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School
Mount Royal University *
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Course
LSCM 3403
Subject
Finance
Date
Feb 20, 2024
Type
docx
Pages
2
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Intro:
-
This article focuses primarily on a retired woman who needs to figure out what she needs to do with a potential sum of $50 million. -
Marianna is 50, single without dependants, and lives with her parents in a home they jointly own. She retired at 46, and she has a self-directed RRSP valued at $1.5 million.
-
Her RRSP consists of dividend paying Canadian equities, with the majority of her portfolio being in the banking and energy sectors. Mariana’s plan generates annual dividends of almost 79000.
Problem:
-
2 years ago, she started withdrawing funds in order to avoid a large tax bill down the road, and is
using the withdrawn funds to pay her yearly tax bill. Though this is the case, she’s unsure if this is
the right approach.
Facts
:
-
She has an additional $2.5 million, including 113k in a TFSA, which is full invested in the same dividend paying Canadian stocks. Her portfolio generates an annual revenue of $155k, which she
reinvests each year.
-
Her taxable income is $329k, which includes $155k in dividends, $79k in RRSP withdrawals, and $36k in income from a part time music teaching job. She plans to never fully retire. Marianna’s situation
-
Marianna wants to know if she’s making the right decision to draw from her RRSP now, or if she should let the plan grow until she’s required to draw funds at age 72, at which point it will be worth $9m.
-
At the same time, letting it grow can lead to a substantial tax bill in the future. -
Lastly, she also wonders if she should be drawing more money than she currently is (additional 40k per year), so that her tax bill will slowly decrease over the next 40 years. She’d also like to know when to collect CPP and OAS payments to ensure that she pays minimum tax.
Expert #1’s solution (Financial Planner and Portfolio Manager, who heads a Wealth Management Firm)
-
The head of a wealth management firm agrees with her decision to start drawing funds from her
RRSP now, rather than waiting till she is 72 to transition into a Registered Retirement Income fund. -
Regardless of her decision, Marianna has more than enough money to comfortably live out the next 40+ years. She can currently afford to spend $270k/yr after tax.
-
If she continues on her current savings path, she’ll amass $50 million at age 92. -
Consulting with a financial planner with allow her to get the amount she can withdraw yearly, including her RRSP dividends, so that her RRSP is near $0 at age 95. This will allow her to avoid a large tax bill on the account, and she can enjoy her savings sooner.
-
Any surplus cash from this strategy can be contributed to her TFSA and then readded to her non-
RRSP portfolio. -
It’s also suggested that she should lessen the overall risk of her portfolio, by diversifying outside of Canadian equities. She can potentially look into bond ETF’s, as they’re less volatile, and pay regular income.
Expert #2’s solution (Fee-for-Service Financial Planner and Tax Accountant)
-
He sees no tax advantage in withdrawing from RRSP income now, rather than later, as Marianna is already in the highest tax bracket.
-
As she’s paying 54% tax on the $79k she withdraws to pay her income taxes, she’s effectively prepaying the tax she wants to avoid paying years from now. -
Rempel suggests investing more tax efficiently in global or U.S. equities focused on deferred capital gains, as her taxable income would be 60k/yr instead of 329k today. This would all be taxed at the lowest tax rate, and reduce her tax bill to approx. 13k/yr. -
It was further suggested that she sells non-RRSP investments and to not touch her RRSP until she’s 64. This will allow her to withdraw as much as she can with a taxable income of below 100k, which is approx. 40k/yr.
The portfolio manager suggests that the CPP payment will make little difference, and that the OAS will be
partially or even completely clawed back. The tac accountant suggests starting the CPP at 60, and the OAS at 65. Our outlook:
-
We agree with expert #1. Based on the evidence, he is a more credible source, and has more experience in this matter. -
It makes little to no sense for Marianna to significantly reduce her yearly income. In short, utilizing his suggestions will allow for a reduction in her tax bill, and an increase in her yearly spending.
-
Though Marianna is living well below her means, she can comfortably afford to spend more, and see minimal differences in her tax bills. Lastly, any surplus she’s left over can still be leveraged to be tax-free, or taxed less, as she can reinvest into her TFSA, and non-RRSP investments. Though she’ll still have a tax bill in the future, it won’t be nearly the size of the current one, and she will be able to live far more comfortably.
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