How to Withdraw from your RRSP Tax Free.

Ricky is about to quit his Job at the age of 40 and FIRE! He has $250,000 in his RRSP and about $500,000 in a taxable account most of which is invested in Canadian dividend paying stocks. He also has $85,000 in his TFSA. How can he withdraw his RRSP balance without tax consequence?

We are going to borrow to invest. You could use real estate to borrow against in order to implement this strategy,  However, Ricky wants to travel the country in his RV and not have to worry about maintaining a home. So Ricky contacts his local bank and gets what’s called an Investment Secured Line of Credit for $400,000 at an interest rate of 4.5%  . With this type of loan, as soon as you pay off any of the credit you’ve used, it’s available again creating a consistent tax deductible loan.

Why does Ricky need to borrow to invest to withdraw from his RRSP?

He needs to create a “loss” on his tax return. So he uses the $400,000 investment loan from TD bank to purchase VUN.TO which has a combined conservative rate of return of 8.5%. The interest rate on the loan is 4.5% and the dividend on VUN.TO is ~1.5% netting a 3% “loss” on paper. This means Ricky  has a $12,000 “loss” every year to deduct on his taxes. Assuming Ricky has no earned income when he retires at 40, he can withdraw $24,000 a year from his RRSP tax free every year until the RRSP balance is Zero. Because the spread between the investment loan and expected return is 4% we have created a spread for risk, as well as a potential for at least another $12,000 a year income to be realized. 

The investment loan from TD has to be maintained throughout the borrow to invest strategy.  It can be maintained by using the dividends from VUN.TO, tax savings from RRSP withdraws and if necessary from Rickys other dividend/investment income from his taxable account.

So below is a graph of how long Ricky can withdraw $24,000 a year assuming he earns 8% from his RRSP, completely tax-free.

Screen Shot 2019-10-20 at 12.50.42 PM

Ricky will be 62 years old when his RRSP runs out. However, after the 22 years, he now has accumulated an additional $423,619 on the extra earnings from the difference of his investment loan and investment income from VUN.TO. This accumulated amount is taxed very favourably at the capital gains rate. By borrowing to invest Ricky has saved approximately $184,000 (total RRSP accumulated room from contributions and interest = $526,598.00 over 22years x 35% tax rate= $184,000) in taxes from his RRSP withdraws and has a net balance of $423,619 in his taxable borrowed holdings account at the end of the 22 years. That’s over $600,000 for a couple hours of work! That’s just insane to think about, Jeff Bezos the CEO of Amazon probably doesn’t even make that kind of hourly wage. Debt is like gas, use it responsibly to accelerate FIRE.

Happy Sunday

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