauce episodes.

Today, I’m going to the inbox again and pulling up an email from a client who’s struggling to figure out what’s best given their specific situation. In this case, it’s Mark’s spouse, who has an operating company and has been making some RRSP contributions. Let me pull it up here and read it out for those listening on the podcast.

The email says, “Thanks, Kyle. Sorry for not replying sooner. We’ve had a busy couple of weeks, including some unexpected expenses at our rental property. The AC and furnace had to be replaced.” We all know how that goes—it’s always a thrill when you get more capital expenditures. Not only does it cost money, but it also hurts your soul a bit and takes time and effort. The email continues, “This drain on our retained earnings has slowed us down a bit with making any large financial decisions, as it should. I think the best option would be to contribute between $20,000 and $30,000 annually. But we want to make sure there aren’t any drawbacks as it relates to our retirement plans as they currently stand. We are still weighing this option and will continue the process, hopefully making a decision soon. With it being as big of a financial decision as it is, we really want to make sure this is the right choice. Talk soon, Mark.”

Absolutely, Mark. It’s important to fully understand what’s going on. I always say, if it doesn’t feel like a no-brainer for your situation, then it’s one of two things: either it’s not a no-brainer and might not be a good fit, or you don’t know enough yet. So, make sure you understand it well enough to make a decision as to whether it is a no-brainer or not. If you’re somewhere in the middle, you’re essentially flipping a coin or rolling the dice, depending on how confident you are.

Now, let me bring you up to speed on what’s going on. Mark’s spouse has been contributing to an RRSP for some time. RRSPs aren’t inherently bad, but it depends on what’s going on inside them. Mark’s spouse is very conservative and risk-averse. While it makes sense rationally to be more equity-focused in the portfolio, that’s not their risk tolerance level, so they don’t feel emotionally able to make that choice. That’s okay—you work with what you have and don’t put yourself in a position where you feel uncomfortable.

Even though it makes sense to be more equity-focused, this particular RRSP is 93% in mutual funds, but the mutual fund selection is a balanced fund. A balanced fund limits downside risk but also limits upside potential. It’s not a great move for those who are well off with a long time horizon towards retirement—about 15 years in this case. The RRSP has been invested in these funds for over 10 years, with about $250,000 in the account. However, the average return is around 4.14%, which is what you might expect in a well-designed whole life policy with high cash value.

The current plan is to invest $20,000 to $30,000 into this RRSP account, which is a balanced fund, likely to continue at around the same rate. But what would happen if we kept doing this? In 15 years, with the same return, it would grow, but not as significantly as we might hope.

Now, let’s compare this to what would happen if we started now with the same $30,000 inside the corporation with a participating whole life insurance policy. By age 60, the cash value of this policy could be around $665,000, with a death benefit of about $1.6 million. If the participant passed at age 60, $1.2 million of that would come out tax-free through the capital dividend account to shareholders.

If we leverage this policy for income in retirement, we can pull out $41,250 after tax, which is almost the same as what the RRSP would provide. However, the policy starts with a balance of $0, while the RRSP has $250,000 already. Over time, the insurance policy could catch up and even surpass the RRSP in value, especially considering the tax-free benefits and the death benefit.

In summary, the secret sauce here is not about where you’re putting the money—RRSP, TFSA, insurance, or otherwise—but what you’re investing in. Conservative investments like a balanced fund in an RRSP might not offer the tax benefits you hope for. It might make more sense to invest in a policy that offers similar returns with added benefits like tax-free leverage for retirement income and a tax-free death benefit.

Hopefully, you found this Wealth Secret Sauce episode helpful. My name’s Kyle, and remember, you can reach out to us to review your situation and figure out the best move for you, given your risk tolerance, runway, and business specifics. Reach out at canadianwealthsecrets.com/discovery and book a call today. If you enjoyed the episode, please share it with someone you know and care about, and leave us a rating and review on Apple Podcasts.

We’ll see you in the next episode. Take care.