As a professional realtor, you should focus on real estate, right? Stick to what you know. Or, from an unbiased perspective, is the RRSP (registered retirement savings plan) a good idea?
Many of us have heard about the hefty tax bills owed on an RRSP at death. The common reaction is to avoid RRSPs. Some people save successfully within an RRSP but end up losing money due to poor investment decisions. There are various ways to invest for retirement, but understanding the basic math behind them is essential. For most individuals, including realtors, it should be a part of your retirement strategy.
The bottom line:
There are numerous variables in how your life could unfold. However, the RRSP is a sensible component, even in a worst-case scenario. Similar to incorporation, the RRSP allows us to defer highly taxed income to later years, where it can be withdrawn at a lower tax rate. In the meantime, you can invest and watch it grow.
Crunching the numbers
Without making risky assumptions that could be misleading, let’s put some simple figures to it:
- Assume I start saving at age 35 and stop at age 60. (Who starts saving in their 20s anyway?!)
- After expenses, I earn $120,000. Assuming I contribute $20,000 per year to an RRSP over 25 years.
- Let’s also assume I invest the money in an average-balanced mutual fund with an average growth of 6% per year, after fees.
Total contributions would be 25 years x $20,000, totaling $500,000. Tax refunds vary by province, with refunds totaling $200,000, making the true investment $300,000. With a 6% growth rate assumption, by age 60, the account balance grows to $1,096,851.
Now, in the worst-case scenario where I die without a spouse to transfer the account to, the entire amount is fully taxable. This could result in taxes ranging from $452,881 to $556,283, leaving the estate with between $643,970 and $540,568 after tax.
Even with average assumptions, the results don’t seem bad. Improving any of the inputs could significantly enhance the results.
If I live to age 90 and withdraw the money evenly each year, I could get $2,255,250 over 30 years. Inflation might erode the purchasing power, but the numbers are still compelling.
Most clients pay tax rates of 5% to 25%, making taxes in retirement much lower.
Take a salary, maximize your RRSP contributions
If you’re incorporated and want to build an RRSP, pay yourself a salary. Salary creates RRSP room, while dividends do not. Paying into the CPP (Canada Pension Plan) is worth it.
The maximum RRSP room for 2024 is $31,560. To create that much contribution room, you need to pay yourself a salary of $175,333. Use payroll software or consult your bookkeeper.
If you have unused RRSP room and extra savings in your corporation, consider paying a bonus directly to your RRSP for a tax-neutral transaction or a refund.
Invest wisely
Once the money is in the RRSP, invest it sensibly. You can manage it yourself or hire a manager. Both options are good choices and can be simple and efficient.
Consider investing in higher-interest mortgages, dividend-paying stocks, and technology. If you choose a manager, look for high education and licensing levels. Fees should be fair and on the lower end of the scale.
Finally, RRSPs are creditor-proof, and you can access the money in slow business times. While not the intention, you have control over the funds.
Investing in real estate might be an obvious choice, but getting informed and analyzing the…
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