After many years in the financial services and planning field, specializing in taxes and accounting, I have developed some core principles that help me guide clients on their journey to maximize their wealth potential. I have had the opportunity to work with numerous clients through the intricate landscape of investment options, tax strategies, and savings accounts. The ultimate goal? To help them safeguard and grow their hard-earned wealth, offering financial security and the freedom to fully enjoy the fruits of their labour.
One of the things I often see when working with people approaching retirement age is a lack of diversification in the tools they use to build their wealth. In this context, when I say diversification, I don’t mean a diversified portfolio of investments, but rather a diverse set of tools for investing.
One of the most common things I have encountered working with clients over the years is a significant reliance on RRSP investments, with little attention given to TFSAs and non-registered accounts. This imbalance impacts financial flexibility before and during retirement. Consider the need for a $20,000 withdrawal for travel or a new adventure: an RRSP withdrawal requires a higher gross amount, say $28,600, accounting for withholding taxes—a considerable expense. In contrast, a $20,000 withdrawal from a TFSA incurs no taxes or penalties.
To be clear, the Registered Retirement Savings Plan (RRSP) does serve as a powerful vehicle for retirement savings, particularly because of the tax deductions that can be leveraged while saving for retirement. It should be part of a broader strategy, however, relying too heavily on RRSPs poses challenges. Take the example a 70-year-old individual with $2 million almost exclusively in their RRSP and few assets anywhere else. While this might seem like a substantial nest egg, looking a little deeper, it’s not an ideal situation due to the high taxes paid on withdrawals, leading to substantial erosion of savings through heavy taxation.
The best way to mitigate this challenge is diversifying the types of accounts used to accumulate investments and assets. This goes beyond spreading investments across various assets like stocks, bonds, GICs, or ETFs; it also involves distributing funds across different accounts.
One of the best options is the Tax-Free Savings Account (TFSA). This account allows tax-free withdrawals, providing unparalleled flexibility and tax efficiency. For instance, if you've maximized contributions to your TFSA, say $95,000, and it has grown to $500,000, you can withdraw these funds tax-free. The contribution room is then restored in the next year to $500,000, creating a robust foundation for future growth.
Another overlooked aspect of investment strategy is the breakdown of household savings and investments. Often, savings are disproportionately held in the name of one partner, leading to implications for tax planning and risk management. A distribution of 80/20 between partners may unintentionally place one partner in a higher tax bracket, while the other incurs minimal or no taxes due to lower income and wealth.
To address this, couples should work towards minimizing the disparity in assets from a younger age, ensuring both partners can draw from their savings at the lowest possible tax bracket during retirement. Tools like spousal loans and spousal RRSPs come into play. For example, a spousal RRSP allows a higher-earning partner to contribute to the other partner's RRSP, gaining the tax deduction while building retirement savings in the other's name. This can significantly reduce the overall household tax burden, providing both partners with access to funds in retirement.
Sometimes knowing where to start, or finding an objective expert to provide input into your strategy can be daunting. At the Angus Watt Advisory Group, we have the right team in place to help you create the best investment and asset management strategy possible, leveraging the right tools and supports to maximize the financial impact of your assets.
The path to financial security is not simple or fast, but involves meticulous planning, strategic decision-making, and awareness of tax implications. Through diversification, maximizing TFSA contributions, and ensuring equitable asset distribution within households, individuals can save and grow wealth, leading to a peaceful and financially independent retirement.
Let's collaborate to create the right plan for you, enabling you to live life on your own terms and fulfill your dreams of global travel or retiring to a serene haven.
