How to Transfer an RRSP to a TFSA without Tax Consequences

hi there and thank you so much for tuning in to this video today and also many of you have been anxiously waiting for us to make this presentation and unfortunately sickness kind of came through our household and I wasn't able to I'd lost my voice and then its stomach flu I guess that's the benefits of having three young ones going to school for the first time as they bring all the wonderful germs and and disease back to the home for us so it it sure wiped out our household but anyways we're excited to show this we think this is one of the most amazing strategies that we implement for our clients the benefits are without a doubt some of the most impactful for all of our clients as they face their retirement and and enter into their retirement income years so for those of you who don't know me I'm Todd McClay I'm an advisor with Preston's Private Wealth and I'm also the senior investment advisor with precedents capital and gravitas securities so today what we're going to talk about is a strategy that we implement for a client to precedence Private Wealth that moves registered assets from RRSPs liras and pensions into tax-free savings accounts in a tax neutral manner so why would anybody want to do this well first of all the government owns half of your RSP and pension which means if you were to withdraw all the assets at once you would pay north of 50% tax on that now obviously there's tax management strategies where we try and reduce that income as much as we can in retirement but the tax burden nonetheless is still there so for a client that has a million dollars inside their pensions in our RSP they actually are gonna have to pay upwards of 40 some percent just to get the income out of that RSP so their after-tax retirement is not a million dollars it's actually an after-tax factor so if you take a tax bracket of say an average of thirty five percent well then obviously six hundred and fifty thousand dollars is that net income that can come out of that million dollar RSP super substantial and up until recently there haven't really been many strategies around this to actually address this fact and with a little bit of creativity and using what CRA has to offer we're able to implement this strategy which has max benefit and amazing of risk/reward so let's get into exactly how this works so for this example we're gonna take a client who is age 56 they have $500,000 in an RRSP they have $100,000 in a tax-free savings account they're gonna continue to make eleven thousand dollars of annual tax free savings account contributions so they're gonna maximize those contributions every year we're gonna assume a 6% projected annual growth on the non registered investment we're gonna use a 35% marginal tax rate obviously this will vary depending on the amount of income you're earning in retirement and we're gonna run this strategy all the way to age 90 what the TFS say maximize our strategy or what this strategy entails is it utilizes three different things one is just the simple withdrawal of money out of a RIF so that's not any different than once you hit retirement you convert your RSP or your lehrer your pension into a RIF or a lift where you're actually drawing income the second is we actually set up a personal mortgage so a non arms-length mortgage on your own property that you actually own and that will go will cover exactly what rules CRA what the exact rule is that CRA allows us to do that later on in the video and then the third thing is we borrow to invest and we'll also discuss the exact criteria that CRA requires in order for us to perform that so by combining these three like siloed very well-known and very well-documented wealth management strategies we're able to create a system that will be able to transfer assets from otherwise taxable registered accounts to non-taxable and tax deferred growth inside a tax-free savings account so for those that are really unsure of exactly what the difference is between an RSP entity of a sale I'll explain so an RRSP when you make your initial contributions you receive an upfront tax deduction eligible requirement is based on the amount of room that you have so if you make a $10,000 contribution to your RSP you actually get a $10,000 tax deduction against your income which can result in a tax refund if you prepaid that tax obviously off your payroll or out of your business etc so for the most part let's say at a 35 percent tax bracket you would get $3,500 back in income tax for that $10,000 contribution which is very very beneficial that's one of the major reasons why clients continue to use our SPS to fund their retirement now money that grows inside an RSP actually grows tax-deferred which means you don't have to pay any tax on any of the compounding growth as your investments perform they deliver interest capital gains dividends etc what you will not have to do is claim that as income tax or claim that as income and have tax on that income every single year no on the contrary a tax-free savings account is an investment account where you make a deposit into the account again based on qualification of TFSA room and instead of getting the tax sort of the tax deduction upfront you actually just get the the benefit of tax deferred growth of your investments over a prescribed amount of time so the major difference between the RSP and the TFSA lies in the tax deduction going into the RSP but most importantly when you withdraw money out of an RSP you have to claim it as income and that's what we're tackling today because that is substantial it's a substantial impact for our clients in their retirement and it's something that is very very taken for granted on the flip side the huge advantage of a tax-free savings account is that all growth is tax deferred just like in the RSP however all withdrawals in the future are also tax-free so you can see where the benefits arise there so how can we utilize getting money into an RSP receiving the upfront tax deductions but also have the ability to pull money out of a tax-free savings account without any tax liability that's exactly what this strategy entails so let's dive right into it so for this example we're gonna take the $500,000 RRSP so we're gonna have two accounts this is gonna be the $500,000 RSP this is gonna be the hundred thousand dollar tax-free savings account and this is the value so you can see the difference in values now you can use any numbers like we're just using this as an example the 500,000 plus 100k you could have twice as much in RRSPs you get up half as much the higher the concentration of tax-free savings account relative to the RSP it's going to be more beneficial and faster we'll explain that in a little bit but for the most part really what you're doing is you're you need to have a tax-free savings account with a substantial amount of assets in it in order to really take advantage of this so what we do is that $500,000 and that $100,000 are tax-free savings account rather what we do is we actually sell it to cash so you sell every single investment inside your RSP and your tax-free savings account and you sell it to cash then what you do is we help facilitate a personal non arm's length mortgage on your own residential or commercial property where you actually are investing in that mortgage so what does that mean so in Canada you can actually own your own mortgage inside your RSP you've been able to do this for several decades we'll go through the CRA bullet tenant later on in the video that states exactly what this fact is but the reason why you're able to do that is let's say to get an RSP that was earning you know 2% and you're in GICs etc and your mortgage is actually at three and a half percent well what you could do is you could actually lend yourself the money from your RRSP and you could actually make mortgage payments to yourself instead of making them to the bank now most people don't invest in guaranteed securities or bonds or anything because the low interest rates so they're in balance funds pensions etc to try and get a higher rate of return so that's very uncommon nowadays however using it still with this within this strategy is very very beneficial so now now that you've set up that mortgage and we'll get back to the qualification and how that works but when you set up that mortgage you're actually applying for a mortgage you still have to go through the same underwriting the same types of criteria but what happens is instead of going to the bank and actually getting them to lend you the money you're lending yourself the money but when you lend yourself the money it actually has to land somewhere so what we do is we send the funds to a non registered investment account which otherwise known as a taxable account now why would we want to do that recall from the initial point that I made about having tax-deductible interest or having an investment loan the reason why we wanted an a taxable account is because we need the interest to be tax-deductible so any interest that is paid is tax-deductible and that will become crucially important later on so now we have this mortgage so now we've invested the $500,000 and $100,000 TFSA into an actual mortgage on our own property that we have taken the proceeds and you can in the cool thing about in this a lot non-registered account is you can replace the assets that you bought before so that you don't actually have any lost opportunity cost so whatever investments you owned in your RSP and your TFSA you can you can do this exact same thing over here some people could choose to maybe take less risk because of the advantages of the strategy there's so many different ways that we can do it but for the most part let's keep it simple it's going to be in a non registered taxable account so the RSP and the TFSA now the crucial part here and this is the this system is that they're invested inside a mortgage but they're given two different types of qualification the RRSP is a first mortgage and the tax-free savings account is a second mortgage now what that means as a first mortgage means that upon a default of the mortgage so let's say that the bank lends you money you are making your mortgage payments and for whatever reason you stopped making a mortgage payments you're unable to fulfill that debt obligation the bank becomes first payer if there was a second position the first payer will always get paid first in the event of default therefore they have much less risk than the second payer in in any circumstance and that's and that's pretty common sense so that makes sense the advantage of that is the first mortgage if you're if you're on first title and you're in a first mortgage position you're gonna get competitive rates at a bank or credit union or through the brokerage channel through a mortgage broker and it's going to be anywhere and let's just use an a round number but let's say that it's 3% and that's gonna be super advantageous the second or third mortgage which will be on this scenario will actually be able to charge a higher amount because of the risk position it's not going to be as secure as the first title therefore you can charge anywhere from say 6 to 15% and realistically that makes sense because if you had far more risk being second payer like so consider mortgage investment corpse or advanced mortgage structures for land at element different things those types of mortgages they pay a higher rate of interest because they have to it's no different than a canadian government bond paying a rate of interest versus a corporate bond where there's a higher chance of default the interest rate has to be higher no difference on the lending side so why so why would this be an advantage well here's how this strategy and how the cash flows work so what we do is every single year we take out via a riff or lift if it's a pension or L riff if it's a locked-in retirement account but for the most part it's going to be a riff what we're gonna do is we're gonna pull out the annual amount of income now this normally is a taxable event if you withdraw $10,000 out of your riff you have to claim that as ten thousand dollars of income so it's taxable what we do is now you've pulled out that that taxable amount but you have to actually make the mortgage payments on this mortgage that you set up so just because you lent the money to yourself you still have to make those mortgage payments so you make those mortgage payments back to the RSP and to the tax-free savings account but you do it in this interval three percent interest in the RSP fifteen percent interest or a prescribed amount that we declare is into the tax-free savings account now as you can see if you were to continue to do this and ignore taxation in the beginning you can see that over time this will erode to zero and a hundred percent of the assets will be in this bucket which would leave a hundred percent of the mortgage being invested in the tax-free savings account but the magic is because the proceeds of the actual mortgage were used to buy non-registered investments which ultimately could be the same risk or less risk so there's no additional risk there's known that an additional market risk or anything like that just a transfer of how the count is taxed this actually is a tax-deductible expense so the tax deductible expense which ultimately is the interest on these mortgages cancels out the taxation on that rip payment so now if you fast forward all of the money month after month year after year gets contributed to the tax-free savings account and a zero is left in the RSP your assets are still able to continue to grow inside a taxable account which when you withdraw on them is much more tax favorable dividend rates capital gains rates etc at 50 sometimes 30 percent whereas the rip would normally be a hundred percent so the advantage is there's no opportunity cost it's not like you're locking up your assets and you're not continue to grow your assets inside your RSP your tax rate savings account it's very it's actually the opposite it's very otherwise is that your ass has continued to grow in the non registered account and we're able to change the taxation on the initial six hundred thousand dollars that is invested here so again let's go through this one more time you set up a mortgage structure that has two components one is a first mortgage with your RSP assets in it the second is a mortgage on second title which has your tax-free savings account assets the reason why we want to have the separate structures is we want to take advantage of the additional risk of a second title mortgage inside your tax-free savings account versus your RSP that way the interest on the RSP that we have to pay back to the mortgage is only going to be three percent relative to the 15 percent in the higher risk portion of the tax free savings account mortgage every single year we pull out the taxable RIF payment or normally taxable RIF payment that exactly matches the cost of interest for that mortgage and then once again because the proceeds were used to fulfill and buy a non-registered investment that interest is tax deductible that ultimately cancels out the tax on the Rif and you're left with a tax neutral transfer from your RRSP - your tax-free savings account so now many of you might say okay well I'm not really sure on how these how this mortgage would work in Canada when you get a mortgage there are two components you have the borrower and then you have the lender in Canada you're allowed to actually be both as long as it's registered in an insured mortgage so what that means is if you register the mortgage as a lender and you set up a mortgage structure that has that a CMHC insured you it qualifies even though it's at non arm's length which means you're actually owning or lending money to yourself you can do that inside your RRSP you can do that inside your tax returns account you can do that inside your pension we can you can do that inside any registered account as long as it is a CMHC insured mortgage the borrower is yourself so the borrower is not any different than if you're boring from the bank you still have to qualify for for the debt so even though you're lending it to yourself there are two separate entities and this mortgage structure actually doesn't know that you're the borrower in theory there's like a Chinese wall in between and what happens is you still have to qualify you'll still have to income test so that doesn't change but what happens is it allows you to provide this structure so that you can take advantage of this strategy so now let's review the benefits of this overall strategy number one you're able to obtain a tax-free retirement income from your tax receiving account instead of from your registered accounts such as your RSP lehre and pension number two the advisor management fees that you normally pay on your RSP in your tax-free savings account now become tax deductible because you're paying them on the investments inside a non registered taxable account if your advisor is charging between one and one and a half percent in management fees if that's tax deductible you're going to save up to 50% of that given based on your tax bracket but you're going to save that in time which means it reduces your fees overall and and further announces your tax position really without doing anything so the difference is the money and managed in this account is going to be the adviser fees are tax deductible whereas all money managed inside of an RRSP or tax-free savings account the management fees that are not taxable so it's a huge difference number three it obviously gives you an opportunity to maximize retirement benefits it's an it's unbelievable to consider that if you had you can have a million dollars in your RSP transfer it over to your tax-free savings account using this strategy and over time it could have zero impact on receiving income benefits such as old age security and CPP now what's amazing is most people that have a million dollar RSP they're not going to qualify based on the income test because of the taxable nature of their withdrawals so they're not going to qualify for old age security so that is something that's you know it's not a lot but it's every dollar counts and it's going to maximize your retirement income even further and number four it gives you an opportunity to transfer all of your assets within your estate in a non registered or tax-free manner versus having them taxable because as soon as death occurs the estate takes consideration as if all of the assets were sold of the date of death which means that it's all taxed in the hands of the of the deceased all at the same time so if you took $500,000 all at one point all five hundred thousand dollars will go into income which means you'd be at the highest tax bracket so virtually almost 50% of that money is gone whereas if it's in a tax-free savings account a hundred percent of it transfers to your beneficiaries or the quest through the through the will so now let's let's talk about and give consideration to the risks the biggest risk really is not in whether this strategy works like it's based on economic fact it's based on three very well-documented and very well-supported wealth management strategies the key is in the unknowns and and the nature of actually doing this type of strategy so number one you're gonna have the same or similar general risks in your non-registered account normally as you would inside your RSP you're not gonna have more risk you can take more risk if you want but more often than not you will have similar risk or even slightly lower risk because of the advantages of the strategy then you would inside your RSP so you're not gonna have additional market risk that's not considered number two you actually default on your own mortgage this is like the definition of insanity nobody in their right mind if they're lending money to themself in this mortgage structure is not gonna make those payments that would mean that when you take this rip withdrawal you actually don't make your payment's that would be just straight stupid but it nonetheless you have an obligation to the lender even though you've lent money to yourself it's still two separate entities the lender and the borrower and you have an obligation so that would be an apparent risk and number three anytime that you do any type of advanced tax strategy CRA is going to look at these if you start to have five or six hundred thousand dollars listed and shown inside your tax receives account mark my word they are going to look at it and that's fine as long as we make sure that we qualify all the steps along the way there's no water risk other than just the time and energy but that that's for the extra time and a little bit of cost to do the extra accounting is far away by the benefits of having a tax-free retirement and so now let's talk about these rules so number one obviously boring to invest rules is is very very crucial because it gives you the tax-deductible nature of the investments themselves so that we can actually write off the or have a tax deduction against the rific on the close out of the out of the actual mortgage strategy so CRA tax folio s3f six c1 is interest deductibility on money borrow to invest and it clearly states interest paid on money borrowed to invest is tax deductible assets must be held in a non registered taxable account they must be available for any asset class that meets the income and profit test that would include stocks bonds mutual funds businesses etc it has to have the potential to pay income so what would not qualify is like art or land that is not leased or gold physical gold that doesn't have to doesn't pay out any income so for instance you can't all own an actual gold bullion ETF because it doesn't technically pay income you would actually have to own gold companies that would have the potential to pay dividends and income and and capital gains so as long as those criterias are met we satisfy that juncture of the of the CRA requirements number two eligible investments inside an RRSP in a tax-free savings account CRA IT 3200 are three personal mortgages are permitted if they are number one insured by CMHC and administered by an approved lender and number two they're invested into what is called a mortgage Investment Corporation what a mortgage investment corporation is is a structure that actually carries the mortgage itself and has an obligation to the shareholder to pay that dividend or distribution for that that money lent mortgage investment Corpse are very very common in Canada a lot of them deal with like hundreds if not thousands of pooled investors that contribute to a mortgage investment Corp and then earn interest it's just what happens is in this case you would actually be not only the shareholder but you would actually be the lender as well through that Mick so let's talk about who's involved in this platform so obviously we spearhead and we manage this entire process for our clients and we utilize the following companies obviously the mortgage has to be CMHC insured and that's a given so what we do is we've outsourced and we've partnered with an approved lender m-link and they're based out of Toronto they do mortgages across Canada and what they do is they're an approved lender with CMHC to facilitate mortgage lending we carry your RRSP and your tax-free savings account you would actually set up trust accounts with computershare which is one of the largest trust companies in Canada and that is where your actual RSP and tax-free savings account mortgage will actually sit and then number three we manage the investments for you here at precedence capital and gravitas securities to make sure that it satisfies all income tests so that that interest remains tax-deductible so the elephant in the room here is that obviously in order to invest in this strategy and use a personal mortgage you have to actually have a free and clear property in Canada now that doesn't necessarily mean that you have to have full title free you can still set these up as second and third mortgages respectively but it really is optimized for someone that has a free and clear property in Canada that can leverage this strategy now if you you might not even be at this situation or you're a few years away if you're concerned and you think holy smokes I'm just starting I have a I just bought a new house I'm still building up my RSP assets on my tax-free savings the assets if you want check out an earlier video that we had posted previously that discusses the tax deductible mortgage strategy in this strategy what it does is it actually allows Canadians to pay their mortgage off in upwards of half the time by simply making their regular mortgage payment and the benefit obviously the quicker you can get to a mortgage free position the quicker you can start to implement this strategy which is going to provide amazing benefits to your retirement and your overall wealth so there you have it folks that is the outline of how we actually convert our clients RRSPs pensions and locked-in retirement accounts into tax-free savings accounts and move the assets in a tax neutral position to garnish a much more favorable retirement and an tax-free income for our clients please leave your feedback there's a true you know obviously we went through this somewhat quickly but you know we're super excited to show this to as many Canadians as possible provide your feedback below ask lots of questions we're gonna be answering to every single person that inquires ask specific questions if you want more confidential discussions please reach out to us you can reach out to us at WWE and ends well calm or you can even hit us up under direct message on Facebook Instagram etc and we can start a conversation at that point but but the best thing to do obviously is to see your own numbers at work see how it's going to impact your retirement and see what benefits we can create for you so that you can have the the most most enjoyable retirement possible you

Channel: Precedence Private Wealth

Views: 381,886

Keywords: RRSP, TFSA, Tax Free Retirement, Wealth Management, Financial Planning, Certfified Financial Planner, Tax Planning, Investment Management, Retirement Planning, Retirement Income Planning, RRIF

Id: l6e0dX9VyQ0

Length: 29min 50sec (1790 seconds)

Published: Sat Nov 04 2017