RRSP surgery begins… now!

Over the last 2 years I’ve been preparing the withdrawal of funds from my RRSP account.  I have $545,000 of stocks to pull out.  I realized 2 years ago that putting Canadian stocks in a RRSP is not a good idea since my marginal tax rate at withdrawal is not less than the marginal tax rate in the years I contributed.  As I withdraw funds from my RRSP, I pay income tax at the same rate as if the funds were salary or interest revenue.

Note that the largest income tax bracket (in Quebec) is 37.12%.  If your Taxable income is between $46,605 and $86,105, this is the tax rate you pay on the $39,500 of this bracket.   In my case, my taxable income over the years has never been higher that the bracket limit.  Therefore, all my RRSP contributions that have generated dividends and capital gains will be withdrawn at the same marginal tax rate at which I contributed.  Not the premise of holding a RRSP…

During my RRSP contributing years, I always assumed that my marginal tax rate would be lower during my withdrawal years.  Well, it’s not going to happen as my investments already generate $45,000 of dividends annually.  This figure will only increase over the years.

Since you read this blog, you may also end up in the same situation as me.  Therefore, ask yourself, “Will I really be in a lower tax bracket at retirement?”  If the answer is “no”, be very careful if you consider putting Canadian stocks (and non-dividend paying US stocks) inside your RRSP.  It might be best to hold them in a cash, margin or TFSA account.

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So, I now begin my RRSP surgery by withdrawing RRSP funds while the stock market is down.  Specifically, the surgery involves:

  • Selling stocks that have decreased by more than 26% in 2018 (about $82,000 of stocks)
  • Withdrawing the funds (brokers holds back 30% for income tax – $24,600)
  • Depositing the funds in my margin account with Interactive Brokers
  • In addition to my deposit, borrowing on margin the amount of withholding tax
  • Buying the same stocks that I held in my RRSP account

Note that:

  • Borrowing on margin is not for everyone
  • Interactive Broker currently charges 2.762% annual interest on its margin loan
  • The margin interest is deductible for income tax purpose
  • I want to hold the same stocks
  • Canadian stock dividends benefit form the dividend tax credit
  • Capital gains and losses are included at 50% for income tax purpose

The big plus in my mind is that I get to take “unloved” stocks out of my RRSP (Dollarama is down 40% in 2018) and pay less income tax (40% less for the Dollarama withdrawal).

If the market correction continues in January, I will prepare a list of “unloved” stocks to pull out of my RRSP in February, if their prices are down enough.

Until next month,

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