In Canada, Discussions, Investing, Money, Retirement, Taxes, Wealth

Tax Efficiency Strategy: What I plan on doing as a long-term plan to minimize taxes

I’ve been interested as of late, in tax-efficiency strategies because I don’t talk about them often, but I do practice them. I realized (from comments and questions) that people don’t realize it is one of the greatest secrets to building wealth.

I use it quite extensively, but then again, please note the following:

  • I am a freelancer not a salaried employee
  • I do not take a salary like other freelancers, I take ineligible small business dividends from my company
  • I do not have RRSP contribution room
  • I only get TFSAs room yearly

(I have way more things to note but don’t want to overwhelm you right now and they’ll come out at the end of this post.)

Looking at my situation today:

My current numbers are this at the time of writing:

  • Age 37
  • Work-optional (can retire any time I want on bare bones + more spending because I have 11 side incomes)
  • Maybe stop working for real at 55? I have no idea. Let’s go with that
  • Leaves me with 18 years left to invest/save
  • I am assuming ZERO HELP from anyone, including the government. If they want to give me $50/month from what I paid in some years ago, great. If not, fine. I can do without that money. Actually, I am even assuming they won’t have any left in the pot by the time I retire, so .. we’ll all be on our own.

I have no RRSP room & I take non-eligible dividends from my company

I do not have any RRSP room contribution, and do not contribute any more.

I take my “salary” from my company in non-eligible dividends in as LITTLE OF AN AMOUNT AS POSSIBLE to live on, and leave the rest in my company as a retirement plan (this was run by my accountant whom I contract for accounting help, and he heartily approved of this versus taking a salary from a tax-perspective even if it meant getting RRSP room).

Why?

Because when I withdraw that money as non-eligible dividends, I pay taxes on it, and this is my tax table for my small business dividends (my salary) depending on the level:


Under $15K is ideal, because you only pay $33 in taxes, but if I need more money up to $30K, I am looking at a heftier tax bill.

(Hefty being relative, because even at $30K, paying only $2050 is great.)

If you want to see this in percentage rates versus an employee, it might help. Here’s what Québec looks like for me (and we are so strict on this compared to the other provinces!)

Income Taxes in $ for Quebec for non-eligible dividends Tax Rate in % for non-eligible dividends Tax rate for a Salary Tax difference of salary versus dividends
$15,000.00 $33.00 0.22% 15% 14.78%
$30,000.00 $2,050.00 6.83% 15% 8.1667%
$50,000.00 $6,610.00 13.22% 15.62%* 2.4%
$60,000.00 $9,536.00 15.89% 20% 4.1067%
$80,000.00 $15,558.00 19.45% 20% 0.5525%
$100,000.00 $23,323.00 23.32% 23.50%* 0.1770%

*This was a blended rate I created as the tax thresholds are not the same for income.

As you can see, the tax savings in taking dividends instead of a salary for me as a freelancer are pretty significant under the $50K mark, but even saving 2% – 4% up to $60K seems like a great deal to me.

Moving on.

Projections of what I will have at the age 55

Current TFSA = $69,052

  • No worries here, already paid the taxes on it
  • Can withdraw at any time

If I keep maxing it out at $6000 a year (maybe this number will rise over time, but let’s say $6000 a year for now, I could end up with $457,908.

Let’s leave that alone as my ’emergency fund’ because I don’t pay any taxes on it and don’t need to think about saving money on taxes here.

Current RRSP = $163,634

  • I am not adding any more money to my RRSP (I cannot, I have no contribution room and do not take a salary)
  • Assuming a 7% growth rate
  • Assuming age 55 is when I will start withdrawing the money

 

I will have about $574,770 at the time of age 55.

Current Margin = $230,196.77

  • Assuming an addition of $1000 a month (this is valid, I get about $14K in dividends a year, and I reinvest it back in at a minimum, but it can go up to $2000 a month or more, as it all depends on contracts)
  • Assuming a 7% growth rate
  • Assuming age 55 is when I will start withdrawing the money

CURRENT TOTALS & FUTURE VALUES

Current Future
TFSA* $69,052.00 $457,908.00
RRSP $169,634.00 $574,770.00
Margin** $230,196.77 $1,239,296.00
Totals $468,882.77 $2,271,974.00

*TFSA = Adding $6000 a year. This may change to be more in the future, but assuming $6000 a year for simplicity’s sake.

**Margin = This is variable. I only put $1000 a month additions, or $12,000 a year but could be more if I get a contract and then I can plow $20K at a time.

With the above estimates, I am looking at around $2.2M in invested assets by the time I retire across 3 accounts.

TFSA Future Value = $457,908 with $11,081.37 annual income

For the TFSA, if I just leave it as-is, it is $457K as an ’emergency fund’ that I can withdraw any time without any tax considerations. I suppose I’ll keep it as a backup fund in case I need to raid it one year for tax-free money, and use it for…. ? Not sure what yet.

I do know that a lot of capital gains & dividend stocks are sitting in this account, throwing off some dividend income per year which I reinvest right back in again, so there’s that as well to consider, that it isn’t as stagnant as it seems.

Let’s assume 50% of it is dividend-stock related, so… $457,908 x 90% = $228,954 would be invested dividend capital.

Taking my current dividend portfolio yields of 4.84%, my TFSA could be giving $11,081.37 in eligible dividend income per year.

(Why 50%? Because my investing strategy was 50% dividends, 50% index funds)

RRSP Future Value = $574,770

Ahh.. this is the deferred income tax one that I am a little concerned about. I can start withdrawing from it at the age of 55, and if I assume that the money still grows at 4% while it is sitting there.

My RRSP also pays off dividends because I have mutual funds in there, but I am assuming $0 for now just to be conservative.

My income at that point, would be this every year at a MINIMUM (you cannot withdraw less than that) and using this RRIF calculator:

Age Current balance Withdrawal Growth Balance
55 $574,700.00 $16,436.42 $22,634.01 $580,897.59
56 $580,897.59 $17,078.39 $22,868.09 $586,687.29
57 $586,687.29 $17,776.62 $23,084.64 $591,995.31
58 $591,995.31 $18,529.45 $23,280.75 $596,746.60
59 $596,746.60 $19,274.92 $23,454.74 $600,926.43
60 $600,926.43 $20,010.85 $23,606.09 $604,521.66
61 $604,521.66 $20,856.00 $23,731.69 $607,397.36
62 $607,397.36 $21,684.09 $23,828.89 $609,542.16
63 $609,542.16 $22,553.06 $23,895.96 $610,885.07
64 $610,885.07 $23,519.08 $23,928.88 $611,294.87
65 $611,294.87 $24,451.79 $23,925.18 $610,768.25
66 $610,768.25 $25,469.04 $23,882.21 $609,181.42
67 $609,181.42 $26,499.39 $23,796.54 $606,478.58
68 $606,478.58 $27,594.78 $23,664.84 $602,548.64
69 $602,548.64 $28,681.32 $23,484.24 $597,351.57
70 $597,351.57 $29,867.58 $23,250.81 $590,734.80
71 $590,734.80 $31,190.80 $22,957.64 $582,501.64
72 $582,501.64 $31,455.09 $22,622.62 $573,669.17
73 $573,669.17 $31,723.91 $22,263.53 $564,208.80
74 $564,208.80 $31,990.64 $21,879.37 $554,097.54
75 $554,097.54 $32,248.48 $21,469.37 $543,318.43
76 $543,318.43 $32,490.44 $21,033.00 $531,860.99
77 $531,860.99 $32,815.82 $20,567.69 $519,612.85
78 $519,612.85 $33,047.38 $20,072.78 $506,638.25
79 $506,638.25 $33,336.80 $19,547.56 $492,849.02
80 $492,849.02 $33,612.30 $18,990.06 $478,226.77
81 $478,226.77 $33,858.46 $18,399.87 $462,768.18
82 $462,768.18 $34,152.29 $17,775.19 $446,391.09
83 $446,391.09 $34,416.75 $17,114.42 $429,088.75
84 $429,088.75 $34,670.37 $16,416.86 $410,835.24
85 $410,835.24 $34,962.08 $15,680.44 $391,553.60
86 $391,553.60 $35,200.67 $14,904.03 $371,256.96
87 $371,256.96 $35,455.04 $14,086.69 $349,888.61
88 $349,888.61 $35,723.63 $13,226.17 $327,391.15
89 $327,391.15 $35,980.29 $12,320.74 $303,731.61
90 $303,731.61 $36,204.81 $11,369.53 $278,896.33
91 $278,896.33 $36,423.86 $10,371.40 $252,843.87
92 $252,843.87 $36,637.08 $9,324.71 $225,531.50
93 $225,531.50 $36,851.85 $8,227.59 $196,907.24
94 $196,907.24 $36,998.87 $7,079.45 $166,987.82
95 $166,987.82 $33,397.56 $5,960.23 $139,550.49
96 $139,550.49 $27,910.10 $4,980.92 $116,621.32
97 $116,621.32 $23,324.26 $4,162.52 $97,459.57
98 $97,459.57 $19,491.91 $3,478.59 $81,446.25
99 $81,446.25 $16,289.25 $2,907.03 $68,064.03
100 $68,064.03 $13,612.81 $2,429.38 $56,880.61

By the time I reach 100, I should only have $57K left in there, more or less.

Margin Future Value = $1,239,296.00

This is where the bulk of my assets are likely to sit. I will not have a lot of it in RRSP (no contribution room), and TFSAs are maxed out already.

If we assume glibly that 50% of this amount is going to yield dividend income (just like with my TFSA), then $619,648 is invested capital in dividend-yielding stocks, and at my current yield of 4.84%, I will have an estimated income of $29,990.96

Total Portfolio Estimated Assets at 55 = $2,271,974.00

If I look at each of my investments individually, with only adding $6000 to my TFSA and then $12,000 into my margin account, I should have $2.27M at 55.

  • TFSA Future Value = $457,908
  • RRSP Future Value = $574,770
  • Margin Future Value = $1,239,296.00

Total Portfolio Estimated Gross Income at 55

Remember the TFSA and Margin accounts paying off dividends off 50% of the invested capital?

Age RRSP/RRIF Income (minimum withdrawal)

YES capital withdrawal

TFSA eligible dividends income

NO capital withdrawal

Margin eligible dividends Income

NO capital withdrawal

Total  Gross Income
55 $16,436.42 $11,081.37 $29,990.96 $57,508.76
56 $17,078.39 $11,196.62 $30,302.87 $58,577.88
57 $17,776.62 $11,313.06 $30,618.02 $59,707.70
58 $18,529.45 $11,430.72 $30,936.45 $60,896.62
59 $19,274.92 $11,549.60 $31,258.19 $62,082.71
60 $20,010.85 $11,669.72 $31,583.27 $63,263.84
61 $20,856.00 $11,791.08 $31,911.74 $64,558.82
62 $21,684.09 $11,913.71 $32,243.62 $65,841.42
63 $22,553.06 $12,037.61 $32,578.95 $67,169.62
64 $23,519.08 $12,162.80 $32,917.77 $68,599.66
65 $24,451.79 $12,289.30 $33,260.12 $70,001.20
66 $25,469.04 $12,417.10 $33,606.02 $71,492.17
67 $26,499.39 $12,546.24 $33,955.53 $73,001.16
68 $27,594.78 $12,676.72 $34,308.66 $74,580.17
69 $28,681.32 $12,808.56 $34,665.47 $76,155.35
70 $29,867.58 $12,941.77 $35,025.99 $77,835.34
71 $31,190.80 $13,076.36 $35,390.27 $79,657.43
72 $31,455.09 $13,212.36 $35,758.32 $80,425.77
73 $31,723.91 $13,349.77 $36,130.21 $81,203.89
74 $31,990.64 $13,488.60 $36,505.96 $81,985.21
75 $32,248.48 $13,628.89 $36,885.63 $82,762.99
76 $32,490.44 $13,770.63 $37,269.24 $83,530.30
77 $32,815.82 $13,913.84 $37,656.84 $84,386.50
78 $33,047.38 $14,058.54 $38,048.47 $85,154.39
79 $33,336.80 $14,204.75 $38,444.17 $85,985.73
80 $33,612.30 $14,352.48 $38,843.99 $86,808.77
81 $33,858.46 $14,501.75 $39,247.97 $87,608.18
82 $34,152.29 $14,652.57 $39,656.15 $88,461.00
83 $34,416.75 $14,804.95 $40,068.57 $89,290.28
84 $34,670.37 $14,958.93 $40,485.29 $90,114.58
85 $34,962.08 $15,114.50 $40,906.33 $90,982.91
86 $35,200.67 $15,271.69 $41,331.76 $91,804.12
87 $35,455.04 $15,430.51 $41,761.61 $92,647.16
88 $35,723.63 $15,590.99 $42,195.93 $93,510.55
89 $35,980.29 $15,753.14 $42,634.77 $94,368.19
90 $36,204.81 $15,916.97 $43,078.17 $95,199.95
91 $36,423.86 $16,082.51 $43,526.18 $96,032.55
92 $36,637.08 $16,249.77 $43,978.85 $96,865.70
93 $36,851.85 $16,418.76 $44,436.23 $97,706.85
94 $36,998.87 $16,589.52 $44,898.37 $98,486.76
95 $33,397.56 $16,762.05 $45,365.31 $95,524.92
96 $27,910.10 $16,936.37 $45,837.11 $90,683.59
97 $23,324.26 $17,112.51 $46,313.82 $86,750.59
98 $19,491.91 $17,290.48 $46,795.48 $83,577.87
99 $16,289.25 $17,470.30 $47,282.16 $81,041.71
100 $13,612.81 $17,651.99 $47,773.89 $79,038.69

As it stands today, without adding any more money aside from the $6000 into my TFSA and another $12,000 into my Margin accounts (reinvested dividends), I should be on track for a modest retirement at 55.

I am not forgetting that inflation means $57K today is not the same as $57K in 20+ years.

Total Net Income AFTER Taxes

Now, this is all before taxes, so what does it look like with that money gone?

I popped the first age’s numbers into a tax calculator for Québec, and it gave me a tax rate of 10.4%, but that was for the lowest $57,508.76 gross income.

So I took the average of the Total Gross over time, and got taxes for that as an average.


The average of the income from age 55 to 100, is $80,931.95 with the average breakdown as this:

  • RRSP/RRIF = $28,603.40
  • TFSA = $14,118.31
  • Margin =  $38,210.23

NOTE: TFSA’s DO NOT trigger taxes, so I removed the average income coming in from the TFSA at $14,118.31 and only put in the income of RRSP/RRIF and Margin for a total of $88,613.63

Also, I want an AVERAGE tax rate (I am not going to do each year individually, ain’t nobody got time for that.

I re-plugged in the numbers into the calculator pretending I am 55 right now, and got: 15.1% as an average tax rate.

Age RRSP/RRIF Income TFSA income Margin Income Total Gross Income Taxes (15.1%) Net income (mostly dividends) 16.7%
Average Income $28,603.40 $14,118.31 $38,210.23 $80,931.95 (Did not use TFSA income in this calculation) (Includes TFSA income)
55 $16,436.42 $11,081.37 $29,990.96 $57,508.76 $8,683.82 $48,824.93
56 $17,078.39 $11,196.62 $30,302.87 $58,577.88 $8,845.26 $49,732.62
57 $17,776.62 $11,313.06 $30,618.02 $59,707.70 $9,015.86 $50,691.84
58 $18,529.45 $11,430.72 $30,936.45 $60,896.62 $9,195.39 $51,701.23
59 $19,274.92 $11,549.60 $31,258.19 $62,082.71 $9,374.49 $52,708.22
60 $20,010.85 $11,669.72 $31,583.27 $63,263.84 $9,552.84 $53,711.00
61 $20,856.00 $11,791.08 $31,911.74 $64,558.82 $9,748.38 $54,810.44
62 $21,684.09 $11,913.71 $32,243.62 $65,841.42 $9,942.05 $55,899.36
63 $22,553.06 $12,037.61 $32,578.95 $67,169.62 $10,142.61 $57,027.01
64 $23,519.08 $12,162.80 $32,917.77 $68,599.66 $10,358.55 $58,241.11
65 $24,451.79 $12,289.30 $33,260.12 $70,001.20 $10,570.18 $59,431.02
66 $25,469.04 $12,417.10 $33,606.02 $71,492.17 $10,795.32 $60,696.85
67 $26,499.39 $12,546.24 $33,955.53 $73,001.16 $11,023.17 $61,977.98
68 $27,594.78 $12,676.72 $34,308.66 $74,580.17 $11,261.61 $63,318.56
69 $28,681.32 $12,808.56 $34,665.47 $76,155.35 $11,499.46 $64,655.90
70 $29,867.58 $12,941.77 $35,025.99 $77,835.34 $11,753.14 $66,082.21
71 $31,190.80 $13,076.36 $35,390.27 $79,657.43 $12,028.27 $67,629.16
72 $31,455.09 $13,212.36 $35,758.32 $80,425.77 $12,144.29 $68,281.48
73 $31,723.91 $13,349.77 $36,130.21 $81,203.89 $12,261.79 $68,942.10
74 $31,990.64 $13,488.60 $36,505.96 $81,985.21 $12,379.77 $69,605.44
75 $32,248.48 $13,628.89 $36,885.63 $82,762.99 $12,497.21 $70,265.78
76 $32,490.44 $13,770.63 $37,269.24 $83,530.30 $12,613.08 $70,917.23
77 $32,815.82 $13,913.84 $37,656.84 $84,386.50 $12,742.36 $71,644.14
78 $33,047.38 $14,058.54 $38,048.47 $85,154.39 $12,858.31 $72,296.08
79 $33,336.80 $14,204.75 $38,444.17 $85,985.73 $12,983.84 $73,001.88
80 $33,612.30 $14,352.48 $38,843.99 $86,808.77 $13,108.12 $73,700.65
81 $33,858.46 $14,501.75 $39,247.97 $87,608.18 $13,228.83 $74,379.34
82 $34,152.29 $14,652.57 $39,656.15 $88,461.00 $13,357.61 $75,103.39
83 $34,416.75 $14,804.95 $40,068.57 $89,290.28 $13,482.83 $75,807.44
84 $34,670.37 $14,958.93 $40,485.29 $90,114.58 $13,607.30 $76,507.28
85 $34,962.08 $15,114.50 $40,906.33 $90,982.91 $13,738.42 $77,244.49
86 $35,200.67 $15,271.69 $41,331.76 $91,804.12 $13,862.42 $77,941.70
87 $35,455.04 $15,430.51 $41,761.61 $92,647.16 $13,989.72 $78,657.44
88 $35,723.63 $15,590.99 $42,195.93 $93,510.55 $14,120.09 $79,390.46
89 $35,980.29 $15,753.14 $42,634.77 $94,368.19 $14,249.60 $80,118.60
90 $36,204.81 $15,916.97 $43,078.17 $95,199.95 $14,375.19 $80,824.76
91 $36,423.86 $16,082.51 $43,526.18 $96,032.55 $14,500.91 $81,531.63
92 $36,637.08 $16,249.77 $43,978.85 $96,865.70 $14,626.72 $82,238.98
93 $36,851.85 $16,418.76 $44,436.23 $97,706.85 $14,753.73 $82,953.11
94 $36,998.87 $16,589.52 $44,898.37 $98,486.76 $14,871.50 $83,615.26
95 $33,397.56 $16,762.05 $45,365.31 $95,524.92 $14,424.26 $81,100.66
96 $27,910.10 $16,936.37 $45,837.11 $90,683.59 $13,693.22 $76,990.37
97 $23,324.26 $17,112.51 $46,313.82 $86,750.59 $13,099.34 $73,651.25
98 $19,491.91 $17,290.48 $46,795.48 $83,577.87 $12,620.26 $70,957.62
99 $16,289.25 $17,470.30 $47,282.16 $81,041.71 $12,237.30 $68,804.41
100 $13,612.81 $17,651.99 $47,773.89 $79,038.69 $11,934.84 $67,103.85

This is mostly because the bulk of my income ($40K) is in dividends and not from RRSP withdrawals, the tax rate of 15.1% is a ‘gift’, really.

How much of a gift?

Well when I re-run the numbers, pretending the gross income (RRSP/RRIF and Margin only) I am taking out is now all 100% RRSP/RRIF withdrawals, my tax rate goes up to 26.3%:

Age Net income (mostly dividends) 16.7% Net income (100% RRSP/RRIF) 26.3% Difference saved in taxes
55 $48,824.93 $44,667.80 $4,157.14
56 $49,732.62 $45,498.20 $4,234.42
57 $50,691.84 $46,375.75 $4,316.09
58 $51,701.23 $47,299.19 $4,402.03
59 $52,708.22 $48,220.44 $4,487.77
60 $53,711.00 $49,137.84 $4,573.15
61 $54,810.44 $50,143.67 $4,666.76
62 $55,899.36 $51,139.88 $4,759.48
63 $57,027.01 $52,171.52 $4,855.49
64 $58,241.11 $53,282.24 $4,958.86
65 $59,431.02 $54,370.84 $5,060.18
66 $60,696.85 $55,528.90 $5,167.95
67 $61,977.98 $56,700.95 $5,277.03
68 $63,318.56 $57,927.38 $5,391.18
69 $64,655.90 $59,150.85 $5,505.04
70 $66,082.21 $60,455.72 $5,626.48
71 $67,629.16 $61,870.96 $5,758.20
72 $68,281.48 $62,467.74 $5,813.74
73 $68,942.10 $63,072.11 $5,869.99
74 $69,605.44 $63,678.98 $5,926.46
75 $70,265.78 $64,283.09 $5,982.69
76 $70,917.23 $64,879.07 $6,038.16
77 $71,644.14 $65,544.09 $6,100.05
78 $72,296.08 $66,140.52 $6,155.56
79 $73,001.88 $66,786.23 $6,215.65
80 $73,700.65 $67,425.50 $6,275.15
81 $74,379.34 $68,046.41 $6,332.93
82 $75,103.39 $68,708.81 $6,394.58
83 $75,807.44 $69,352.92 $6,454.53
84 $76,507.28 $69,993.17 $6,514.11
85 $77,244.49 $70,667.61 $6,576.88
86 $77,941.70 $71,305.45 $6,636.24
87 $78,657.44 $71,960.26 $6,697.19
88 $79,390.46 $72,630.86 $6,759.60
89 $80,118.60 $73,297.00 $6,821.59
90 $80,824.76 $73,943.04 $6,881.72
91 $81,531.63 $74,589.73 $6,941.90
92 $82,238.98 $75,236.85 $7,002.13
93 $82,953.11 $75,890.18 $7,062.93
94 $83,615.26 $76,495.95 $7,119.31
95 $81,100.66 $74,195.45 $6,905.21
96 $76,990.37 $70,435.12 $6,555.24
97 $73,651.25 $67,380.31 $6,270.94
98 $70,957.62 $64,916.02 $6,041.59
99 $68,804.41 $62,946.15 $5,858.26
100 $67,103.85 $61,390.38 $5,713.47

Average savings would be $5850.33 from the age 55-100, per year. That’s quite a nice chunk of change, an extra $487.53 per month.

Now if we take this money, and express it in today’s dollars.

To do this, I found an inflation calculator from the Bank of Canada, and pretended it was 18 years ago in 2002 to 2020 to get an average.

If I apply that same percentage change of 36.38% to the future income to deflate it to express it in “today’s dollars”, it means this is the income I can expect at 55, with the current inflation/cost-of-living taken into account.

Age Net Income  after 16.7% Taxes Total Net Income In “Today’s Dollars” Net Monthly Income
55 $48,824.93 $35,800.66 $2,983.39
56 $49,732.62 $36,466.21 $3,038.85
57 $50,691.84 $37,169.56 $3,097.46
58 $51,701.23 $37,909.68 $3,159.14
59 $52,708.22 $38,648.05 $3,220.67
60 $53,711.00 $39,383.34 $3,281.94
61 $54,810.44 $40,189.50 $3,349.12
62 $55,899.36 $40,987.95 $3,415.66
63 $57,027.01 $41,814.79 $3,484.57
64 $58,241.11 $42,705.02 $3,558.75
65 $59,431.02 $43,577.52 $3,631.46
66 $60,696.85 $44,505.68 $3,708.81
67 $61,977.98 $45,445.07 $3,787.09
68 $63,318.56 $46,428.04 $3,869.00
69 $64,655.90 $47,408.63 $3,950.72
70 $66,082.21 $48,454.47 $4,037.87
71 $67,629.16 $49,588.76 $4,132.40
72 $68,281.48 $50,067.08 $4,172.26
73 $68,942.10 $50,551.47 $4,212.62
74 $69,605.44 $51,037.87 $4,253.16
75 $70,265.78 $51,522.06 $4,293.50
76 $70,917.23 $51,999.73 $4,333.31
77 $71,644.14 $52,532.73 $4,377.73
78 $72,296.08 $53,010.76 $4,417.56
79 $73,001.88 $53,528.29 $4,460.69
80 $73,700.65 $54,040.66 $4,503.39
81 $74,379.34 $54,538.31 $4,544.86
82 $75,103.39 $55,069.21 $4,589.10
83 $75,807.44 $55,585.46 $4,632.12
84 $76,507.28 $56,098.61 $4,674.88
85 $77,244.49 $56,639.16 $4,719.93
86 $77,941.70 $57,150.38 $4,762.53
87 $78,657.44 $57,675.20 $4,806.27
88 $79,390.46 $58,212.68 $4,851.06
89 $80,118.60 $58,746.59 $4,895.55
90 $80,824.76 $59,264.38 $4,938.70
91 $81,531.63 $59,782.69 $4,981.89
92 $82,238.98 $60,301.35 $5,025.11
93 $82,953.11 $60,824.98 $5,068.75
94 $83,615.26 $61,310.50 $5,109.21
95 $81,100.66 $59,466.68 $4,955.56
96 $76,990.37 $56,452.83 $4,704.40
97 $73,651.25 $54,004.44 $4,500.37
98 $70,957.62 $52,029.34 $4,335.78
99 $68,804.41 $50,450.51 $4,204.21
100 $67,103.85 $49,203.59 $4,100.30

That’s already more than what I spend today which is around $1200 for base expenses!!!

My ‘ideal’ budget was already $3000 a month so it looks like I am good for now with what I have saved.

I can stop and coast if I want. And whatever I make in the next 18 years, I can spend on whatever I want, technically speaking.

(I won’t because I am nervous about running out of money.. but I can breathe and take my foot off the pedal if I wanted to.)


New possible additions & changes to my strategy:

From doing this entire exercise, I am realizing a few things.

1. Will start withdrawing RRIF to TFSA “in kind”

One of the tricks I could use is to withdraw the MINIMUM from the RRIF but not to spend it, and move it into my TFSA to top it up “in kind”.

This avoids the withholding tax altogether, but I will pay possibly a transfer fee, but at least I only pay the 16.7% in income taxes (and not higher!) as I am moving it from a pre-tax registered account to a post-tax registered account.

The withholding taxes in 2020 are:

  • From $0 to $5,000 it is 10% (5% in Quebec)
  • From $5,001 to $15,000 it is 20% (10% in Quebec)
  • Greater than $15,000 it is 30% (15% in Quebec)

I could also take out more from my RRSP/RRIF and save it in my TFSA so that it becomes more tax-efficient in the future when it comes time for me to pass on my estate to Little Bun.

This is just if I don’t want to spend the money, but can slowly make it more tax-efficient. I do something similar to this already by taking my Margin investments and transferring them to my TFSA, but it isn’t as much of a tax-efficient deal because I have to pay a disposition on the “sold” Margin assets in taxes (capital gains tax in this case), to be able to register it under a TFSA.

2. Need to drain my RRSP/RRIF sooner

I was only calculating the minimum withdrawal on my RRSP in the above scenarios.

It’s clear I will have too much left even until the age of 100, and this was not even taking into account:

  • Using any of my TFSA capital or Margin capital in withdrawals – I was living off the dividends
  • Any side incomes I will likely still have at that age

This means I need to take out more than the minimum $28,603.40 per year from my RRSP to drain it ASAP but without knocking myself up to a too-high tax bracket. I have to figure out the balance on this.

3. Considering withdrawing from my RRSP earlier than 55

I know this is a ‘terrible’ idea, but I am considering draining my RRSP sooner before the age of 55. I have to think more on this.

It will have to be done after I clear my non-eligible dividends from my company down to $0 so that my “income” counted from that, is negligible, and it lowers my overall taxable income so I have that extra room to drain my RRSP, even with a 10% withholding tax, etc.

If I consider this scenario: I have no income this year, I am 37, and I took out $20K from my RRSP to deregister it, I would pay 9.9% taxes on it. That sounds more favourable.

The problem arises in that I do in fact, make money more than $20K from my RRSP in side incomes as well as in eligible dividends, so I have to find a balance to see if it makes sense to start draining my RRSP before age 55.

This amount drained, I wouldn’t necessarily reinvest back in a Margin account, but maybe keep in cash, and that can be part of my allocation shift as I age.

The withholding taxes are the same as RRSP/RRIF:

  • 10% (5% in Quebec) on amounts up to $5,000
  • 20% (10% in Quebec) on amounts over $5,000 up to including $15,000
  • 30% (15% in Quebec) on amounts over $15,000

The downsides are:

  • Loss of compounding tax-sheltered gains – OK that I knew, but I would keep it in cash or spend it as I would be “retired”
  • Loss of contribution room – Fine, but if you’re planning on retiring anyway, you don’t need the extra room
  • Withholding taxes + the money is considered an income on top of your taxable income for the year – OK but if you don’t have any other income like a salary/job like me, this is not so much of an issue

3. Transfer investments to Little Bun earlier

AS mentioned above — since the TFSA is already tax-free, I should drain my RRSP as soon as possible, and then use the TFSA afterwards

The real issue would come from the Margin investments, which are my bulk of my investments at the end.

If I can transfer investments from my account to my son, and have him at a lower income tax bracket, pay a lower amount of taxes on this “income”, that would be ideal.

Have to figure out when would be a good time to do this, as any transfer of investments not in cash, would be deemed a disposition, and I’d pay taxes on it. I’d need to do it in a year where he has a low income, and I don’t have much either.

So if I had $1000, I doubled it to $2000 with capital gains, I am subject to 25% taxes on that $1000 capital gain, and THEN my son gets the net of that which would be $1750.

4. Should move my money into cash instead of bonds as I age

Cash is not taxable in an estate, along with TFSAs, and my Principal Residence.

So.. the more money I have in all 3 of these at the end, the better.

I’ll just leave it in a high-interest savings account which seem to be doing better than bonds these days. O_o

If I leave my money in a high-interest savings account in cash, it has actually kept up with inflation, more or less (in some cases, done better), seeing as Canada has very favourable rates compared to other countries. We can get on average 2% or more if you’re smart about moving your money around.

5. Leave the TFSA and cash for the very end

As mentioned – these two things are not taxable at the time of your estate, even to your children. They would only pay taxes on any income earned AFTER the date of death which is called the Rollover Period.

Example: Death Date April 15th. You get $200 in dividends on April 16th in the TFSA. The child getting the TFSA would then only pay taxes on the $200 earned.

6. Pump up my Margin accounts

It will get taxed at capital gains, so I’d rather have $10M in there taxed at 25% capital gains tax, than $4M in cash.

As for the capital gains tax, it would work like this:

If I had $1000 at the start, and at the end it is $5000 by the time I sell it, then the difference or capital gain is $4000.

I’d be taxed 25% on that*

25% on let’s pretend I have $10M but the $5M was in capital gains at the end, that is $1.25M in taxes, and whoever gets my estate would get $8.75M which is still a lot of money.

*The real calculation is actually $4000 divided by two, and then I am taxed 50% on that half, but it works out to an effective 25% so I’d rather use that instead.)

OTHER POINTS I AM LEAVING OUT

So many other variables, but in a nutshell:

  • Assuming no other income from the blog or any side incomes except dividends – again, keeping it simple – but this is obviously a big one because I am making quite a bit in side incomes these days. Must have a rethink.
  • Inflation – Things that cost $20 today will not cost $20 today. Everything will be more expensive. My condo fees if I still have it will likely go up, same with cost of living. I’ll need more money than I need today, to survive, and seeing as I need at a bare minimum $15K, assuming I need at least $60K in the future is safe enough. I am assuming doubling the cost of my expenses every 10 years, so at 47, my expenses are $30K, and at 57 my expenses are $60K. Who knows if this is reasonable or not!?
  • I may make less than I expected – in terms of the interest rate, I am saying 7%. What if it is 5%? Or I am in the middle of a recession when it hits?
  • I will be re-allocating a lot of these assets into cash that won’t fluctuate as I get older, because what happens if another recession like this hits for 2-3 years? It means my “returns” on the money I am talking about above, will change as they are no longer in stocks earning 7% but earning 2% in a high-interest savings account.
  • What if I sell some dividend stocks and downgrade to more ‘stable’ ones, that pay lower dividends at 1% – 2% rather than 4% – 5%?
  • Not considering my business has any income left. At this point I have drained it of all ineligible dividends as a salary to myself. This is actually not likely, but is a very conservative view of my future holdings.
  • I am not considering government contributions from pension plans
  • I am not considering any emergencies or having to take out chunks of money for whatever reason
  • I am not considering any health issues – if I have to hire a private nurse, they aren’t cheap, so that’ll take a lot more money
  • I am not considering any inheritances (unlikely to have any)
  • Am not considering having to pay for anyone else, but if health issues arise my expenses may go up and I may have to pony up more income to help or at least be happy I have the extra money
  • Don’t know when I am going to die – obviously the worst one LOL … I can’t plan for this

There are SO MANY OTHER FACTORS that go into how much I will have at the end, but a conservative look at it is what I am doing, and to also highlight the tax-efficiency you get from supplementing your retirement income with eligible dividends instead of just relying solely on socking away money into your RRSP.

Reflections on the amounts

Basically, I am considering all I have now and today, is all I get. I very likely will have much more than I think by the time I am 55. Too much is better than not enough right?

This also helps me breathe easy because I CAN do things like spend on what I want, and I don’t need to be fearful I’ll end up eating cat food.

It is one thing to have a general feeling you’ll be fine, it’s another to run the numbers and actually be pleasantly surprised.

Not only that, my home is cleared, I only have Little Bun to focus my money on and I would be more than happy to:

  • help out with student loans (I want to secretly clear his student loans a year after he graduates, as a surprise, and not tell him beforehand, as well as to secretly see if he is on the right path to being financially secure)
  • take more risks with my money – private lending, dividend stock picks, etc
  • pay for my parents (I do this already, but now I am not worried about that 24/7 private nurse I may have to hire if things go really bad)
  • gift investments earlier to reduce my estate – I have to also consider giving gifts to Little Bun to reduce the taxes on my estate when I pass, but if I leave it all in cash, he won’t pay estate taxes anyway on cash or TFSAs.
  • leave TFSAs and Cash as my last resort to touch – If I have $500K at the end or more in these two accounts and he doesn’t get taxed on the amounts, I will be v. happy. May have to consider a trust for him, so he doesn’t get that ‘windfall’ at the age of 18. I will have to see how his money education goes and if I can trust him to be responsible even at 18.
  • go on more vacations and enjoy myself knowing that what I earn now, is more than enough for the future, more or less, and I will be fine (I have a secret fear of being a HENRY that won’t ever go away until I hit maybe $10M in invested assets LOL)

For now, Canada has no gift tax (property is another issue altogether), but I could give Little Bun and/or his future children money every year to lower my invested assets portfolio, and help him out, as I am very likely to have more than what I outlined above.

I will also not plan on living to 100.

I mean I think 85 is within my grasp, but 100 is truly if I take good care of myself, and nothing bad happens. I plan for 100, but I do not expect 100 (THOUGH I WANT TO!). My grandparents both lived until their late 90s with none of the medical advances in technology today.

I will likely live to be older as well, maybe even past 100 which is where my TFSA/cash comes in.

Consider the OAS clawback may come into effect

In addition, if you save TOO MUCH in your RRSP, I had a friend (an accountant) tell me she had her OAS pension payouts that she paid into all of these years, clawed back because she saved too much and the government determined she didn’t need the money.

Here’s a little chart for 2020:

Year OAS Max (Monthly) OAS Max (Annual) OAS Clawback starting threshold OAS Maximum clawback threshhold
2020 $613.53 $7,362.36 $79,054 $128,137

For every dollar ($1.00) of income above the threshold, the amount of basic OAS pension reduces by 15 cents.

For example, if your taxable net income was $75,000 in 2015, then you would be above the clawback threshold by $2,191 which in turn would mean that you would lose $328.65 per year of OAS or $27.39 per month. If you qualified for the maximum OAS, you would be losing just under 5% of your OAS pension income. 

More excellent points on how to minimize this clawback here on this site, some of which mentions being careful about your dividend income creating a gross-up effect that puts you over that OAS threshold as well.

But don’t avoid dividend income just because of a clawback. You still get more money in the end.

Thoughts? Suggestions?

Have you gone into a deep dive of your retirement portfolio in the future and thought about how to minimize taxes?

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Sherry of Save. Spend. Splurge.

Millionaire at 36 after getting out of $60K of student debt in 18 months, a little over a decade earlier, using TheBudgetingTool.com. Since then, I have paid my $600K home in cash (my half was $300K), my $180K casr in cash, worked 50% of my career (taking 1-2 year breaks), and quadrupled my income within 2 years of graduating, going from $65K to $260K with an average lifetime savings rate of 50%. I could retire today if I wanted, but love my work-life balance as a freelancing consultant in STEM (Science, Technology, Engineering, Math). I am all about balance - between time and money, and also enjoying my money. I also post daily on Instagram @saverspender.

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4 Comments

  1. Kay

    Sherry, my husband does contracting and takes money out as Ineligible dividends… but his taxes are way higher than this. (Ontario) I wonder what he’s missing …

    Reply
    1. Sherry of Save. Spend. Splurge.

      If you have other income on this tax return, it affects the tax return. This is just strictly ineligible dividends without any other considerations.

      Reply
  2. Financial Orchid

    My strategy: work + save +invest until health does not permit. Then scale back as necessary until mort. Sprinkle some nice holidays + luxury accommodations in between. C’est la vie.

    Reply
    1. Sherry of Save. Spend. Splurge.

      That sounds about right for me as well 🙂 I enjoy working!

      Reply

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