Q: Maybe someone could comment on a strategy I’m developing. My wife is older then myself (She is 55 and I’m 47), and she has stopped working. We plan to start withdrawing from her spousal RRSP account in three years to reinvest it in a Corporate Class Fund. Is this a sound investment plan? I figured it would be taxed lower at this point. When the RRIF point approaches we won’t be forced into taking larger sums of money at a higher tax rate. Some details that might help are I’m in the $40,000 tax bracket and I will retire at 55 with a full pension. My wife worked part time and earn around $15,000. I will continue adding to my own RRSP although the tax break isn’t that large. The tax saving probably won’t be that large from this plan, but the concept interests me.
A: By the way in the interest of full disclosure I’m not a tax or investment professional, I just read a lot about personal finance and these are just my suggestions and should not be considered recommendations.
Pulling money out of a spousal RRSP would be a good idea if she isn’t working since you can pull out up to the personal income tax deduction with no tax at all (provided she has no other income). So from now until you turn 55 you could pull out around $8000/year for a total of $8000 x 8 years = $64,000. (Check you province limits on www.taxtips.ca to confirm the exact number and any limits on spousal withdrawals) When you make the withdrawals do it in amounts of less than $5000 to reduce the withholding amount to 10% (or 5% in Quebec). You should get the amount back when you file taxes, but you will still have the withholding amount up front.
Once you turn 55 and start taking your pension you will want to reassess your situation. With the new pension splitting rules you might find it more useful to split your pension and take the tax hit on any RRSP withdrawals. You will have to do your own math on that one since I’m not sure exactly how that all works yet.
As for your choice of investment, Corporate Class Funds tend to have expensive fees with them so you might want to shop around for other options and make sure it makes sense for your situation. Some good dividend paying stocks might be a better option if they are invested in your wife’s taxable account and they make sense in your overall allocation and comfort level. Check out the taxtips.ca web site to make sure you understand how each investment type will be taxed.
So follow reader’s any additional comments or ideas on what to do please feel free to leave a comment.
Well Canadian Money Blogs Reviewer asked me a question over at Million Dollar Journey and when I didn’t get back fast enough I got the same question here.
Q: I’d really like to retire by 45 too 🙂 What would you say are the main strategies to use to get there? How much money will you need by then? Is your strategy also to live on dividend paying stocks?
A: First off if you want an idea of how much money I think I need to retire at 45 please go back and read my Retirement Calculation posts (Part I, Part II, Part III and Assumptions). I’ll update those calculations after I get my tax return back, but for now you will get a good idea of what I’m planning. From those calculations you might be able to tell that I’m not planning on living off of just dividend paying stocks like Dereck Foster. I plan to have some blue chip dividend income, but also at least one REIT and some fixed income investments within an RRSP. I’m still working out the exact mix of investments as I go along.
My main strategies are fairly typically of most people looking for early retirement. I always live below my means (ie: live off of $30K even if you earn $60K), never pay any attention to trying to keep up with the Jonses and never pay attention to what anyone thinks about me for the most part.
I also avoid debt like it is a plague. I paid off my wife and mine student loans ($60,000) as fast as possible and then got saving for a house down payment and the car buyout on our lease. Now I’m 28 and the only debt I have is my mortgage which I’m going to accelerate paying down to hopefully get rid of it within the next ten years.
Perhaps the most useful strategy that I have is I hate wasting money on things I don’t care about. Reading my saving money posts (Part I, Part II and Part III) you may notice that I don’t like to pay more for my utilities. Also I don’t pay full price retail on anything unless I have too. Most of my books I buy at sales (By the way I just found out my library sells old books they no longer need for $0.50 for a paper back!). I have no problem buying a nice shirt from Walmart if I like it and its on clearance for $5. I always check out the clearance section of any store I go into to see if there is anything I could use/like (For example, my wife got a piece of her china pattern that retails for $30 for $3.)
This isn’t to say that I’m cheap. I also own a 32 inch wide screen LCD TV with surround sound. My wife owns some very nice china and crystal glasses. I also sleep in 400 thread count sheets during the summer. I just know what brings me the most happiness for my dollar. If you can master that, then everything else will fall into place fairly easily.