Episode 68: Should I Always Contribute To My RRSP To Minimize Income Tax? 

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Navigating the complex world of retirement savings in Canada and wondering if RRSPs are the right choice for you?

This episode is crucial for anyone looking to secure their financial future in Canada. With RRSPs being a central part of retirement planning, understanding their nuances and tax implications is essential, especially given the ever-changing economic landscape. Whether you’re just starting out or looking to optimize your existing retirement plan, this discussion offers insights directly applicable to your financial journey.

What you’ll learn: 

• Discover tailored strategies for RRSP investment, considering your unique financial situation and goals, ensuring your retirement plan is as efficient and beneficial as possible.
• Learn about the potential tax implications and benefits of RRSPs, including how to manage your contributions to minimize future tax burdens.
• Gain insights into alternative savings and investment strategies, such as tax-free savings accounts and the use of permanent life insurance policies, to diversify and strengthen your financial plan.

Resources:

• Should I Invest in A RRSP or TFSA?
• Canada Revenue Agency (CRA) overview of the Tax Free Savings Account (TFSA)
• Canada Revenue Agency (CRA) overview of the Registered Retirement Savings Plan (RRSP)
• Book a Discovery Call with Kyle to review your corporate (or personal) wealth strategy to help you overcome your current struggle and take the next step in your Canadian Wealth Building Journey!
• Looking for a new mortgage, renewal, refinance, or HELOC? Reach out to Jon to share some options.
• Follow/Connect with Kyle Pearce on LinkedIn for daily posts and conversations about business, finance, and investment. 

Calling All Canadian Incorporated Business Owners & Investors:

Consider reaching out to Kyle if you’ve been…

• …taking a salary with a goal of stuffing RRSPs;
• …investing inside your corporation without a passive income tax minimization strategy;
• …letting a large sum of liquid assets sit in low interest earning savings accounts;
• …investing corporate dollars into GICs, dividend stocks/funds, or other investments attracting corporate passive income taxes at greater than 50%; or,
• …wondering whether your current corporate wealth management strategy is optimal for your specific situation.

By hopping on a discovery call with Kyle, he will review your specific personal and corporate financial situation in order to determine if there are some quick wins available for you to minimize taxes personally or corporately, provide ideas for how you can increase your personal cash flow, and ensure that the net worth of your estate continues to grow in tandem.

Let’s Connect For A Discovery Call!

For those interested in having a review of your financial wealth plan, learning more about potential joint venture (JV) opportunities, or a mortgage review, book a free discovery call now.

Watch Now!

Episode Summary:

RRSPs: Individualized Financial Planning Discussed

Kyle and Jon discussed the nuances of RRSPs, a retirement savings plan in Canada. They stressed the importance of considering individual factors when deciding where to invest money and exploring scenarios and case studies to understand the plan better. They also discussed the pitfalls of blindly following common financial advice and the importance of proactive financial planning. Kyle emphasized the need for a plan that allows access to more money without being counted as income, while Jon shared his experiences and the importance of thinking ahead towards future goals. They noted the difficulty of encouraging people to engage in this type of thinking and stressed that those who are interested in this type of discussion are likely the ones who would benefit most from it.

RRSP Investment and Tax Implications Discussed

Kyle and Jon discussed the financial advice Kyle received from his advisor regarding retirement savings plans (RRSPs). Kyle emphasized the importance of considering tax implications when investing in an RRSP, especially for those with a defined benefit pension plan. He argued that while it might not be financially advantageous to invest in an RRSP for those in higher tax brackets, it could be beneficial for those in lower brackets. Kyle also stressed the importance of legacy planning, suggesting that it might be more beneficial to withdraw money from an RRSP at a lower tax rate and give it to a charity or loved ones rather than let it be taxed upon death.

Retirement Savings Plan Strategy

Kyle and Jon discussed the strategy of contributing to retirement savings plans. Kyle suggested that it’s not always about maximizing contributions, but rather about optimizing based on individual circumstances, such as tax bracket and projected growth. He emphasized the importance of considering when to stop contributing to avoid future tax issues. They also touched on the uncertainty of future tax brackets and the potential for taxes to increase, especially for high net worth individuals. Jon proposed investing in tax-free savings accounts as a possible solution.

Personal Financial Planning: Tax-Free Savings and Investment Strategies

Jon and Kyle discussed personal financial planning, specifically focusing on the use of tax-free savings accounts and RSPs. They agreed on the waterfall method, where they would fill the first bucket until it’s full, then move on to the next. They also discussed the next step after filling these buckets, with Kyle suggesting the use of a tax shelter vehicle like a permanent life insurance policy. This would allow money to grow tax-free and potentially be leveraged for other investments. They acknowledged that this strategy might not be suitable for everyone, but it could provide benefits in terms of growth, tax advantages, and flexibility.

Strategic Financial Planning Discussed

Jon and Kyle discussed the importance of strategic thinking when it comes to financial planning, especially regarding retirement savings and tax management. They emphasized the need to consider one’s personal goals and circumstances. Kyle shared an example of a client with a large defined benefit pension plan who was unsure about how to manage his savings, suggesting the idea of creating a tax-sheltered bucket through a permanent life insurance policy. They concluded by urging listeners to consider their own financial scenarios, seek advice if needed, and share the episode with others who might find it valuable.

Transcript:

00:00:00:12 – 00:00:27:21
Kyle Pearce
Hey, Hey. They’re Canadian wealth secret seekers. We are just coming off the heels of RRSP season and there’s lots of questions out there, lots of people wondering, should I have contributed the maximum, Should I have contributed something, Should I not have contributed to my RRSP? I think in general we see marketing around this idea that RRSP is a way to get free money, right?

00:00:27:21 – 00:00:47:04
Kyle Pearce
You get the tax refund back in your pocket. And today we’re going to dispel maybe some myths and then also unpack some of the questions that might be circling around in your mind or maybe some of the questions that you never thought you should have been asking yourself about the RRSP.

00:00:47:10 – 00:01:08:07
Jon Orr
Yeah, stick with us. We’re going to unpack questions like, Should I always had my RSP as much as possible? How do I think about my RSP in terms of tax savings for the future or tax deferrals for the future? How do I navigate an RSP if I have a predefined or a defined benefit pension plan? Here’s a good one.

00:01:08:09 – 00:01:24:00
Jon Orr
How When should I stop contributing to an RSP? Is there a break even point that makes sense for me if I’m thinking about the future? And also like what are we doing with spousal RRSPs? Is there a way to maximize that? And also the last one here. Kyle We’ve got a lot we got a lot to dig in here.

00:01:24:03 – 00:01:31:13
Jon Orr
What are the best uses if I’m investing inside the RSP vehicle? So we’re going to unpack all of those, but let’s get to it.

00:01:31:18 – 00:01:44:13
Kyle Pearce
Here we go.

00:01:44:15 – 00:01:49:21
Kyle Pearce
Welcome to the Canadian Wealth Secrets podcast with Kyle Pearson. John, here.

00:01:49:23 – 00:02:03:02
Jon Orr
We are recovering high school mathematics teachers and education consultants whose entrepreneurial spirit led us to begin multiple businesses in real estate investing, digital courses in coaching and consulting. After the bell rang, it’s dismissal time.

00:02:03:04 – 00:02:31:19
Kyle Pearce
Fast forward a decade later where we’ve grown our portfolios and our time freedom to the point where we can now help entrepreneurs, business owners and investors grow their wealth into a legacy that lasts generations through hidden investment and tax secrets. Your financial advisors won’t believe our true. All right, John, we’re going to be digging in and we are going to unpack and kind of dig deeper into the RRSP.

00:02:31:19 – 00:02:55:04
Kyle Pearce
A few episodes back, we had some discussions, some high level discussions around where should I be putting my money, Should I put it into an RSP? Should I put it into a tax free savings account? And of course, the decision is really individual. There are a lot of factors that go into both. In that episode, we sort of highlighted some of the differences between them today.

00:02:55:04 – 00:03:20:04
Kyle Pearce
What we want to do is we actually want to unpack the RRSP, some of the nuances, some of the things that you never realized about it. RRSP Let’s be honest, all the marketing out there is around this idea that everyone should be investing in an RRSP. You’ll see things like almost all people will benefit from an RRSP. And the reality is of course, 100%.

00:03:20:04 – 00:03:49:24
Kyle Pearce
I agree. Saving money versus not saving money is the better option. However, where and what vehicles we use to save that money and ultimately invest for our later lives, our time Freedom Goals is the bigger question. So today we’re going to unpack some scenarios. We’ll look at some case studies even. I had a great call yesterday with an individual who had a plan and actually was calling for some questions about corporate structuring.

00:03:50:01 – 00:04:15:09
Kyle Pearce
And ultimately I sort of said, that’s not your real issue here. Your real issue is your RRSP. So we’ll dig into that in a little bit as well. But John. Yeah, Tell me, what are you hearing about RRSPs? Maybe even go back to some of what you recall as I know for a little while you were investing into RRSP as you were contributing, I should say, and as of late you’ve been doing that less so.

00:04:15:10 – 00:04:24:24
Kyle Pearce
However, there might still be a case for you in your particular household where it could still make sense as long as you pay attention to some of these nuances, correct?

00:04:25:01 – 00:05:03:21
Jon Orr
Yeah, You’ve got to be thinking and it’s important you kind of understand the structure and the purpose of this structure and other structures that you have access to for your wealth building and your financial planning, your future financial planning. But I think when I first was introduced to the RSP container, I think my thought was that makes a lot of sense the way that most people, I think, are utilizing this container by this understanding, this thinking that in our working years, in our building years and we’re building our futures, we’re bringing in money right now, the idea is that in this current state I’m bringing in, probably this is the assumption that I was under

00:05:03:21 – 00:05:23:04
Jon Orr
and this is the assumption I think most people are under, is that in these years you’re going to be making more money. Your income, your T4 income or the money that you’re bringing in each year is going to be more than in your retirement years. And I think that is the idea that most people are utilizing the strategy.

00:05:23:04 – 00:05:44:07
Jon Orr
Most people are betting on for the RSP. Because every time I let’s say I contribute to my RSP this year, I get that tax deferral. It pushes that money goes in there. That money will sit in that container for until a certain age. I start taking it. At that time, I’m going to be taxed at whatever tax bracket that current year is in.

00:05:44:07 – 00:06:02:21
Jon Orr
So that tax will come out and it will get taxed at that time. But the idea is that I’m going to save this year on the taxes because I’m making more money. Hopefully now than later. Now, here is where I think we’re starting kind of like this doesn’t make a lot of sense. If you’re listening to this podcast, you may be like us.

00:06:02:21 – 00:06:24:19
Jon Orr
You’re trying to grow your wealth to be financially free. I started to shift my mindset, Kyle, when I said, like, I hope I make more money when I’m older than I’m making now. My whole goal is to make more money so that I can live that financially free lifestyle. I can all of a sudden have that pot up there that I can pull from and go, Hey, look, this wouldn’t this be awesome?

00:06:24:19 – 00:06:42:10
Jon Orr
Like, if you’re an entrepreneur or a business owner, your goal is to always be making more money. So if I’m 55, if I’m 60, I’m 70, I want to be making more than I am now. And that’s the conflict right now. Because if I’m making more money, then when I start that money’s going to sit in that RSP and it’s going to grow.

00:06:42:12 – 00:06:45:08
Jon Orr
Let’s say it’s in that container, it’s in an investment.

00:06:45:10 – 00:06:52:05
Kyle Pearce
Of problems, right? Like, let’s be honest, it’s not the worst of problems, but if I can do it better, then I should do it better right?

00:06:52:06 – 00:07:11:10
Jon Orr
Exactly. It’s just saying like the theory, though, is flawed. If my goal is to be making more money because that money’s sitting in there, and then when I go to pull it out, I’m now have to pay more tax than I would have paid this year. And that’s the assumption. But my assumption is I do want to grow my income year to year to year to year.

00:07:11:10 – 00:07:21:00
Jon Orr
So that I’m making more money. Now, if you’re also wanting that to happen, think about what are the RSP? What’s your strategy now behind utilizing this container?

00:07:21:06 – 00:07:38:22
Kyle Pearce
Now, you said a few things, and I want to be specific, and this is for me. I can’t speak for you, John, but I’m going to make an assumption and think that you’re with me on this is I want to have access to more money every year in my later life, but I actually don’t want it to be counted as income if I can help it.

00:07:39:03 – 00:08:13:17
Kyle Pearce
Right. And I think that’s really the journey that we’ve been on for this past decade, is like, how can we design our financial situation, our wealth plan, our wealth management plan to allow for us to have money that is spendable, which some would call it after tax or not taxable dollars, Right. Whether it’s not taxable or if it’s after tax, I want more of that to be available to me, not because we’ve talked about it before, like I have no goals, super fancy cars or anything like that.

00:08:13:17 – 00:08:31:02
Kyle Pearce
I just want to know that we can pick up and go, We love traveling, we love living life. We’re doing that with our children right now as well. And we’re really looking at how do we look at the big picture to put ourselves in the best situation, not to only just do the thing that everyone’s supposed to do.

00:08:31:02 – 00:08:52:02
Kyle Pearce
So here’s an example where I’ve talked to business owners all the time, specifically those who own real estate. I talked to a lot of people who own real estate and they are doing what everyone says they should do. They’re buying real estate. And guess what? For 99% of them that I talked to, they say that they are cash flow poor and that they are equity rich.

00:08:52:04 – 00:09:09:18
Kyle Pearce
They were just blindly doing the thing. And we’ve been there. We know what that’s like, like we’ve done that. We haven’t had a need to pull that income, but a lot of people get the wrong thought in their mind is like, Hey, if I do real estate, I’m going to X, Y and Z. It’s like, No, no, that’s going to be a great wealth creator.

00:09:09:20 – 00:09:30:01
Kyle Pearce
But then you’re going to have to solve the problem for when do you want to actually use the money that’s coming out. And the same is true here is that, hey, if I just keep stuffing all my income into my RRSP and I don’t pay attention to any of the details, right? So I’m just doing the thing that everyone’s telling me I’m supposed to do.

00:09:30:03 – 00:09:45:20
Kyle Pearce
I could be putting myself in a situation where, again, you’re not going to be at the end of the day, you’re not going to be like in an alley with no money. That’s not going to be the issue. The issue is going to be that you’re going to have too much money coming out of that thing and that is a problem.

00:09:45:20 – 00:10:10:21
Kyle Pearce
But again, not as bad as not having anything at all, of course. But that is a problem that can be avoided if we pay more attention. So I love the thought process of getting that first job and say, the parent or whoever, it might be a mentor in someone’s life saying, Have you started contributing to your RRSP? And really what they’re saying is, have you gotten in the habit of paying yourself first?

00:10:10:21 – 00:10:37:20
Kyle Pearce
That’s really what they want to say. But they’re saying, have you contributed to your RRSP? You’re in a probably in a low tax bracket at the time. And the message that the person is getting is that, oh, okay, I’ll do that if I want to do the right thing. And then meanwhile, fast forward 30 years from now, if you were to ask that person, are you hopeful that you’re going to earn the same income or less income, they would probably say, I’m hopeful that I will earn more income.

00:10:38:01 – 00:11:03:17
Kyle Pearce
And then we ask the same thing. When you decide to stop having to work, right, whether you call it retirement or something else, do you want that number to go down from where you are today when you’re 20 to 25, whatever that age was, where you started contributing in this low tax bracket? The answer most likely is going to be like, I hope I’m earning more than I am now because this feels hard and I haven’t even bought a house yet, or I haven’t even done this or I haven’t had a family yet.

00:11:03:19 – 00:11:33:11
Kyle Pearce
So the reality is we really want to be looking at this thing beyond just I mean, it’s hard enough for us to go, Hey, I’m going to commit a certain amount of income every week or every month or every quarter or every year, whatever you choose to actually invest and pay yourself back the future you back. But then doing the extra thinking to think about, okay, what makes the most sense for me based on where I am now and what’s going to maybe make sense for me later?

00:11:33:11 – 00:11:57:13
Kyle Pearce
It’s hard thinking, but that’s where the true financial advisory really does matter. Having a good financial advisor does not mean rate of return is high. That is a bonus. The real goal is getting you to get into the right habits and to set up the right structures that are going to help you reach the goals that you’ve set for yourself.

00:11:57:13 – 00:12:22:15
Kyle Pearce
And oftentimes the goals that you don’t even recognize you have like that is hard work. So true. Like, what do I really want? Why do I want it and how do I want to receive that compensation later? These are big questions that have to happen if we want to make the more, I’ll call it optimal choices around where we send funds in order to plan for our futures.

00:12:22:17 – 00:12:29:05
Jon Orr
That makes so much sense. And I think when I flash back to young John thinking about this and thinking about, you.

00:12:29:05 – 00:12:32:09
Kyle Pearce
Know, John is think your name was John, Little.

00:12:32:09 – 00:12:56:01
Jon Orr
John. Little John. And when I think about you’re right, you’ve got people saying, how are you contributing to that retirement plan? I remember thinking like, you got to be kidding me. I’m just started. I’m not even thinking about retirement. But I mean, it makes complete sense that you probably did stuff because people told you. But even though you were on a trajectory to get to a particular goal but you weren’t thinking about your goals, right?

00:12:56:01 – 00:13:18:09
Jon Orr
It was like I got my job and it’s like you thought about it. What is my job look like? If I continue down this pathway is my goal. Just stay in work at this job or this career for 30 years. And if it is when I’m 20 years in, if I’m 25 years into my ten years in, what does that look like?

00:13:18:14 – 00:13:37:02
Jon Orr
And should how do I want to optimize that? The money that I’m bringing in now to pad for the future later? Because if my goal is to make the top end of the salary at that career, at that job, then it might not make sense for me to contribute to RRSPs right now because I’m going to be making more money.

00:13:37:02 – 00:13:51:03
Jon Orr
When I think about that defined pension plan coming out, or if I think about those that kind of like if I contribute this, this is the lifestyle I want to see when I’m 40 years old, 50 years old, and you want to maintain that, what does that look like? I don’t think people are thinking about it that way.

00:13:51:03 – 00:14:11:01
Jon Orr
Kyle I think you’ve made up complete sense to go like you have to actually think about what are your goals for the future. Start there and go, Imagine, what does that look like, and then backwards and reverse engineer it to go, What should I do now? If that becomes a reality, If that becomes a reality, what does it look like with the structures I have now and then plan now.

00:14:11:01 – 00:14:20:22
Jon Orr
Things are going to change, but every time they change go like, Well, what’s my now goal? What’s my goal for the future now based off? What were my experiences are? How does that change my plan?

00:14:20:24 – 00:14:42:08
Kyle Pearce
Yeah, totally. And what you’re highlighting is, I think specifically why we don’t see more people doing this type of thinking because it is hard. And I’ll be honest, I’m not blaming, say, financial advisors out there either. I think for a lot of them, they probably tried to have these types of discussions at points and I’m going to guess that a lot of people aren’t interested.

00:14:42:08 – 00:14:59:07
Kyle Pearce
And if I had to make a choice and I’m going to be honest and say if I had to make a choice, someone’s willing to invest in their RSP, but they don’t want to hear why. Maybe putting a little here and a little there or why it doesn’t make sense. You’re probably going to go, you know what? You’re still going to be better off than not doing anything at all.

00:14:59:13 – 00:15:19:02
Kyle Pearce
So you’re still better. So again, I just want to keep highlighting that that this isn’t like a blame game and we’re not going to play that. But for those who are listening to this podcast, I’m going to argue you’re the type of individual who wanted to hear this from their advisor, what your advisors already been sort of like immune to this thought that most people don’t want to hear and therefore they’re not going to say it.

00:15:19:02 – 00:15:42:14
Kyle Pearce
And something that came up in one of our social posts we were talking about this idea of the RSP, is that the one I was looking at here? I see what you’re highlighting here from Ben. I want to come back to that. Mike, who I worked with is an educator, awesome guy, has a defined pension plan and is saying that if you do have a defined benefit pension plan, you should not be investing into an RR.

00:15:42:14 – 00:16:04:11
Kyle Pearce
RSP. He says banks want your money so they don’t offer this advice. Now, Mike, I know back story with Mike is that his father or father in law, one of the two was a financial planner, so he knows this. Now, I’m not going to put such a hard, fast rule here because I’m going to argue that, hey, maybe if you’re in the top of the bracket, you might want to start putting some in there.

00:16:04:11 – 00:16:30:09
Kyle Pearce
So you’re earning $100,000 a year and your defined benefit pension plan is 60,000. You might want to contribute some because you’re in a slightly higher tax bracket. It’s not going to be a massive amount of difference, but it wouldn’t necessarily be the end of the world. But I wouldn’t have done it or wanted to do that all the way up the bracket, starting at 40,000 and working my way all the way up through the grid and all of those things.

00:16:30:11 – 00:16:49:14
Kyle Pearce
So if I have a pension, some people really need to be thinking twice. And I want to use an example. I was on a call yesterday with a client. He has a defined benefit pension plan which is going to work out and this person’s retiring in two years makes it nice because it’s like nice and close. It’s in the near future.

00:16:49:16 – 00:17:09:12
Kyle Pearce
So this person is going to retire. They’re going to be 60 at the time and they’re going to be earning around $90,000 with their pension. Now that’s a great pension, right? So probably earning a much higher t for income and so forth. But here’s the interesting part. When you’re at 90,000, you’re already at around the 30% tax bracket.

00:17:09:12 – 00:17:40:21
Kyle Pearce
When we combine provincial and federal and from there, from one or 2 to 1 to six, it goes to 33, almost 34%, then one in 6 to 111, you’re at 37%, 38 if we round up. And then from 111 to 150, you’re at 43%. Now, while this particular individual may have been earning in the 43 or maybe even higher, maybe 48% tax bracket when contributing, it’s the comment that he made to me that made me want to share it here on this episode.

00:17:40:21 – 00:18:16:15
Kyle Pearce
And the comment was, I have enough from my pension as well as from my investment properties and other sort of unregistered accounts and tax free savings that I won’t need to touch my RRSP for at least ten years and I don’t plan to. And I immediately said to him, that is not the best move because his RSP, which I’m not going to tell you what’s how much is in there, but he’s got a lot of money in this RRSP, which as you mentioned earlier, is growing good problem to have not a bad thing growing tax free.

00:18:16:17 – 00:18:41:12
Kyle Pearce
But ultimately he only has so many years left on this planet before all of that money will either be transferred to a spouse. Right? So that and then when that spouse leaves the estate will be taxed and it will be taxed all at once in that one year where you decide to move on to the next world, which in his case is going to be likely at the 53% tax bracket.

00:18:41:12 – 00:19:00:21
Kyle Pearce
And he may or may not have ever been in that tax bracket. But whatever’s left in there is going to be taxed at that rate as of the day before passing. And that is to me, one of these considerations that I get it, you’re not here anymore. So it doesn’t actually matter to you. You can’t take the money with you.

00:19:00:21 – 00:19:29:08
Kyle Pearce
But if legacy planning is at all on your radar, if you have children or maybe you have a charity that you care about, right, why wouldn’t you want to protect that? You’ve grown it. You’ve sacrificed all your life to create this set of asset, this net worth, that you can access. But if I push off taking that RSP and actually trying to siphon out as much as I can at the lowest tax brackets possible.

00:19:29:08 – 00:19:52:23
Kyle Pearce
So in his case, trying to take out at least ten to even like 20,000, I would say at least 10 to 15000 to kind of keep him in those low thirties every single year to get the money out. It has to pay tax. You can’t avoid that. So you might as well do it now starting as soon as you retire rather than waiting, waiting, waiting.

00:19:52:23 – 00:20:02:11
Kyle Pearce
Because you’re like, I don’t need the money. It’s not a I need the money situation. It’s I don’t want to give the government more money than I need to situation. Right.

00:20:02:14 – 00:20:34:06
Jon Orr
Yeah, I think that example, that case is a prime example of thinking about this mentality that it’s just there because you’re are going to be forced to take it out at some point as well. There is that age limit that it’s like, well, now you have to start taking it out. So we wanted you to be very conscious about where do I feel like going back to that goal setting, where do I feel like I’m going to be in that age range and where do I start with withdrawing or where do I start stop contributing into this container because like this guy you’re thinking about, you’ve been making real estate investing, you’ve got investments over

00:20:34:06 – 00:20:53:04
Jon Orr
here, you’ve been trying to do all the things we talk about here on the podcast, and you’ve built this net worth up. That net worth has to go somewhere at some point, and we want to obviously minimize the tax you’re going to have to pay or your legacy or your state has to pay. Now, when I think about that, Kyle, and thinking about when do I stop paying it?

00:20:53:04 – 00:21:24:16
Jon Orr
Because when we kind of rewind there and talk about this, when you’re young, when you first start, you’re probably in a lower tax bracket than you are in your middle years. So it makes more sense to not contribute, then start contributing later and then all of a sudden, like maybe siphon off after that. So Ben asked this also on social media, is there a threshold if I’m contributing to my RSP, when I look at my income, should there be some sort of threshold I should watch for so that when I tip over that threshold, I should start contributing?

00:21:24:22 – 00:21:33:01
Jon Orr
And then if I tip over another threshold, do I stop contributing? So it’s kind of like where does that leeway, that range lie for you?

00:21:33:03 – 00:21:56:06
Kyle Pearce
Yeah, totally. I think it really involves a number of things, which of course is what tax bracket are you in now? How much do you have in your RRSP now? Right. And then what are you projecting that RSP to grow at? Right. And that’s a hard one, right? Because I mean, again, this isn’t about perfection. This is about optimizing based on assumption that we’re making.

00:21:56:08 – 00:22:29:00
Kyle Pearce
And you have to decide for some people who are more active traders, I know someone in the comments. I think it might have been maybe Ryan, someone in the comments was talking about being kind of like an active trader. I have some things to say about that as well that we can come back to, but it depends. If you’re normally getting a 10% return every year and you’re pretty consistent with that inside your RRSP, you’re probably going to find yourself in a situation where you’re going to want to actually stop contributing sooner than somebody who’s going in and putting it into a pretty safe, pretty consistent type assets.

00:22:29:00 – 00:22:49:06
Kyle Pearce
And this is one of those things that you really have to be thinking about. And then you also have to think, if I’m contributing to my RSP, when I stop receiving, call it the regular salary, the regular, whether I own a company, maybe it’s the regular salary or dividend that I’ve been sending myself through the corporation, if that’s how you chose to do it.

00:22:49:06 – 00:23:21:03
Kyle Pearce
Most people do it because they don’t know a lot of other strategies. But however, when that stops, like when that day stops, you should be then considering about how many years do you anticipate to be funding your lifestyle and you have to decide how much of that on average should you be taking out Now again, it’s you can look at it from a spending perspective, but that’s to determine how much investments and how many assets should I have to get to this place in my life in a successful fashion.

00:23:21:05 – 00:23:48:21
Kyle Pearce
What I’m talking about here is actually strategically saying that I only want to take out X number of dollars to keep me in this tax bracket each year from the day that I choose to hang it up until the day that whether it’s maybe the average age for death or maybe it’s two 100 insurance companies always we always plan to 100, whatever that number is for you to make you feel good.

00:23:48:23 – 00:24:06:20
Kyle Pearce
The reality is like you want to be doing that calculation because if this thing balloons, which again, it’s not a bad problem to have that you’re RSP balloons, but we want to at least be smart about it, to go, okay, I want it to balloon, but I also don’t want to over contribute in add to the balloon. Right.

00:24:06:20 – 00:24:32:22
Kyle Pearce
Like, I don’t want to add more air when there’s already air kind of growing based on whatever I’m investing in inside of there, you want to get to a place where you go, okay, if I want to hang it up at 55 and I don’t have a defined pension plan right? I want to keep myself in under the $55,000 mark because I want to stay in that combined rate of about 24%.

00:24:32:24 – 00:24:56:22
Kyle Pearce
I’m good with that because I’ve been contributing at brackets that are higher than 24%. When you get to that place where you go, wow, I can take out $55,000 a year every single year, assuming the rate of growth of my account based on the balance today, I’ve accomplished this goal. I’m not going to continue contributing to that particular vehicle for two reasons.

00:24:56:22 – 00:25:16:05
Kyle Pearce
One, because I’m going to run into a tax issue because I’m going to have to, whether it’s me or my estate. And then to the other thing is it is you’re actually saying I’m taking this money and I’m going to put it in this place and I will not touch it until later. And you’re getting a slight benefit.

00:25:16:05 – 00:25:38:13
Kyle Pearce
Now. You get to put the tax you paid off of your T4, for example, into your pocket and put the rest over here into this RRSP to grow. There’s a benefit to that. I get it, but not if it’s going to actually cause you higher taxes in the future. And here’s the unknown. We don’t know what the tax brackets are going to be like ten years, 15, 30 years from now.

00:25:38:17 – 00:25:55:10
Kyle Pearce
I have a funny feeling that if I had a it’s not even a coin flip, but I’m telling you right now, if I had to say whether they’re going to go up or whether they’re going to go down, me personally, I’ve got my money on taxes going up, especially for those people that have too much money in the RSP, right?

00:25:55:10 – 00:26:11:06
Kyle Pearce
So if you have too much money in there, you’re now high net worth and you’re going to have a target on your back. Right. So once again, I’m going, okay, I’ve got this money. I still want to invest it. We’re not going to just spend it because we didn’t put it here. Now we have to go where do I put it in where it go?

00:26:11:06 – 00:26:32:11
Jon Orr
Yeah. So is the answer like we should go right to the tax free savings account? Max, our tax free savings account. We’ve got other structures to utilize. Is that the move? We’ve talked about a waterfall kind of method. It’s like, let’s build this bucket up till it makes sense. And what then? The spillover is let’s now fill this bucket until we can’t anymore because there is a limit on tax free savings, right?

00:26:32:11 – 00:26:36:01
Jon Orr
So that when that bucket fills up now what?

00:26:36:01 – 00:26:54:09
Kyle Pearce
Yeah. And I would say, you know, again, the way the order of the bucket. So if, you know you picture it kind of like one buckets higher flowing into the next, flowing into the next. You and I talk about the waterfall method in our own planning, right? In our business planning, in our personal wealth planning. So the bucket that you’re going to fill first at the top may be the RSP.

00:26:54:09 – 00:27:12:21
Kyle Pearce
For people without a defined pension plan, it’s probably going to be the tax free savings account for those who are earlier in their career, meaning they’re in a lower tax bracket. I’m going to fill that bucket up first. So those two buckets are not sort of stuck. There’s no sort of plan for everyone. But we have to think about those two things.

00:27:12:21 – 00:27:35:18
Kyle Pearce
And then once I get to a place where it makes sense, you might choose to start filling out the bucket of the RSP. So those two are really great tools and I would never say not to use them. Sometimes I don’t like the limitations As a real estate investor, I personally am not a massive fan of either, but I also had a defined pension plan for the majority of my adult life, right?

00:27:35:18 – 00:27:55:02
Kyle Pearce
So I wasn’t kind of thinking along that path. I was thinking real estate. So the question becomes for those who, let’s say, have filled up these two buckets, and when I say RSP, not that you’ve Max contributed, but you’ve filled it to the point at which you don’t want to add more because you don’t want more tax liability later, your tax free savings account.

00:27:55:02 – 00:28:15:04
Kyle Pearce
There’s never a bad reason to fill that thing up to the gills. Now the question is, where does it go next? Now, for most people, they would say, all right, at this point I’ll just open an unregistered account. That’s fine. That’s one option. One place that I tend to suggest to people to consider is like, You’re doing great over here.

00:28:15:06 – 00:28:40:23
Kyle Pearce
You’ve got a good little base case. But before you start investing in other places, because oftentimes people will be more aggressive on the unregistered or maybe real estate or maybe private lending, like whatever. I’m always advocating for the idea of putting it first into a tax shelter vehicle. The only other tax shelter vehicle you’re going to have outside of and I don’t want to talk about like R-E-S-P-E-C-T and things like that, Those are good, too.

00:28:40:23 – 00:29:03:16
Kyle Pearce
Don’t get me wrong, if you’ve got kids, that’s a very specific scenario. But I’m talking about you and your wealth planning for your financial future. I’d be looking and going, You know what? I’m going to start a policy, a permanent life insurance policy, permanently in my name. And I know that this thing’s going to payout. Remember that the death benefit pays out tax free to your estate.

00:29:03:18 – 00:29:26:14
Kyle Pearce
So that helps you for any taxes that your RSP is going to cause any taxes for capital gains on that real estate that maybe you’ve already purchased, whatever it might be, any of that additional money, I’m going to flow through there first, this thing’s going to grow and compound tax free for the rest of your life. And upon death, it’s going to payout tax free to your estate.

00:29:26:16 – 00:29:49:12
Kyle Pearce
Amazing. So those are really great benefits. But the part I really like about it, not only that, it’s going to compound between typically around 4 to 5% on average over the life of this particular structure, you also have the ability to leverage against it at any point now, can I do that with my RRSP and my tax free savings?

00:29:49:14 – 00:30:16:16
Kyle Pearce
Some banks might allow you to, but maybe up to 50%. Right. And that’s still feels risky because the market can go up and down and then there’s margin calls and people typically aren’t fans of that idea. But with this particular structure, it grows very, I would say, almost most consistent. And you have access to it, whether it be for emergencies, whether it be for the big family trip, whether it be for whatever.

00:30:16:16 – 00:30:44:06
Kyle Pearce
But it just acts as this place to send any of that other investment dollars before putting it into the next opportunity, be it taking it and leveraging against it to put in the S&P. Because you are a big advocate for earning 10% in the S&P, this thing’s earning 4 to 5. You’re borrowing at around the same rate. So you’re like, That’s not that great, but I could put it here and then I can pay back, right?

00:30:44:08 – 00:31:16:00
Kyle Pearce
I have all kinds of strategies that I can do from this particular shell that I can’t necessarily do from that RSP in the tax free savings. So again, it’s not an either or. This is sort of like the next step in the journey because again, I want to essentially create my only other tax free savings account. I have access to the benefit that I get is that I can use it for other things as well, instead of it being sort of locked up in that tax free savings account until I’m ready to flow it out as income.

00:31:16:02 – 00:31:39:18
Jon Orr
Love it. Love it. What I just heard here today is almost like thinking about three different structures we can utilize. We can optimize for our wealth building journeys, but also for future planning and retirement. And we often think our RRSPs are the other than our defined pension plans. But the be all end all, we got to make sure that we max those out as always we’ve talked about here that that’s not always the case.

00:31:39:18 – 00:32:06:04
Jon Orr
And I think we’ve hopefully given you some insight on how to think about it. There is no one right answer. I think the main takeaway here for me, Kyle, is to think critically about the structures we have access to and where we are on our journey. I think the goal setting is so important and thinking about where do I want to put this dollar so that it minimizes the tax I will eventually pay, but also keeps me to live the lifestyle that I’m aiming for.

00:32:06:04 – 00:32:24:10
Jon Orr
And we have to have those targets in mind. But know that there are three buckets that we talked about here other than just RSP. And I guess there’s four. If you think about if you already have your pension plan, if you’ve got that, you’ve got RRSPs, you’ve got your tax free savings account, But we also have whole life as a vehicle that can help you do a lot of the same things.

00:32:24:10 – 00:32:25:14
Jon Orr
And like you said, more.

00:32:25:18 – 00:32:46:14
Kyle Pearce
Yeah. And I guess my big takeaway, I think you summarized it really well is that every person’s scenario is different and it requires them thinking. And I would argue that you can do the thinking along. But as you and I have always found, John, like we always find it helpful to discuss things together with other people, with other mentors.

00:32:46:14 – 00:33:05:23
Kyle Pearce
So I think you owe it to yourself to do that same thing for yourself. Because if there is a blind spot there and you’re not seeing it, you’re not aware of it, you just know what you know, right? And rather than kind of go and just hope and pray that you didn’t miss something, you should reach out. You should ask those types of questions.

00:33:05:23 – 00:33:33:19
Kyle Pearce
And let’s be honest, there is no right answer. Like the person that you reach out to may give you an idea, and they might think that there’s a better option for you and you might choose that. That’s actually not something that you’re interested in. That’s fine too. In this particular case, the client I was speaking with yesterday was this $90,000 defined benefit pension plan and was going to save all those RSP is not really thinking about what will happen next.

00:33:33:21 – 00:33:51:14
Kyle Pearce
His scenario now is like, Hey, I’ve got all this money and now he’s like, holy smokes, I have to now plan. Can you help me, Kyle, to plan when I should be taking this money out? And then we have to look at his other assets and kind of go like, what’s going to happen there, right. And see what’s going on there.

00:33:51:14 – 00:34:08:07
Kyle Pearce
So we’re going to do that process. And then the question came for him where he goes, Listen, I don’t think I’m going to need all this money every year, but I do need, like you said, I do need to take out and it’s going to be more than that. 15 I argued because it’s too big. He’s going to have to take more than that.

00:34:08:09 – 00:34:27:18
Kyle Pearce
So he’s going to take more every year. And his question to me was what do I do with it? And that’s where we go down the tax route. Do you have room there? No, I don’t. Okay. Well, in the meantime, what it probably makes sense because you don’t have a plan for this extra income. You’ve been planning to not touch this for a really long time.

00:34:27:20 – 00:34:47:01
Kyle Pearce
Where should we put it? We need to create you a new tax shelter. We need to create you that bucket, that permanent life insurance bucket where we’re going to design it. So it’s very specifically structured so that it has a high cash value and it can be leveraged for his next rental property if he wants to purchase one.

00:34:47:01 – 00:35:12:17
Kyle Pearce
Or maybe he wants to do something like private lending, whatever it is that he chooses. It’s like we’ve got to put it in a spot where he’s going to get the best benefit out of that money so that there’s an opportunity or when an opportunity arises, he has it. And something that’s really interesting to. So as someone who is going into these later years, the retirement years, one of the biggest fears people have is running out of money, right?

00:35:12:17 – 00:35:35:16
Kyle Pearce
There’s only been a handful of people I’ve met with where they say, you know what, I don’t really want to leave something for my kids. I want them to have to earn it. They totally respect that. What I recognize is the vast majority do want to leave something. They do want them to kind of leave that legacy. And for this individual has children and one of the children is actually renting in one of the properties that they own.

00:35:35:18 – 00:35:55:20
Kyle Pearce
And why sort of set them like this is kind of a way that you can offer something really massive but still have access to those funds. So instead of keeping those RRSPs locked up and then eventually give half to the government, what you’re doing is you’re releasing them now you’re given the government that they’re cut. Nobody likes to do it, but you have to.

00:35:55:20 – 00:36:33:11
Kyle Pearce
That’s what you agreed to do when you filled that thing up. You’re giving that smaller cut as you go every year. And now he’s dumping it into a policy so that it can still be tax sheltered. It can grow at a modest rate of around that 4 to 5% compounded annually over time until death. And ultimately that death benefit that it’s creating for his family and for the legacy that he gets to leave is now going to be dramatically higher than if he just left those IRS PS as is and kind of rolled the dice that it wouldn’t be taxed so bad when we leave this place.

00:36:33:11 – 00:36:58:08
Kyle Pearce
So there’s so many strategies. The big takeaway for me, folks, is don’t just blindly follow the path. Look at your scenario. Have someone else. If you’d like me to do it, I’d be more than happy to. I do a lot of corporate wealth management planning, but I also work on the personal side. It’s not what I necessarily focus on 100% of the time, but for those who are business owners, I always help them on the personal side as well.

00:36:58:08 – 00:37:20:17
Kyle Pearce
So I’d be happy for any listeners who want to go down this rabbit hole with me. I’m available. You can reach out to me over at Canadian Wealth Secrets dot com forward slash discovery that is Canadian wealth secrets dot com forward slash discovery and we’ll hop on a quick call get your scenario and run you through some possibilities that might make sense for you and your family.

00:37:20:19 – 00:37:48:16
Jon Orr
Folks we want to thank you for listening to this episode of the Canning Well Secrets Podcast. We want to encourage you to share this episode with someone you think will find value in it. So if you were discussing our space with a colleague, a neighbor, a friend, and you think some of the insights you heard here today will benefit them, share this podcast with them, send them an email, send them a link, text it to them, airdrop the episode to them if you’re sitting next to them on your device.

00:37:48:16 – 00:38:04:06
Jon Orr
But please share the episode. This is how we kind of start changing our local areas, networks and financial planning. So do that. If you have listened to many episodes also in the past, we encourage you to hit that rating and review button and leave us a rating. Review.

00:38:04:08 – 00:38:39:00
Kyle Pearce
All right, my friends. Well, again, over out in the Canadian Well Secrets dot com website you can find more information about this particular episode transcripts and links to that social post which went kind of down a slightly different rabbit hole for our still more to learn over there and otherwise my friends Canadian Well secret seekers keep on seeking.

00:38:39:02 – 00:38:48:05
Jon Orr
Just a reminder of the content you heard here today is for informational purposes only, you should not construe any such information or other material as legal tax, investment, financial or other advice.

00:38:48:07 – 00:39:06:23
Kyle Pearce
John Law is a mortgage agent with Brix Mortgage License m23006803. Kyle Pierce is a licensed life and accident and sickness insurance agent with the wealth creation team at Pan Corp and Corporate Advisors, which includes Pan financial.

Canadian Wealth Secrets is an informative podcast that digs into the intricacies of building a robust portfolio, maximizing dividend returns, the nuances of real estate investment, and the complexities of business finance, while offering expert advice on wealth management, navigating capital gains tax, and understanding the role of financial institutions in personal finance.

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