First RRSP surgery is completed!

In early January, I completed the withdrawal of 10 stocks from my RRSP account.  I directed 9 of these stocks to my margin account with Interactive Brokers.  The 10th stock, a REIT, was directed to my TFSA at Questrade.

With the stock market correction in December, I sold 10 stocks in my RRSP account that experienced serious drops in price in 2018.  The proceeds amounted to $78,400.  At the market top in September, these stocks were worth $119,599.  Therefore, these stocks were down 35% from their price tops.

Note that on this withdrawal, the broker retained 30% of the amount as a withholding income tax for the governments.  The withholding tax amounted to $23,505.

When I purchased these same stocks in my margin account, I borrowed the amount withheld for taxes.  Presently, Interactive Brokers charges 3.107% in annual interest on Canadian dollar loans.  Questrade transferred the rest of the withdrawn funds to my margin account.

Note that I have no intention of getting rid of these stocks.  I want to continue collecting the increasing dividends these stocks pay quarterly.

With the large RRSP withdrawal, my taxable income will be much greater this year.  Thus, this year, the Canadian dividends I receive from these transferred stocks will be taxed at 35%… but in the following years, the tax rate will be closer to 17.5%!

Pleasant surprise, after I purchased the stocks in my margin account, most of the stocks profited from the increasing stock market in January.  Only half of these theoretical capital gains will be taxed from now on!

So here is what 2019 looks like to me:

  • I will pay about $730 in interest on my margin loan – this interest is tax deductible at the regular rate
  • I will receive $1669 in Canadian dividends – taxed at the lower rate
  • I will receive $1631 in US dividends – taxed at the regular rate less the US withholding tax
  • I will receive $290 in distributions from my REIT in my TFSA… tax free

With these 9 stocks now outside my RRSP account, I will transfer these into my TFSA over the next years according to the annual limit.  Therefore, the dividends these stocks pay will become tax free.

This month, I will withdraw another $26,412 worth of stocks that I will repurchase in my margin account…

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My fund and stock allocations indicate that the value of my Canadian stocks in the base consumption sector is the most below the target.  Therefore, I used my January dividends in my RRSP account to buy, for the first time, shares of Alimentation Couche Tard (ATD.A-T).  After all, I usually purchase my gasoline at its stations; so I decided to put the profit on my purchases back in my wallet!

For my $6000 contribution my TFSA, I forgot to transfer my newly, outside my RRSP account stocks…  Instead I bought the Brookfield Renewable Resources (BEP.UN-T) units I withdrew in my RRSP withdrawal.  I put this holding in my TFSA as its distributions are fully taxed, unlike Canadian dividends.

Until next month

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,

And the sale goes on!

Wow… stock markets where on sale in October!  Will the sale continue in November?  We will see…

This stock market decline highlights the difference between « traders » and long term savers.  This decline in the market scares “traders” as they usually borrow money to buy and sell shares in a rising market.  Of course, when the market has down days, day after day, traders sell at any cost.

On the other hand, long term savers like you and I appreciate the opportunity to buy additional shares at lower prices.

It is important to keep in mind that stock markets are not very precise at determining business value in the short term.  For a while shares are way overvalued and then they are way undervalued.   That is why as a long-term investor, it is important to not pay attention to this “noise” and just continue on following a savings plan that includes regularly buying shares using an objective decision tool.

Warren Buffet maintains that, “In the short term the market is a popularity contest; in the long term it is a weighing machine”.  Therefore, keep your focus on long term goals.

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In October, my Stock allocation for 2019 indicated that I had to sell some Procter & Gamble (PG-N) and buy other shares on sale:

AT&T (T-N), 3M (MMM-N), Transcontinental (TCL.A-T), McDonalds (MCD-N) and Lowes (LOW-N).

I added to my existing position of these stocks on days when they experienced significant drops in price.

My Stock allocation for 2019 also indicated that I should sell some shares of Helmerich & Payne (HP-N) at the beginning of the month and then buy them back at month end… 15% cheaper .

Until next month,

Which sector will do best?

This week I came across this sector performance chart.  I first saw such a chart in 2005 when I was a financial advisor with Edward Jones on the South shore of Montreal.

Sector performance chart

Its main message is that when you have a diversified stock portfolio, it is difficult to predict which sector (i.e. stocks) will do best.  Note the dynamic nature of the various sector returns over the years.  To help me manage my stock portfolio, I use two simple rules:

  • Never have more that 5% of my portfolio in one stock – Protects me from the next Nortel
  • Allocate funds by sector in a manner similar to the S&P 500 index

In order to allocate funds similarly to the S&P 500 index, I use my Stock allocation tool.  By inputting the value of each stock I own, the table shows me if any sector is “due for harvesting” and which sector is below my allocation target.  Such a tool is what the investment industry calls “neutral sector allocation”. Basically, it’s a stock portfolio that follows the same funds allocation as the S&P 500 index.

As the S&P 500 index sector allocation varies from year to year, I revise my tool’s sector allocation to the average of the previous 10 years.

This tool definitely keeps me away from stocks prices that increase too much too quickly.

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Which stock in each sector will do best?  I have no idea.

Actually, I do not worry much about stock selection.  I look for companies I understand, that increase their dividends on a regular basis.

I’m more careful about keeping my asset and stock allocation in line with my targets.

Note that when a stock’s price takes off… I sell part of that holding to buy a stock that is not so popular.

Until next time,

Using my margin account

Over the years I have been able to pay back most of my mortgage loan.  Presently I have a condo on the South shore of Montreal.  I am both content and frustrated by this loan situation.  My frustration stems from all the sunk into my condo which seems to increase in value at the same slow rate of inflation.

To tone down my frustration, I have been using a margin account for my taxable stock holdings.  Basically, a margin account allows me to use stocks as guarantee for additional stock purchases with funds I borrow from the broker.  My broker charges me interest on this borrowed money, but since this expense is incurred to generate taxable revenue, the government allows me to deduct this interest.

My strategy is to borrow an amount equal to the value of my condo less the mortgage loan balance.  This means about $140,000.  When I sell my condo, I will simply pay off both the mortgage loan balance and the margin balance with my broker.

I deal with Interactive Broker.  This online broker offers its margin account at an interest rate of 2.72% for Canadian dollar margin and at 3.41% for US dollar margin.  These rates are much cheaper than the 3.95% interest rate my bank charges me for my mortgage secured line of credit.

In the end, I am in no hurry to pay off my fixed rate mortgage loan.

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June is a big month for dividend and interest revenue in my portfolio.  This year, my June revenue is $7,745.  To reinvest this amount, I checked my asset allocation and stock allocation to identify which sectors my stockholdings are below my allocation targets.  At this time, the following sectors are below target; Consumer staples, energy, technology and finance.  Therefore, I added to my holdings the following stocks:

CCL Industries  (CCL.B-T)               Consumer staples

Brookfield Energy Partners (BEP -N)        Energy – this is the American version of BEP.UN in Toronto

Helmerich & Payne (HP-N)          Energy

Oracle (ORCL-N)               Oracle

AFLAC (AFL-N)                  Finance

Until next month,

The importance of discipline in saving for the long-term

Discipline is of primary importance to achieve your goal of long-term savings.  By long-term I mean 50, 60 or even 70 years.  I started investing for the long term 28 years ago at 26 years of age.  I will end my accumulation period in a couple of years and then move on to living off the income from the accumulated capital for the rest of my life.  In my case, while I plan to live off the income from the capital, I plan to leave the capital itself with charities and family after my expiration date.

To me, discipline in long-term savings means:

Regularly depositing a pre-established amount in a savings account, that is once a month or on each payday.  As a result, you adjust your way of life without thinking of the amount of spending you deprive yourselves.

Follow the rules of your savings plan.  If your plan includes buying units of a mutual fund every three months, make it so whether the stock market is up or down.  After all, over the next decades, you can reasonably expect recessions to happen about every 10 years.  So down markets… there will many during your long-term project.

Live below your means.  In our life and time, it’s not very appealing to live less of a life than you can afford.  So, although the amount of money you set aside may appear small as to ask yourself the question why bother?  In the long-term the results will likely me immense.  So it’s important to respect your plan and live below your means.


In May, the value of stocks in the consumer discretionary and REITs has exceeded my model target.  Therefore, I’m selling some shares of Magna International (MGA-T) and Northview Properties (NVU.UN-T).

With these funds I will purchase more shares of stocks in sectors that are below my stock allocation target, namely health and consumer base.  These will likely be Johnson  & Johnson (JNJ-N) and Pepsi (PEP-N).

Until next month,

Hello everyone,

Welcome to my blog where I discuss a very emotional subject… saving money for retirement.  For over 30 years, I’ve been setting aside money for my retirement.  As I have crossed into my 50’s, retirement is getting close.  With a life long interest in savings and the stock market, I’ve developed the skills and patience to grow savings into a money machine.  I want to share this knowledge with you to help you become a better saver.

See you in June,

Philip