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201. How to Melt Down Your RRSP: Case Study · Wealth On Main Street

• 0:00
  Speaker A: You are listening to the wealth without Bay street podcast, a canadian guide to building dependable wealth. Join your hosts, Richard Canfield and Jason Lowe, as they unlock the secrets to creating financial peace of mind in an uncertain world. Discover the strategies and mindsets to a financial future that you can bank on.
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• 0:38
  Speaker A: Well, RSP season's coming up. It's time to melt down the RSP. That's not something that you hear very often. It's time for RSP season and we want to melt it down. Well, what do we want to do? Do we want to put more in or do we want to get some out? My opinion, you probably want to get it out. So today we're going to talk about how people strategically go through that process of melting down an RSP, where they exit the capital from the RSP to be able to use it again in their life in some way. I'm joined again with Henry Wong here, and we're going to have a fun conversation. We're going to look at an example of a case study of someone going through that process, and Henry is going to navigate some of the ins and outs of why a meltdown makes sense and how you can look at that strategically, given your own circumstances. So this is a popular topic. A lot of our clients ask about how they might go about exiting money from their RSP. And I think a lot of that goes to Nelson's book, Henry. It goes to page 29, Willie Sutton's law. And Nelson says that the government isn't capable of producing anything. It gets all of its sustenance from the productive element of society. Government is a parasite and lives off the productive taxpayers, the host. It is self evident that if the parasite takes all the produce of the host, then both parties die. So he gets into the idea of onerous taxation, and ultimately, if we're taxed enough, well, they have to stop doing that at some point, otherwise they won't be able to continue taking off that productive host. And so the tax qualified plan mechanism was invented years ago. And ergo, we find this RSP model that everyone in Canada is losing their brains about because they want to have one. And there's tons of information out there about it, of course, but we're going to look at it from a different set of eyeballs.
• 2:27
  Speaker C: Yeah, definitely. I mean, there's a few parts that I'm going to highlight in terms of our conversation today is just on a general standpoint, there's a lot of information that I'll go through and I'll share a chart, but one of the main things that I also want to dive into is this is the most common question that people will ask related to how do I get money out of an RRSP in the most tax efficient way? And I think it begs the question that really starts with, should I put money into an RSP that we can't always answer for everyone. We're also not here to promote any fact of how to get it out or anything like that. I just wanted to use an example on some of the client conversations that I have, specifically a specific client of mine in terms of this process that we go through relating to using, practicing the process of banking to help minimize the impact of situations of taxes recovering it. And I'm not going to try to sensationalize it even though I can, but I'm not in terms of this conversation. So let me just, I guess, dive into talking about. Let's just start with an information standpoint. So I'm just going to share my screen. Now. When it comes to an RSP, most people will hear the most common set of information. And what I am just putting together is how the flow of information is usually provided and also emphasized on. And what I want to first start with is laying out there's kind of two components with it. There's the user, let's say myself as a Canadian who's registered and set up an RSP, and then there's times and stages to it. And this will make a little bit more sense as I start showing a bit more of the visual diagram. There's the accumulation stage, then there's the portfolio value, then there's the withdrawal, and then there's the end stage. Now, when it comes to things like RSP and everything like that, as it comes on to the end of the year, at the end of the year, you have about 60 days from the end of the year to fund and put your RSP. So you'll hear a lot of campaigns and informations from said deposit receiving institutions that cooperate with the government and their RSP for accumulation. And then the other selling feature of that accumulation, once you bring that money in, they'll talk about, oh, there's these wonderful tax benefits related to the portfolio value that when it increases, it's not taxed in your hands as it comes into it, but when it comes to the quantity of information that is ever talked about. There's very little information focused on that withdrawal component. How do you get the money out? And so now it's left into the Canadian's hands to figure out or work with a professional, figure out how to get that money out. And then, of course, if that's also a little bit of information, then there's the end stage. What happens to an RSP based on very specific events at the end stage? End stage could be something as simple as you decide to cut ties and leave Canada that will trigger end stage. There's also uncontrollable end stage events, like when you pass away. What happens when you pass away? So this is kind of just setting the stage in terms of the flow of capital as it goes through this RRSP journey. Now, if we kind of start in that accumulation stage, you come into capital. And the way that you come into capital is through earned income. And earned income is defined as if you work as a t four, that is earned income. Just to keep things really simple. T four income creates contribution room that goes into the RSP. And if you're told to put that in, how that impacts is the rules that are set up in the RSP is 18% of that. Sorry, there's two rules to it. It's either 18% of your earned income or the maximum of 30,780. Now, even if we look at it from this frame of reference on the amount of money that goes deposited into an RSP, I find it very counterintuitive that if you need to put more money into a retirement program that was designed for your fulfillment for retirement, I find it a little bit unusual that you're restricted on that. That's the first thing that I'm actually going to first point out there. And the other part is to talk about the tax environment or the impact on it. People think it's saving taxes. That's not true. You're taking your capital from earned income. You're crossing the toll road, which include some gate that was just open for you. It's like, please bring us your capital now. It's in the jurisdiction of the government and the bank. And in that standpoint, the tax deferral. At some point, when you need to get that money out, which I'll talk about in the withdrawal, the gate is closed. And how are you going to bring it back out of? How are you going to get the capital to cross that toll bridge that was giving there? So at some point, taxes need to be paid. So sometimes people who don't look into the understanding of these mechanics. They'll look at the money going in. They get a check from the government as a refund, or they even label it as a refund. It's not actually a refund. It's a temporary incentive to get that money in.
• 7:44
  Speaker A: I think the important piece there, Henry, is the way that we are marketed to. And so the bulk of society says, oh, I get a refund or I get a tax break. And you use certain language around the perception of what happens and that know propagates out into the marketplace. And that's what people think when they put money in the RSP, oh, I'm going to save on tax, I'm going to lower my tax. And they look at the initial aspect, but they're not actually using the right language. Tax deferral is the right language. Deferral means you haven't gotten out of paying any tax. You've just chosen to pay the tax at a later date, at some future unknown event that either you do or don't control at a tax rate that you most definitely don't control. So again, just to reiterate for our listeners, the language utilized in both the marketing and the promotion of these types of vehicles can both hinder you and help you, depending on how you're interpreting that language as you make these decisions. So just get really clear. Nelson Nash used to say how we classify things matters, and if we classify them by their major characteristics, then you can understand what's going on. So the important word here is tax deferral. It's not a tax break and it's not tax savings. You might be able to achieve those, but many Canadians are finding out that they do not exactly, especially when the.
• 9:18
  Speaker C: RSP program has now been over 60 years old. And here we have actually really good hindsight data where in how information is even shared on putting money into an RSP or a program before you put your money into something just as simple as that. When you're putting your capital into something, what are the downstream trickle effects beyond, or what are the side effects? Or what are the things that you are not seeing? And so this is part of what we're going to cover today, just again, just to bring and shape the RSP's mechanics into light. So the second stage of that process is money has gone into the RSP. Now it goes obviously in the form of cash, which you then, when you go into, depending on what institution you open it with, you are also limited to a set of products that are offered by those by the institution. For example, if you had a business and you wanted to invest in your business, that you had an ability to generate a 30% rate of return. You are not able to do that because you're restricted in using your RSP to buy things to do that. So I think that's also a little bit of a point that I wanted to highlight that is not really clear in the long set of rules that are listed in the Income Tax act for someone to interpret when it's written in legalese. But it's important to capture that you already have a restriction on what you can use the money for. Now, it goes into the portfolio, and whatever product you use it for, you're going to get exposure to market gains or market losses or interest income. Now, all of that, people understand it as just money going up or money going down. But I want to talk about a few things related to the tax environment to it. So the most purported comment that will get shared is your money gets to grow in your RRsp tax free. But there are other important components that are unseen, which I will highlight. One very specific example of it is surrender tax advantages. If you took the same money and you put it into a property or like property, when I say some form of an asset that when you sell it gets triggers what's called capital gain, capital gain attracts 50% on that gain. So if you have a property that you have purchased for 60,000 and you've sold it for 100,000, that gain is 40,000, where 20,000 of that is tax exempt, and then 20,000 of that is taxable as capital gain, which then gets included into your marginal income. But if you receive capital gain in the stock or whatever you did in that RRSP, and you receive that same 60,000 gain to 100,000, if and when you get to that withdrawal stage, I'll talk about you have given up that favorable tax advantage, and that's something you actually don't get to see.
• 12:18
  Speaker A: Yeah, I want to reiterate that. So I think sometimes there's a confusion about the capital gains, just in that we say it's 50% is taxable. People hear 50% in a tax and their brain tends to freeze up and lock in motion to some degree. The advantage of a capital gain situation is that you might have a very large gain, 50% of that gain is tax free, and 50% of that gain is then taxable as income, which means it doesn't mean you're paying 50% tax, it means you have to add that portion, 50% of that portion into taxable income in that same calendar year. Whereas in the RSP, any gains of any kind of any type are taxed as income, 100% of it is taxed as income at some future point, which is where you're leading to. So the tax treatment of any growth inside of the RSP program is vastly different than other potential avenues that you can take with non registered money. Plus, in the non registered money category, there is not the same level of restrictions. Not that there's a lot, but there are restrictions on what you get to choose as a consumer to put the money to work in. What are those market options that exist that fit under the governmental banner? The bullet point list of here are the acceptable places that you can choose to allocate your money citizen, basically the restrictions that you indicated. Henry.
• 13:49
  Speaker C: Thanks, Richard, that was awesome. Now, the part that I just wanted to highlight again is this is the emphasis of information that people know, and I just wanted to highlight the facts of information that is probably not clearly presented for people just on these two stages. Again, this is very clear in terms of money coming in. The purported argument is you don't get taxed on that money that grows into the value. But I'm just kind of giving an alternative perspective given my just time and experience on seeing these type of things. Now, this is the segments that are not emphasized on which is stage three and stage four, which is withdrawal and end stage. Again, the first thing is take advantage of the deduction or the savings that you can have today, which is really just a deferral. And then I'll let you figure out the withdrawal and the end stage. So let's kind of highlight a few points related to the withdrawal or the end stage. Now, first of all, the determination on how to properly wind and get money out of the RSP is usually left into the consumer to figure that out. And then they're going to find some professional, tax professional or financial professional, anything along those lines to help them with that plan. And again, that's helpful, I guess. Right? I just wanted to make sure that. But the onus is on the individual to figure out how to get that out. And the part that I want to highlight specifically, and we'll dive into specific examples around this, is when money comes out of that jurisdiction, into the hands of the consumer going through the tolls of tax that has gone through. Let's remember that if you built your portfolio of an RSP in the form of a value of capital gains, and if that was exclusively all that your portfolio has gained on. When you eventually need to withdraw all of that out, you're going to attract the rules related to normal income, so you don't get that 50%, even though you built it on 50% taxable advantages that would have happened outside. So everything gets converged into the rules of normal income, which, in case people don't know, is the highest form of rules in terms of taxation impacts on that source of income.
• 16:05
  Speaker A: Yeah. So, like, as an example, if you weren't in the RSP and you were generating interest income, like on a GIC, let's say, or a CD for our american friends, 100% of the interest earnings is taxable as normal income. When the RSP, it doesn't matter what the format of the investment is, 100% of any earnings is taxed as normal income. So at withdrawal, every withdrawal has to be, you're going to get basically a t form that says, here's a withdrawal amount that you have to report as.
• 16:33
  Speaker C: Income, and then you have to provide it to the professional to let them know how much it is. And I'm not even going to go into the specific nuance of when you withdraw money out of the RRSP immediately, it is 30% of that money is withdrawn, depending on the amount that you withdraw. There's a certain scale to it, but if you draw more than 15,000, and again, for the canadian folks that are not in Quebec, but there's immediately withholding of, let's say, 30% of it, and then when you file your taxes at tax time, receiving that tax form, that t slip for April, then they are going to add, in context of your current income that you've earned, which we'll dive into today, too, on top of the money that you withdraw. And then they'll reconcile whether you overpaid or underpaid on that withdrawal.
• 17:26
  Speaker A: Yeah. And again, taking one more stab at, looking at, from another vantage point, let's say you withdrew $100,000 from an RSP and it was January 1. Well, they're going to withhold 30% because you're over the limit, which means $30,000 is going to get basically sent over to some prepaid tax slush fund, and you are only going to receive 70,000 to go about the year's business for that year. But when you go to file your tax return now, at December 31, you're reporting the entire 100,000 as income earned in that calendar year, the 30,000 that came off the top, or the withholding tax. Sometimes people think of it as a penalty. I mean, it does feel penalizing that is true. So how it feels is probably not far off of what it is, but it's not effectively an actual penalty. It's not like an additional fee or an additional charge. It's really a prepayment of tax that was owed long ago when you put the money in years before. So it's just the government's way of saying, oh, money went in, we need to settle up on that money and make sure we take our pound of flesh as it comes out. And then we're going to ask for an additional pound of flesh once we look at the final tax return.
• 18:47
  Speaker C: Yeah. So the settlement comes when the quote unquote settlement comes when you file your tax return. And the example that I'm going to use is actually 100,000. So on 100,000 that you withdraw from the institution immediately on that withdrawal, they'll take 30,000 from it. If we assume you receive no additional income, your actual taxes will actually approximate around 25 26,000, which we'll see again in the numbers that I share with you. So then when you settle it in April of the next following year, that extra 4000 will be sent to you as a check. And it sounds great that you received an extra check, but that should have been given to you up front on that withdrawal. But that's not how it works, right.
• 19:27
  Speaker A: If you took it out on January 1 of the calendar year, you basically lose 15 months of potential utilization of that $4,000 refund that you get.
• 19:36
  Speaker C: Or I would look at as I gave the government $4,000 of my money tax. Interest free interest.
• 19:43
  Speaker A: Yeah. You gave them an interest free loan for approximately 15 months. That's true.
• 19:49
  Speaker C: Now that's the first kind of nuance of the mechanics of the dynamics that I wanted to just clarify. The second part is once you draw income and if you're in the stage that everybody claims that when you get older and you're retiring, that you want to withdraw money out. And now the question is the tax brackets and the government programs or entitlements that are set up for that, that are income penalizing. So things around like oas or guaranteed income supplement, I'm not going to go into the details of what it takes to qualify for them. But if your income is too high, like for old age security, if you hit, let's say, $90,000, again, just the rough, that's kind of the beginning of that threshold, then the government will start decreasing the amount of money that they would be paying you. Because you are earning too much income. And on that standpoint, that, to me, even though it's not called a tax, you're receiving less money. And that is deceptive in the standpoint of if we're looking at the sole variable of the taxes you'll pay, yeah, you'll pay probably maybe less taxes. But if you were entitled to those benefits, and now you're getting those benefits clawed back, which ultimately means if we go down to the fundamental detail of the amount of money that's going to be resting in your hand, you can call it a tax, you can call it whatever you want, but it's less money that's going to be coming in your hand because you've triggered the government's clawback system.
• 21:22
  Speaker B: Become your own banker and take back control over your financial life. Hey, is this even possible? You may be asking, can I even do this? Well, you better believe it. In fact, it's easy to get going. So easy that we put together a free report. Seven simple steps to becoming your own banker. Download it right now. Go to sevensteps ca. That's seven steps ca. Now let's get back to the episode.
• 21:52
  Speaker A: So being mindful of this withdrawal phase is very important. And when you're doing it relative to different stages of life, is the takeaway. And if you're in the process of receiving government benefits at a later statistical retirement stage, as Kane's like to think about, you could be creating unnecessary impacts. And you might not even know that they're there if you haven't done the research yet. So, understanding that clawback situation, we have other videos in regards to, you know, the end result is the RSP is income. So income impacts other benefits, I think is the summary. Right, Henry?
• 22:29
  Speaker C: That's a great takeaway. Now, the last one is just the end stage. And people at the beginning at their financial journey. Let's just use an example. You're in your twenty s or so. The last thing you're going to think about is the end stage of an RRSP. And actually an RSP does have an end stage. At age 71, there is a forced decision that you need to make, and there's usually three of them. You either collapse it and take it all in income today, which most people, of course, will know not to do that you can roll it into a riff which have its own second attributes to it, which includes a forced minimum that you must do to get money out of it. And then there's another one called an annuity. Not the purpose of our discussion today, but I just wanted to highlight, there's not a lot of information in terms of shared. When you enter into these type of arrangements with the government sponsored programs and the bank institutional programs, I think it's important to be very mindful of what that roadmap entails once you enter into that. And then the last one is deemed disposition. And that could happen either by you cutting ties with Canada, let's say, surrendering your citizenship. Even though you haven't sold or withdrawn money out of your RSP, you've already decided to cut ties and they will consider it sold. And that's going to get included in your income when you initiate that triggering event. And the other one is also death, which I'll kind of tie into when we talk about. So the main part I now want to talk about is actually just using a client example again. I'm going to protect his privacy and confidentiality with it. And some of the information that I've shared is a little bit more nuanced. And of course, everyone's situation is very different and unique. But I think when I walk through someone's example, whether you relate to it or not, I think it's just nice to see how it can work when we talk about implementing the process of banking and practicing it while using it with the objective to, I'll just say, reclaim your capital out of the RSP in the form of a meltdown. I'm just going to introduce himself. His name is Peter, and just for everyone to share a little bit of details. And he is a successful business owner. And before we talked, and part of our conversation always includes other things, his children, and also even actually tax planning advice. I don't practice in taxes, but that doesn't remove the fact that I have built a career on experience around that. And some of those conversations include helping him keep more of his money in for himself. And that included changing it to dividends in the future. But I'm just using it for everyone to know. It's around salary. And he loves IBC. He's already implemented the process. He already understands infinite banking and how it works for him personally, corporately. But this was just another way for him to actually capture more control of his capital. And at the moment he has 300,000 in his RRSP. And now how this conversation actually came up came from the frame of mind that he has had an RSP for a very long time. He's actually 50 years old, and he had entrusted a financial advisor who recommended him put his money into a portfolio, and he was looking at his portfolio and in his portfolio, his values were going down. And of course, if we kind of look at the financial markets, they're a little bit sideways and doing what they're doing. But in my opinion, given high interest rates, his value shouldn't be going down. If his portfolio was again reorganized in the environment that it is, he should at least be getting 5%, at least for interest or any other product that there is. So that already triggered a reason for us to have, again, would trigger some opportunity for him to think about thinking things differently. And that's where our relationship open, was allowed to have that type of conversation.
• 26:44
  Speaker A: And if he would rebalance the portfolio or was guided to do that, earning interest in the RSP would have been fine, versus if it was non registered. Well, earning interest on the non registered fund was also okay, but then it's 100% taxable income. Well, everything in the RSP is 100% taxable income, so it doesn't matter if it's interest earning or not. Essentially, yeah.
• 27:06
  Speaker C: And so now I want to first also share for everyone his context of his income earning level, which is $100,000. And I also want to clarify, when we go through these types of discussions, it's important to recognize his current situation and his context. So let's look at his current income level, which is $100,000 in the form of a salary, and how he gets taxed on that. So when he gets taxed on the $100,000 on his salary, at the top here, you'll see $100,000. And then the taxes he will pay is 26,000. Again, the key thing as the takeaway that we talked about is withholding tax when you withdraw is 30,000. Well, here's that example here. 26,000 is actual. Actually, even here is already approximated too, but nonetheless, it's approximated to be 26,000. So there's already a gap of 4000 that he's loaned to the government in the form of an interest free loan until he files his taxes to then reclaim that 4000 because he's overpaid his taxes from that standpoint, which he gets no interest for. So his net money that he gets after paying taxes, CPP and all that stuff is 73,653. Now the point I want to highlight first in terms of the mechanics of the discussion is average tax rate is 26.35%. How that is derived is basically the amount of taxes he pays divided by his income. This number is usually what people, if they have not looked into the details of how the mechanics of the tax bracket work, it's oversimplified by saying my average taxes is 26.35%. So that's all I have to worry about. And there's some truth to it, but there's also not a clear context of the picture. The next part of the context of the picture is I want to introduce this marginal tax rate. Again, people can use that term incorrectly, but the terminology on marginal tax rate and here for him is 33.89. What that means is if he earns any incremental income on top of the 100,000, that's the rate that it's going to attract. On a simplistic standpoint, there's actually different grades to it too, which we will go through the example and show. And again, I'm going to use a very simple example of 10,000 to show it. But in this specific case here, if he earns anything on top of his 100,000, it's not going to be attracting the 26.35 tax rate, it's going to attract the 33.89% tax rate.
• 29:38
  Speaker A: Yeah. Every dollar that you earn over and above the 100k equals an increasing amount of tax that disappears on every earned dollar. So you're working harder to keep less money.
• 29:51
  Speaker C: Yeah. When people say the canadian income tax system is a progressive tax system, it's progressive for the government, but it's penalizing for the citizen.
• 30:00
  Speaker A: Yeah, there you go. That makes sense.
• 30:02
  Speaker C: Let's walk through the example of the context of the income tax bracket that he's at $100,000 and again, his income that he's getting taxed at as an average rate of 26.35 because it's 26,000 divided by 100,000. So let's take a look at the impact of what happens if you had $10,000. So the $10,000 could come from any type of form. But now I'm also going to highlight the impact of if you were to withdraw it out of an RSP and what tax advantages were surrendered in this circumstance. So $10,000 is the number. If you've earned $10,000 on the left side here, you'll see earned outside the RSP, what the tax impact is on that $10,000 at his tax bracket. Sorry, at his income level of 100,000. And what would happen if all. It doesn't matter if he earned the 10,000 and now he wants to get it in his RSP and he wants to get it out of his RSP. What the impact on him from a tax standpoint, what that would look like. So let's just kind of.
• 31:03
  Speaker A: There's one more thing to that, too, Henry. Because even if he's taken out of the RSP, it might not be that he earned anything. It actually could be that the account value was down and he's just frustrated and he says, I just want to get my money out of this thing.
• 31:14
  Speaker C: Yes.
• 31:14
  Speaker A: So whether they've earned anything or not, it's literally just the withdrawal of the RSP period is going to initiate this taxable event.
• 31:22
  Speaker C: Yeah. That taxable event of 10,000, what that impact is. But let's just say in his RSP, he earned $10,000 to get that same $10,000 now, out of the RSP, just in isolation, he would pay taxes as normal income of 37 51. Now, on his capital gains, if he earned 10,000 with on top of his $100,000, the taxes he would pay is 17 nine. So this is an example of that surrendered tax advantage. And I'm using 10,000 to actually also illustrate the point that with his average tax rate of 26% and his marginal tax rate of 33%, notice how the income that he's going to get taxed on is 37 51 relative to the 10,000. That's 37.51%. There's nothing around 26%, nothing around the 33%, because he's triggering new levels that are happening on that progressive scale for the government, on the income. So that's 37.51%.
• 32:29
  Speaker A: Yeah. And the difference between those two numbers is a little over $2,000, which, in essence, is a 20% differential of the total amount he's taking out. It's a substantial difference.
• 32:43
  Speaker C: That's a very insightful point. That's a 20% difference, which is huge. Now, if we look at dividends eligible, and how you receive eligible dividends is if it's from a company that's paying the highest tax rates, and then they issued income to their shareholders.
• 33:00
  Speaker A: So eligible dividends, like a dividend paying bank stock or something, essentially. Or a utility company.
• 33:05
  Speaker C: Exactly. So dividends, if it was in the eligible form, outside of the RSP environment, would be 1927 again, if it was earned, because people can hold dividend paying stocks in an RSP. Now you want to withdraw that dividend that you got, 10,000. Well, it's going to still come back as paying taxes of 37 51, which is an eleven. Sorry. $1,600 difference, which is in. Richard, what you just shared, that's a 16% difference. Just to continue with it, ineligible dividends are the non high tax paying corporations that pay dividends, that's about 3000. So still lower than normal income. And then the only indifference is if it's coming from earned income on interest or passive forms of that nature, then it would be the same. So whether you had it in an RSP and you earned 10,000 in interest and then you would drew it out, the impact from a tax standpoint is exactly the same as if you were to earn it outside on the same income level that's being earned. Let's kind of talk about his options. I want to make sure it's clear for everyone what their options are. If we were to put into perspective his options, he has $100,000 in income and let's just assume again he's withdrawn it, ineligible dividends from his business. Because he has his own business, he has control on how he receives his source of income and he's chosen to receive it in the form of ineligible dividends. So I've kind of muddied the example with it's 15,000 and I'm just bringing it that down just to show the impact of it too. But if he were to withdraw it, one thing I want to highlight is his marginal tax rate is 43.41%. So even though he's getting taxed less personally in this form, any future income on top of that 100,000 is actually going to attract that marginal tax rate of 43.41%. So his first choice, again, people kind of intuitively know this, which is to withdraw. They won't withdraw it all at once because they kind of already know the system is very penalizing if too much income is declared at once. But let's walk through that impact. So it's very clearly understood. So with the $100,000 that is being paid in the form of income from dividends from his company, 15%. Now his RSP, a full 300,000 comes out of the RSP and that's going to get added to his total income, which makes it 400,000. So the 100,000 portion attracted the 15% from the ineligible rates. And then now the 300,000 attracts the normal income and that brings the total withdrawal to be, if we take a look at this, it was 15,000 before. And now if we look into the context of what is taxes, which is 167,000. Again, it was in dividends, which already excludes the CPP and EI. So this would be even higher or worse. But 167 five five two, where 50% of that or 152,000 relative to 300 which is more than 50%, because half of 50% is 150 goes to taxes. So I want to just make sure that circumstance of withdrawing it all is very clear because it is kind of like known that you don't do it. But I want to make sure people know why you don't do it.
• 36:25
  Speaker A: Yeah. In other words, you have a $300,000 RSP account, and if you collapsed it, which is your choice to do 52% of that in this example isn't yours, it's not your money. In other words, you're taking on all the risk in the marketplace to hopefully grow the canadian government's money and not yours. And they have a larger share of the money than you do. So you're taking on all the risk and dealing with all the stuff. But they're the ones that are going to end up with most of the money versus your family, who's probably the ones you want to end up with it, or you personally. Now, that's the nuclear situation where you're collapsing the account, which upon death, that does happen, unless it's a rollover to a spouse, which we're not going to get into today. But in other words, the moment the money enters the RSP, there is no way around the tax that must be payable. You're making a choice by putting it in that I'm going to forego tax today to pay an unknown tax in the future. I'm going to choose to gamble on the tax rates of tomorrow, that I'm going to be smarter than the system and I'm going to come out okay because everyone told me I'm going to make less money when I'm retiring. The whole premise of the concept is that you're going to make less money. How many times have you heard, I was talking to someone yesterday who says, well, I was told I would make less money when I retire. I'm like, how's that going to work with today's inflation numbers in Canada? Is that going to help you out? That's probably not going to work out very well for you. So if that is the whole purpose of the whole program and the goal is to make less money, well, do you want to retire on less money? If the answer is no, then automatically logic should tell you that this program might not be the right fit for you. I'm not here to say that Erasp is a bad program and that's not the case. But if your goal and your personal opinion of things is different than what the program is promoting, then you really need to reconsider the value of that program in your own life.
• 38:29
  Speaker C: What kind of vibration of message is being sent when you're going to retire with less money in your life, when you decide to retire, and so you're then going to pay less taxes already. That statement is already very counterintuitive.
• 38:46
  Speaker A: But they talk about it like it's a good thing. They say, oh, yeah, don't worry, you'll have less money in retirement. You won't need as like, I don't know, too many retirees I've talked to that feel like they don't need as much. But that's just me. Maybe I'm talking to the wrong people. I don't know.
• 39:00
  Speaker C: And you touched upon the fact of Peter has in this example, or anyone who owns rsps has no control over his best before date. So there's an unknown exposure of tax liability that exists until the actual event of death happens.
• 39:20
  Speaker A: Right. Well, now that we've seen what the nuclear option is, let's take a look at the meltdown strategy.
• 39:25
  Speaker C: Let's do that. Now, in terms of the meltdown strategy and the comments that I would dive into it, I think it's still important to caveat. The discussion was very particular to Peter, and Peter himself. And I can design the perfect plan, give the perfect vehicle. But if the driver does not know how to use the vehicle or take care of the vehicle and runs it off a cliff, the behavior of Peter or the driver is far more important than the plan that I can do. If he decides to drive it off a cliff, he will drive it off a cliff and will have all these unannounced consequences. And I can only introduce some concepts or strategies such as this. If he understands it. If he doesn't, then I'm not going to propose it to him. I mean, that's the reason why we have such a great relationship as being his coach and also him being a client, because he has a willingness to learn. And I'm not saying he's just listening to me blindly. Trust me. We have heated, good discussions on how I can help him get further. That is the central message of the context of our relationship and our conversations is how can I offer my value of skills, my years of experience, anything to help him get further in his journey of building wealth and keeping it more for him and his family. So the scenario I'm going to share with you is actually not exactly his scenario, too. I've actually made it worse. I've taken the example of if he were to take 300,000 of his RRSP. Now, he made the decision of an acceptable time frame of how at the pace he wants to get it out at. Could he get the whole out at the right point in time at once? Sure. But obviously with some common sense in my experience, I could not, without any moral reason, tell him not to do it because of the impact of it. But the question then is like finagling. Okay, should I have this tax bracket this or tax bracket this? Should I squeeze in 5% here, squeeze in 5% there? No, I just showed him a very simple example. Okay, look, Peter, if you want to draw out your RSP, what's the pace you want to do? He's like six years. Okay, if I do it in six years, then it's simple math. 300 divided by six is 50. Let's remove the tax consequences out of the equation and put 50%, because that's already the worst case scenario if you withdrew it all at once anyways, or 53%, but I'll still use 50%. So with 50%, then what he will actually have is 25,000 in his own hands. So let's kind of go through that really quickly. What that visual journey looks like. If you were to put take 50,000 out of his RSP, where he actually will retain only 25,000 of it. So he's 50 years old and he's taking out 50,000 at a time. And what we set up again to his goals is to build an additional branch in his system of policies. And that means he is funding a policy of 25,000 each year. So that funding, which is the blue color, will end by the end of those six years. Now again, Peter understands the importance of becoming your own banker and the importance of the actual insurance product with the interest of funding it to the end of time, to his capability that offers him. But in terms of what I'm going to share with you is just to isolate what it would look like impact of his decision that he's making today and the consequences of the future if he were not, what is he giving up in the future? Because people don't see that unseen force. Now, this purple line that's also shared on top is 25,000 related to the taxes on the 50,000 that he's paying. So 25 goes to taxes, 25 goes to funding the policy. So money going into the policy is 25,000 per year. But the amount of money that is getting drawn out of the RSP is 50,000 per year.
• 43:53
  Speaker A: And when he takes the 50,000 out, he's going to have that 30,000 withholding amount, which is a prepayment of some of that tax due at the end of the year. He'll have a little bit more available. But in your case, you're just summarizing it to, let's assume that the full tax amount is paid.
• 44:10
  Speaker C: Yeah. And with that full amount of tax. So there's obviously an opportunity in his favor, if he were to do it this way, is that the institution is going to withhold 30% of it. So 30% of it, but the other 20%, he can do something with it in that time. But I have not discussed that in this purpose. Again, these were micro strategies that we talked about in our conversation.
• 44:37
  Speaker A: Yeah, you're keeping it very simple, and I guess, for lack of better term, we'll call it a worst case kind of scenario. The reality is, if he takes 50,000 out, 15 grand is the 30% that's withheld by the institution. He'll have 35 to work with. In theory, if he was good and he was listening to your good coaching, he could augment the size of the policy a little bit. He might have an additional tax to pay at the end of the year, which he could utilize the policy to help him do, potentially. But for the purpose of our example here, I just want to reiterate that you're keeping it at the baseline level of assuming all the tax has already been paid.
• 45:14
  Speaker C: And the other point I just want to highlight in terms of just new listeners, is that when it comes to the policy, the policy is a properly designed whole life insurance, dividend paying whole life insurance policy. It's a financial instrument that we help engineer based on the client's circumstances. So it can be engineered to suit certain advantages that they want to do. So even if you just hear a whole life insurance policy, every whole life insurance policy, just like a vehicle, like a car, can be designed very differently. And that's the first thing, is the solution to this problem is not the policy, not the product. It's what you do with the product, and which is practicing the process of banking, which is what I, again, want to make sure that gets very clearly emphasized. And one of the attributes and how it gets designed is based on how he funds the policy. There's what's called a growing tax free death benefit from doing that. So he's taken the 50,000 out, 25,000, goes to the government again, kept very simple, said very simply. And then here's the first part that I wanted to highlight. That is the micro steps that get lost. In terms of implementing such a plan specific to him. Immediately, a tax free death benefit is created, which you can see on his death at 51, it's slightly less than 600,000. And then every continuing year that he funds the premium, that tax free death benefit keeps growing again, every time new 25,000 goes into it, there is a future tax free death benefit of money that the insurance company is going to pay him that is growing tax free, which is already more than his current RRSP value. This is one really important point that I want to compare the context of numbers to as it relates to an insurable contract that's tax free versus a government plan that is tax attracting of 300,000.
• 47:29
  Speaker A: Yeah, he had 300 grand that was fully taxable. He's taken 50 out. So he's only got 250 grand left in the RSP. But he's immediately created a tax free benefit for his family greater than $500,000 in the same transaction.
• 47:45
  Speaker C: Just in one simple step, one very simple step, convoluted and complicated by the systems that we live in, of withdrawing 50,000 and putting 25 into his policy. So here is that the yellow line that you see here is the impact of his tax liability related to that property or asset. I'll say of the RSP where there's now a diminishing tax liability obligation, because if he were to graduate, first of all, that death benefit is greater than that 500,000, which is far more. If he is not able to implement the full extent of this process that I'm sharing with him in the first year, and he unfortunately graduated, then there would be a tax bill of about 150,000 that he would have to pay. But because of how it was set up, his family has an extra 500,000 that will come in to pay that off, which still nets him further ahead. And each dwindling withdrawal that he goes through, that tax liability on the RSP starts decreasing. But notice how the death benefit is also increasing, countering that process. And this is how, after his plan of six years, that tax liability or the RSP account or the money that's in there becomes zero. But his RSP money, sorry, his death benefit tax free is significantly higher and it's almost approaching $800,000.
• 49:23
  Speaker A: So you had $300,000 of taxable money moved over a six year period of time, an ever increasing death benefit that started around five hundred k and is now almost 800k in the same time frame.
• 49:36
  Speaker C: Exactly. Now let's take a look at the element of time, because time is often ignored when it comes to the decisions you make with your capital today, you kind of lose sight of the trail or the journey of that money over time. So I wanted to paint the picture here. Where the blue again is the premiums funded 25,000, the cumulative funded. So blue is 25,002nd year is 50,003rd, year is 75, 4th year is 100, so on and so forth. So by the end of six years, it's 150,000 of money that has gone into the policy. And then orange is a number called cash value. And when we practice the process of banking, this cash value is a very important component in terms of practicing the process of banking for us. But I just wanted to highlight the fact that there is a cash value that is also accumulating not at the exact same pace to the premiums, but at some point at the six year mark, the cash value now has exceeded the amount of premiums that have gone in. Now, overlaid into this graph that I'm sharing here is the taxes paid to get that money out again. So 25 cumulatively, second year is 50, 75, 100, 125 and 50. So in this whole process of journey of getting the capital out of the RSP at the pace of six years, here are the context of that information with that capital, where all of the taxes were paid 150,000 until the end of time. All of the money that has gone in until the end of time of six years, that has completely captured the context of the money, of the situation we're talking about. We're not talking about one year, this is what happens. Oh, I put in 25,000. My cash value is x amount. What's my rate of return? We're not talking about rate of return, we're talking about the journey of his money over that extent of the plan. So we're giving the six year outlook of that plan. Now, one of the highlights that I want to emphasize is that he puts this money into an insurance policy which is a contractually guaranteed, financially guaranteed contract from the insurance company. Provided he follows with his responsibility of the contract, which is to fund the premiums. He does have the contractual authority to fund the maximum or the minimum. He also has a contractual authority. Again, he's in control of this to stop funding it, provided that it's been funded properly for a specific amount of duration. Again, the six years is the example that we kind of come up to, but everyone's situations and the contract designs and everything like that can be very different.
• 52:26
  Speaker A: Yeah. In other words, if the policy is strong enough, it in theory will keep itself going. That's not suggesting, that's the recommendation. You always want to continue funding premium. But in this case, we're trying to isolate that six year period of going from RSP to policy. And what's the summary of that? Assuming he didn't put anything in afterwards. Is that correct?
• 52:45
  Speaker C: That is absolutely correct.
• 52:47
  Speaker A: Even though he probably will, in our case, we're going to assume that he doesn't.
• 52:51
  Speaker C: Well, we gave him the choice and option and flexibility that he can put more money into his RRSP. Because as an example, even his RSP at age 71, if he wanted to put more money into it, he can't anymore.
• 53:08
  Speaker A: But policy, he'll be able to do that.
• 53:11
  Speaker C: Of course, nothing is preventing him to put more money into his policy except his own mindset. The only one that's holding him back is him. Now, the other part now I want to just highlight and recap again, is those cash values. Now, obviously the scale of the graph is different, but this is important that we're not talking about rate of return, we're talking about the journey of the money that has entered into the policy and he's decided to no longer fuel it anymore. And as he doesn't fuel anymore, there is a contractual guaranteed mechanism that are built into the contract where the insurance company, not Peter, has the responsibility to build the cash value. The insurance company has the obligation to build that. But that obligation is all dependent on what Peter does. So if Peter decides to stop funding it at six years, notice how what I've now shared with you is just truncated ten, five year, ten year marks of what that cash value is, with no more fuel of premium. And that's that lighter orange or yellow color which notice how by each 60, the cash value already exceeded the amount of taxes that he's paid in this 60 year journey. And now, over and over time, that cash value keeps growing and let's say at 70, it's close to 375, has exceeded 300, so on and so forth, all the way to age 100. That cash value has grown all the way to $997,000, which has matched his death benefit, which is just slightly less than a million dollars for him, putting in 150 at the beginning of this six year journey.
• 54:56
  Speaker A: One way of looking at that is he paid the tax in the RSP, he moved the remaining net money into premium. By the end of the 6th year, he had the equivalent value of what he put in, a greater amount even available in a cash asset. In a policy, he had a whack of death benefit protecting his family the whole time frame, which he didn't have before. Most likely, I mean, Peter's case, he did, because he's already been doing work with you specifically. But the average person wouldn't have this. And now if we shoot forward to age 100, the account value has turned into 997,000. Now, that looks to me like you got all of your capital back available to work with, that you put into the insurance contract for the utilization over the rest of your lifespan. Plus you got the equivalent, at a far greater equivalent of all the tax that you paid the canadian government available to work with over that time frame of rent. In fact, roughly by age 70, it almost peaks at that $300,000 level. So you basically have, assuming you stopped funding it, you didn't put any money in from year seven beyond. But within 20 years, you have not only all of your capital available, but also the tax portion that you paid has recovered itself effectively through the mechanism of the insurance just accumulating naturally.
• 56:22
  Speaker C: Yeah, and I could be a sensationalist marketer and share, oh, here's some wonderful thing that will get all your money and recover your taxes and all that stuff. That's not the intention of this. The intention of this is to teach the point that the product that is being used and the way the product was engineered with the right professional working on this is what is the success factor in terms of doing all of this. And it's not just some marketing concept that is just happening that way. And when we talk about practicing the process of banking in this example, now, the capital that has moved, transferred from the RSP to his family banking system. He's not now restricted. Sorry. He now has the ability actually to invest money into his company, which he knows he can get a 30% return on his inventory. He can use the money to fund it into his corporation. Use his money corporation to fund working capital, which is inventory, because he's in the manufacturing business to then sell that, because he gets a great margin on top of that. He can get 30% on that. That's a great 30% rate of return that he's also in control because it's his business versus the limitation of the products that he has to buy of an ETF, a mutual fund, a stock bond, whatever, you name it, that is exposed to this fluctuation of a roller coaster, of a market that he doesn't control.
• 57:55
  Speaker A: Are you telling me that this graph that you're showing Henry doesn't factor in the way that he can maneuver capital and the value of the control he has by being able to determine what.
• 58:05
  Speaker C: To do with it all.
• 58:07
  Speaker A: I'll say, you can't show that on every spreadsheet that we put together. That's amazing.
• 58:11
  Speaker C: I can't even show that on those illustrations, on those insurance policies. These are numbers that you just don't see. But what it does do, that you cannot quantify is the driver's ability to access additional control. With that additional control, what they can do with it. And that is something you cannot simply show on a spreadsheet or whatever numbers people love to look at.
• 58:36
  Speaker A: What's interesting that is just thinking about, very simplistically, his ability to generate, just on his own business practice, something he's doing presently with the margin of selling inventory and having lift on that product, et cetera, that 30%. Well, if the same 25 grand went into the company to go do that, that's about $7,500 a year. Well, over the span of these years. If he just did that on the initial $25,000, he could probably actually rotate it several times, I'm assuming, but he would have an extra $45 to $50,000 by the time he got to year seven. He could pay two more premiums.
• 59:13
  Speaker C: And you know where he'll get all these ideas. Richard, you got it. So, the other part that I just wanted to drive home in terms of this concept, in terms of the strategy that I shared using this concept and everything in the context that we're talking about, is why this can be so confidently talked about is, again, the insurance product has financial guarantees contractually built in terms of the arrangement with the insurance company, that the cash value, when funded properly, will match the death benefit by age 100, when money has gone into the deposit in the form of a deposit to an RRSP, which is a government sponsored program partnered with a commercial bank as an example, what financial guarantees do you get if you put in $150,000 with them?
• 1:00:08
  Speaker A: A big old pile of nothing.
• 1:00:09
  Speaker C: Or we can listen to certain other financial entertainers that think that the financial markets, over time, will give you 12% rate of return and you'll suddenly be a multimillionaire from that belief or hope that 12% will happen.
• 1:00:28
  Speaker A: Well, having done this now for, I think I'm going to be stepping into my 16th year soon and meeting with thousands of clients and doing presentations to, I don't even know how many Canadians, workshops and events I have not yet met. One of those people who has magically achieved a 12% rate of return on those mutual fund market products that I keep hearing about in a consistent basis. I've had people who've hit or exceeded those targets in a given year, but not a single one has been able to show me how. Look at my history of earning a consistent, approximated average 12% rate of return on my investment. Since I started my investing career, not one has come forward. I'm sure they exist. I haven't met them.
• 1:01:15
  Speaker C: I'll just have to say there's not even clarity on. Is it post tax or pretax?
• 1:01:21
  Speaker A: Yeah, but, honey, it's 12% of my RSP. Doesn't that mean I get all that money? Oh, wait, right. I have to pay 100% on the growth of that when I take it out. Got it. Okay.
• 1:01:34
  Speaker C: At a higher tax attracting rule. Now, just to kind of summarize on Peter's 300,000 rsp plan, remember, it was 50,000 that he was withdrawn each year at a length of time, six years. So he's paid 25,000 in tax. And the premiums that he's funded is 25,000. So 50 money, in this whole equation, we're talking about 50 per year. 25 went one way, 25 went another way. And during this time, the money withdrawn after that six year plan was 300,050 went to go pay the liability that the government has set up rules to pay them for. Fine. And then premiums funded now in a different location. Relocating that money was 150,000. But if we look at the cash value at age 100, maybe Peter doesn't live to age 100. But I'm just showing you from the contractual performance obligation that is required from the insurance company under that specific estimated scenario. It's 997,003. Three, four and a death benefit. 997334. If we look at the amount of money that went in, 150,000 compared to the projected value with reasonably strong probability criteria of by age 100, because it's contractual to get to 997334, I think that more than covers his $150,000 tax bill.
• 1:03:05
  Speaker A: Yeah. And I'll take that one step further for, again, if anyone's new here, the cash value must equal the death benefit by age 100 in Canada, 121 in the United States. And that is a function of the basis of the whole life contract. Now, in this example, sometimes we'll say, well, is it the cash value plus the death benefit? No, because the cash bill and death benefit are effectively the same thing. They're just shown at two different points in time. So the cash value is growing to equal the death benefit because it eventually will be utilized for the purpose of paying said death benefit. So just to highlight that real quickly on the example here, to make sure everyone's clear on that. But either way, it looks like a smoking example to me for a rationale to consider slowly and strategically melting down on RSP if that's what someone desires to do, so you can increase your level of control. In Peter's example, the level of control is being able to access money to put back into his business to achieve vastly superior controllable growth that can help augment and fund his other retirement objectives outside of a fully taxable environment where 100% is taxed as income. To instead be in an environment where growth is growing at a tax exempt level and it's wrapped around a beautiful tax free layer of protection. So that, heaven forbid, if Peter gets taken out of the game early, his family and his kids are in a far better situation than they were before they met you, Henry.
• 1:04:48
  Speaker C: Well, it'll be also meeting us.
• 1:04:52
  Speaker A: Well, there you go. That's a summary of the meltdown model. Again, everyone's situation is different. Take heed to the importance of working with a good tax professional, but hopefully everyone enjoyed this video. Amazing content. Thank you so much Henry. You'll notice that bam. There's another video that just popped up right below you right there. Go ahead and take a look because probability is that's YouTube saying you need to watch this. This is good stuff. So go ahead and continue your journey of learning. Appreciate it.
• 1:05:20
  Speaker C: Awesome.
• 1:05:21
  Speaker B: Thanks for listening to the wealth without Bay street podcast where your wealth matters. Be sure to check out our social media channels for more great content. Hit subscribe on your favorite podcast player and be sure to rate the show. We definitely appreciate it. And don't forget to share this episode with someone you care about.
• 1:05:37
  Speaker A: Join us on the next episode where.
• 1:05:38
  Speaker B: We continue to uncover the financial tools, strategies, and the mindset that maximize your wealth.