Henry and Vern break down RRSP rules for Canadians: contributions are tax-deductible up to age 71, then converted to a RRIF with mandatory withdrawals. The 2022 limit was $29,210 or 18% of prior income. They flag concerns about forced withdrawals, OAS clawback at $90,000 income, and whether RRSPs actually serve retirees' goals.
Chapters
When it comes to retirement and the problem we're trying to solve, which is to have a sufficient amount of income, isn't it unusual that you would put your money into a vehicle that when you withdraw it, you don't know where taxes are going to be? You're already controlled with how much money you can put into it. You have no control on whether that money goes up or down. If you are deciding to purchase a bank product for investing it, it doesn't really line up very, very well.
We're always trying to find ways to, to save tax, right? That's the big buzzword out there. Want to pay less tax. And well, maybe if you want to pay less tax, you should probably just find a way to get out of this place in general, because I don't think that the taxes are going anywhere. But my colleague Henry and I today are going to go through RSPs, what they are really understanding how it works and so that you can understand whether or not, hey, is this a good avenue for you to go or not? And the reason why I brought up tax is because generally speaking, you hear from people to say the best way, especially for T4 people to lower their income bracket is put money into an rsp. Right, Henry?
Absolutely. When everybody sees and hears about an rsp, the first thing that comes to their mind by default is they're going to take the money that they earn and they're going to deposit into a RRSP so that they can get a tax refund from the government. And we're going to dive into really explaining what an RSP is for beginners. And we're going to do as much as we can for what you need to know about it.
So what are, what are some of the, you said we're going to go through RRSP for beginners. Is there some specific things that we're going to cover in the video?
For sure. So what is an rrsp? Well, an RRSP stands for a registered retirement savings plan. And this is a government designed plan that is a savings account to help Canadians save for retirement. They work with the government, works with banks to facilitate this RRSP. And the RRSPs, when you put money in, which is known as contributions, are tax deductible, meaning whatever your tax rate or that you have to pay on your income, when you deposit some of that money into these RRSP accounts held at a financial institution like a bank, then you are able to reduce your income for that specific period and therefore that ultimately will bring you to reduce your tax bill. Now, who can Contribute an rrsp. It's anyone who's Canadian, and you can only contribute to an rrsp until you're 71.
Okay. So we touched base on what an RRSP is and who can contribute. So let's break that down a little bit. To me, you occur to a guy, like a guy who's very clear and concise and specific about what you talk about. You don't strike me as the type of person who would talk about something if you weren't really well versed in that subject matter. Is that a pretty fair statement?
Very fair. I'm very direct.
Yeah. So having said that, would you say that the language or the words that you use are pretty darn important?
For sure, absolutely.
Okay, so you had mentioned rrsp, Registered Retirement Savings Plan. Registered with who? The government? Retirement. We all know how most people rolling around ascendant financial feel about that word, particularly Richard Canfield is not a big fan of retirement, but now savings. Now, I do understand that you can save in an rsp, like you can. You could put money in there and put it like in a, in cash or like a money market where there's like very little exposure to investment. But generally speaking, like, people are not actually saving money in an rsp, right? Aren't. Isn't that an investment vehicle?
That's what they, that's what they believe it to be. And you know what the best part is and what goes. Why you think banks want to participate with helping the government and helping for your retirement? Because they get to issue products that you can use that money to purchase.
Right. So you're purchasing a product and you're putting money in this. Again, I just find it fascinating with the language that they call it a savings plan, when generally speaking, you're not, you're. You're. Because if you, if you save money, you're not really supposed to be exposing that money to risk of loss. That's how I understand savings to work versus investment. Nothing wrong with investing is not. Not what we're saying here. But when I invest money, yeah, I can grow it, but I'm putting at risk of loss. Is that a fair statement when you.
Introduce the term investment? There is a risk of loss.
Yeah. So I just find it kind of fascinating that they, that they call it a retirement savings plan. And I find that interesting. And so we're talking now too, about one of the reasons why people put money in there is maybe to invest it and grow it and save it, quote, unquote, for the future, so that they can have money to Draw down in the future when they're maybe not working or what have you. Well, one of the primary reasons that put people put money into the RSP is so that they can reduce their tax burden. Today, one of the things we talk about when we're talking about, talking to people about, you know, this process called becoming your own banker, the infinite bank concept is we say, look, unless I understand the problem that I'm trying to solve, it really in anything, but specifically as it relates to this process, becoming a real banker, unless I understand the problem that I'm trying to solve, there's no point in going any further until I really understand the problem. So the problem, when we're talking about RRSPs or taxes, the problem is like, just generally speaking, hey, I, I pay a lot of tax. I'm heavily taxed, right. How do I reduce my taxes? Okay, we'll put your money in this registered retirement savings plan. Okay, so who created the tax problem?
The government.
And didn't you just say earlier that the government is the one who created the registered retirement savings plan to help us reduce our tax burden and to save for the future?
Unusual. The one who created the problem is also creating the solution to the problem.
Yeah, so it's like, okay, hey, I'm going to punch you in the eye and make your eye bleed, but then I'm going to hand you some ice. Like, are you really going to trust me to not punch you again? You know what I mean? Like, it's like, this guy's a problem. He's violent. Oh, he's got. Oh, there, he's got ice. No worries, we're all good. Just seems like kind of an interesting thing just to think about, using logic to say, okay, I've got a tax problem that they created, but yet they've got the ultimate solution to help me reduce that tax burden. And then let's assume you're putting money into the rsp and let's assume that being invested or saved or whatever term you want to use, and let's assume that it's growing, who really ultimately has the control? Because if I wanted to keep it there, growing, first of all, when I, when I withdraw any of the money, even if it's on a loss, if that account gets cut in half, am I paying? How does that work? Is it tax free on the withdrawal or I'm paying tax on the money or.
Well, well, Vern, when you earn the money. And let me just also clarify the amount of money that you can contribute to an RSP, at least for 2022 is 29,210. That is the maximum amount or 18% of your last year's income. So if you earned $100,000 last year, your maximum would be 18%. Do you find it a little bit awkward that when you need to save for your retirement, some bill in the future, you're restricted to how much you can contribute, who's in control.
Yeah, exactly. So they set the rules and how much I can even. They set the rules on how much I can even save in there or deposit or whatever term you want to use. And then at some point in the future, I'm either going to want to withdraw it or the government's going to make me withdraw it. Is that right?
That is absolutely right. Because at age 71, your RRSP ends and you will need to convert that to. Well, there's three options, but the most common option is to move it into what's called a Registered Retirement Income fund, or a rif, and that is where they have a minimum annual withdrawal. And so going back to when you have lost money in your RRSP because the money went into a RSP or a rif, it has entered into the government's sphere in which they dictate the rules. And if you need to get that money out of that sphere now you have to pay taxes on that exit.
Wow. Okay. So I don't have as much control over how much I can put in.
Nope.
I pay tax on every dollar I withdraw, whether I withdraw it the very next day or 30 years in the future.
Correct.
Now, if I decide not to withdraw, because maybe I've done some other things, maybe I've purchased a bunch of other assets that produce income. Maybe I've got, I don't know, a pension. Like, I've got a. I. I have a good problem, which is I have too much money.
Yeah.
So I don't need this RSP money. So maybe I'm thinking, oh, you know, this would be a good inheritance. Maybe I could pass it on. I have to do some other additional planning because even though I don't need the money, by the time I, before I turn 72, at the end of my 71st year of life, they're now going to start take. Making me take it out. And I don't even get to dictate the minimum that I take out, they're going to tell me what the minimum is going to be.
That is correct. And when they force you on that minimum or you earn too much income, if you are counting on government entitlements like the old age security, where in 2023 is if you earn more than 90,000, they start taking away what's called, or they use the term claw back those benefits and you're losing the benefits that you would have gotten if you didn't make too much money.
I'm just trying to, you know, rethink my thinking here, Henry, because I got to tell you, if you were trying to convince me to put a money into an RSP right now, I know that's not what you're trying to do, but I don't think the conversation would be going very good because I'm thinking, gosh, I don't know if I want to put my money here. Of course that's not what we're trying to do. We're just trying to, for lack of better terms, have you rethink your thinking so that you know the full truth so you can decide if ultimately this is a vehicle you might want to implement. Implement in your own planning. Okay, so now I'm at the point where I need to take the money out or they're going to force me to take the money out. Now, in that scenario, like you mentioned, hey, I've done well. I've been responsible. I've already got other streams of income. Now, if the money that's coming out of the RSP is then fully taxable, wouldn't that then mean that I'm paying, I'm in retirement in my quote, unquote retirement or passive income years, and now I'm still in like a really high.
Tax bracket while you're, you may be in a lower tax bracket, but if you make too much income, you lose those government benefits. So that to me, doesn't that sound like a tax to you that I'm losing the benefits I should have gotten that I paid into earth?
Right. So you're losing benefits that you should have gotten and you're paying tax on the money that's coming out of the rsp?
That's correct.
Okay, so I'm sacrificing, or I guess I'm gaining, quote, unquote, the benefit of getting a tax break today, which today, generally speaking, I know the tax rate so that I can only ultimately pay tax on every dollar I take out of the rsp, either by choice or by them forcing me to do that in the future someday at a known tax or at an unknown tax rate.
Yeah. Do you know if taxes are going to go up in the future or go down?
I don't know, but I have a pretty good sense of what's going to happen, but I don't actually know.
Yeah, I don't. I don't either. But if the government has over $1 trillion in debt and they're annually losing money in terms of how they're operating, they're spending more than they're making, who's going to pay that bill? Vern?
Yeah, I would say that it's probably going to come from those registered accounts.
It wouldn't be reasonable for us to assume that.
I would. I would say it would be reasonable for us to assume that for sure.
Wow. So when it comes to retirement and the problem we're trying to solve, which is to have a sufficient amount of income, isn't it unusual that you would put your money into a vehicle that when you withdraw it, you don't know where taxes are going to be? You're already controlled with how much money you can put into it. You have no control on whether that money goes up or down. If you are deciding to purchase a bank product in for investing it, it doesn't really line up very real. Very well.
You know, this is fascinating, Henry. So again, it's thinking about logic. Right. We all want it to your point, like, my objective is to create too much so that I have more than what I need. I have more to bless other people's lives. I can take care of my family. Right. So if I have more than what I need, you could consider me wealthy. Is that fair?
Yeah.
In the future. So. So to generate wealth, if we think about what wealthy people are doing, are they putting their money in all these places where they have way less control, or are they finding places to put money where they have more control?
They're most likely putting their money in places where they have more control.
And so the traditional kind of financial planning model. And again, we're not, you know, we're not beating anybody up here. We're just kind of walking through the logical steps. Because, Henry, you and I are both in our mid to late 30s. Like, creating wealth for our future is pretty darn important at this stage of life. Is that fair?
Absolutely.
We're walking right along the side the same journey that, that you are. Canada, watching this video. We're, we're, Henry and I are both trying to achieve the same thing. So we're thinking about this stuff actively for our own families. So if I could pile up, let's just use an example here. The traditional financial planning model. This is kind of how it occurs to me. Ultimately, you're taking the money to go and Acquire the goods and services that you need for your life. So let's just play around for a minute and think about food. Let's just pretend that you could actually preserve the food. So right now you can go out and work and do all the work that you want to do and you could pile up as much food as you possibly wanted to. You're piling it all up so that one day you can start to access and consume that food so that you can continue to live the rest of your life with a full belly. Now, we don't have a crystal ball. So if you pile up a whole pile a bunch of food and you start consuming it and then all of a sudden you get to a point where you still have energy and a lot of life, but you got no food left, what are you going to do? Like go back to work or like we're going to have to need to figure some things out at that point, right?
So If I'm at 80 something years old, is working really realistic for me?
That's the other problem, right? Like where how are you going to produce an income at that point? Right? So the traditional financial planning model, in my mind, when I think about it, they're telling us to, hey, pay off all your debts. Good luck with that, by the way. And pile up a whole bunch of capital. And the pitch that you hear a lot is, hey, you're going to need way less money because your kids will be out of the house, all your debts will be paid off, your expenses will be lower. Hey, Canada, how's that working out for us right now? Our expenses going down? Do we have a lot of control over that? No. Again with the spending and the having to recover those costs, Right? So you pile up as much as you can. And aren't you ultimately hoping that you die or graduate before the money runs out?
Like you know when you'll die, you'll.
Die when the money runs out or you get too stressed out.
I don't die. But did you know that when you pass away, if you did a really great job or to build up your RRSP balance and at the time that you are the last one standing between you and your spouse, if you built up too much, let's say 300,000 or more, all of that amount that you built up in your RRSP will get included into your income and half of it, about half of it will go to the government, even though your says 300,150 is actually going to be passed to, let's say, your children.
Okay, so I've done all the work, I've done all the planning, I've taken all the risk. And let's say I actually did a really good job. And so when I pass away, there's still money left over. So even if I didn't take the money out while I was alive and they taxed me while I was alive, you're saying that they're basically going to tax me, but not. Not exactly. Every province is different, yada, yada, yada. But basically 50% of that registered account is going to go to the government anyway. Yeah. Dollar for dollar, right? Like the only way to pay the bill is dollar for dollar from the other wealth or the assets that I've accumulated.
That's correct.
Holy smokes. So, you know, just circling back to what I was saying again, like, if you just look at. Well, first of all, that's not a very positive outlook at the end to say, like, hey, if I have something left over, I know about half of it's going to go.
If you think about, like when you're in your passive income years, like, we're working really hard right now, like, yeah, we want to enjoy life today, but we're hoping the whole plan is to like, build up enough wealth so you can enjoy passive income time and you can enjoy your life and do things that you're more passionate about or whatever. But yet the entire time you've got this fear in the back of your mind that like, what if I run out of money? What if the market takes a hit? What if taxes increase? What if expenses go too high? Like, what if I run out of money? If you think about, let's say that God forbid, like if we were to suffer like a terminal illness, if one person is sitting there, exact same people, exact same profile. We are like identical twins. Both have the exact same illness and ailment. One person has millions of dollars because they planned Right. Or they had insurance or whatever it is. They're not worried about financial stress at all. The other person doesn't know how they're going to pay their mortgage next week. We're not doctors, but who do you think is going to have the more likelihood of recovering and living a more fulfilling, long, healthy life?
Well, the one that properly planned with insurance and. Yeah, different way.
Yeah. So I'm only using that analogy to think about what was, what will my life be like when I'm 79 years old and I'm, you know, worried about my grandkids and living life and doing these things. I want to maybe go Travel and do the things I didn't get the chance to do before. But I'm constantly in fear of running out of money or tax rates increasing or all these things that I can't control.
And there's also the element that once you graduate or pass away, would you rather leave a bonus check or would you rather leave extra debt?
Yeah, no. This is fascinating. And then you'd mentioned before, obviously the people who can use an RRSP would be only people in Canada. Right. There's other vehicles in different areas of the world. Is there anything else on that list in terms of what it is and how it works that you had that you wanted to share?
I mean, there are some exceptions that you can withdraw out of the RRSP without being taxed, which is if you were to use that to buy a home, you can use about 35,000. Now if you live in Toronto, the average house is about a million dollars. So I don't know how much 35,000 will get you, but you still have to repay that back at the schedule that the bank wants you for about 15 years. Alternatively, if you attend one of the approved financial institutions, you can take money out of the RRSP through a lifelong learning plan, but again, you will still have to repay it over a specific period of time.
Oh, this is actually a really interesting segue. So again we started the call by mentioning this book, the Infinite Banking Concept Family Banking Process. That's what we coach our clients to implement here at Ascended Financial through our channel here, the Banker's Vault. So make sure you go to the link below in the description watchibc.com so you can learn more about the process of becoming your own banker. But the reason why I shared all that is because you just mentioned borrowing. So I just kind of find it interesting when we talk about implementing the process of becoming your own banker. Sometimes people collapse the process of becoming your own banker with this, the tool or the product that we use to implement the process, which is dividend paying, participating whole life insurance. Just because I have a dividend paying policy doesn't mean I'm becoming my own banker because I'm not necessarily implementing the process. But again, long winded way to say that I have the opportunity to borrow from the value of my, my cash value of my policy and I can borrow from that without interrupting the growth. I can use really any tool to implement the process, become a neural banker. It's just that dividend paying whole life insurance seems to be the best tool that we've been able to find to implement the process. But you mentioned borrowing from your RRSP for a very specific reason. Not because I want to buy a car, not because I have another investment opportunity, not because I want to help my kids with something, but because I maybe A, am taking advantage of the lifelong learning program or B, maybe I'm a part of the first time home buyer program. And so if I were to do that and I say, hey, this is a good opportunity for me, I'm going to go and educate myself and do something different, I'm going to borrow from my rsp. What I caught was you said that the government or the bank is going to tell you how you have to pay that back over a scheduled period of time. You don't even have control over the repayment for that, for that process.
That is absolutely correct. So when you are borrowing money, and let's be very clear here, withdrawing the money out of the rsp, you are withdrawing, you're not really borrowing it. The government will set a schedule that you need to repay the amount of money. Otherwise that amount starts getting included in your income in the year.
Okay, so you're going to get taxed on the money that you took out if you don't pay it back on that schedule.
That is correct.
Okay. Fascinating. A couple of weeks ago, in fact, if you're in Toronto on April 28, 2023, you can see my smile and mug sharing some of this there. But what I, what I shared in Henry, I know that you'll be at the event, can't wait to see in person, but I shared a couple of weeks ago in Calgary one of my slides, it says what is the value of control? And then I get some participation. I say, hey, what comes to mind? Leave a comment when I'm saying this right now, I'll pause for a second. What do you see as the value of control, especially when it relates to your, your capital, your money that you've worked for? What's the value of over that money? So the words that people were yelling out were words like freedom, flexibility, peace of mind. I even heard somebody say infinite. So the value of control, you can't measure the value of control. And I would assert that if you're out to create wealth, if you're to create peace of mind, if you're out to create abundance, I would say that control is a pretty important element over being able to produce that result. Would you say that's a fair statement, Henry? So when we're thinking about, you're familiar with the Pareto principle, right? The 80, 20 rule.
Yeah.
So if we think about putting money into an rrsp, that that analogy kind of comes to mind. We are thinking about the 20% benefit of getting the upfront tax return tax break today, but we're forgetting about the 80% that could potentially be classified as a downfall. All of that lack of control, the taxes later down the road, somebody else kind of determining what's going to happen with your own money and potentially running out of money. To me, I just don't think based on this conversation that to reduce my tax burden or whatever it might be saving for the future, I don't feel like the R is the right solution for my family.
I don't know if it would be for many if they actually know that there are alternatives to how you park your money and where you park your money. And just to even compare, when you get yourself a copy of the book becoming your own banker, you're going to need to go through some training and we offer some free training@watchibc.com, it's a free 90 minute training. You're going to learn about what the process of banking is. It's not what you're putting your money in, it's the process of banking and what that entails. And just to share in terms of the tool we use as Vern, you've already touched upon participating whole life insurance policy. When you are withdrawing money out of the RRSP, if you had $100,000 in there, you had to withdraw it for learning or home savings plan, the balances go down. So what already earning is already going to go down. Whereas in terms of the participating whole life insurance policy, especially the ones that we place with a mutual insurance company, you become a co owner of the insurance company and when you become a co owner you get access to the resources to a company that definitely has a lot more than I do, definitely has a lot more than you do and they will say to you keep your money sitting in there, let it grow. We're going to let you access our resources to do the things that you need to do without begging and qualifying for another credit check. Providing any of your income verification, no questions asked on how you decide to spend that money and you get to repay it in the schedule that you decide that best fits for you, not the schedule that opposed to when you withdraw money out of an rsp. For those purposes they define for your safety, I believe that you need to repay at some points that they feel comfortable with.
Okay, great. And so just circle back on that. This is really fascinating because you said something that got my attention. You said, hey, when you borrow money out of the RSP for lifelong learning or first time homebuyer, they call it borrowing. But you said the balance actually comes down. So if you were earning interest, you're earning interest now on a lower balance. Whereas when I borrow from my policy, I never lose value or momentum on my capital. I'm truly borrowing against the value and I'm using the life insurance company's money to achieve whatever objective I wanted. You talked about implementing the process of becoming your own banker is a, is a process of how we go about financing things throughout our lifetime. It's not a retirement plan or what have you. So in theory, if I still did want to take advantage of the upfront tax advantages of putting money into an rsp, what I'm hearing you say here, Henry, is if I change the process of how I went about doing that, by first implementing the process of becoming your own banker, put my money to work, my capital to work, every single day I become a co owner in the life insurance company, I give rise to a tax free death benefit that, by the way, could probably take care of some of the future tax problems that I'm likely going to create for myself when I pass away. I could then borrow from the policy. Would there be anything for preventing me from using that process to then finance the deposit that could go into the RRSP that I could still get the tax deduction for?
Absolutely. If that's the strategy that was designed for you, isn't that you absolutely can do that? Huh.
I'm just rethinking my thinking here, Henry, as we're going through the call.
So aren't there different ways to do things?
There are different ways to do things. And correct me if I'm wrong, didn't you do a webinar pretty recently that would be found on our YouTube channel, the Truth About RRSPs, or remind me.
Henry, in our banker's vault. I've done some pretty detailed deep dives on the truth about RRSPs, what happens on withdrawal, what happens when you turn 71, and explaining the beginning for beginners. Everything you need to know about RRSPs. There's definitely a lot more details you need to know. And the reason is because it's a government design plan that they gave a lot of rules that you need to be very much aware about. And the most recent and the most recent webinar will talk about also components related to what happens to when you depend on too much on the government design plan.
Okay, so if you want to get an expanded explanation of even deeper into what RRSPs are, how they work, and what you need to know for the future, that link is going to be right here where I'm pointing down. You'll be able to find it. And the other option, of course, to learn more about the process becoming your own banker, go to watchibc.com that's watchibc.com and get access to a 90 minute webinar to learn more about how you can multiply your wealth, make your money work harder, just by changing the process, not by changing your objectives.
