Wash The Dirty Filthy Taxes Off Your Beautiful Money

Mar 6th, 2009 – 1 Comment

Dave from Peterborough, Ontario writes about his RRSP: Good morning Lou, I listen to you so much on AM640 that I feel that I know you. I understand what people say about not pulling your money out of your RRSP and I agree with that. First of all, let me tell you that I am 52 years […]


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Lou Schizas is an equities analyst, investor, entrepreneur, professor and television and radio personality – and a true believer in the happiness-inspiring powers of capitalism.


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Feed The Cow: Milk The Cow

The idea with the RRSP is to build a portfolio of assets, feed the cow, and then draw down on the pool, milk the cow, at a time when your income is lower and the tax hit on the drawings are reduced.

Dave from Peterborough, Ontario writes about his RRSP:

Good morning Lou,

I listen to you so much on AM640 that I feel that I know you.

I understand what people say about not pulling your money out of your RRSP and I agree with that.

First of all, let me tell you that I am 52 years old. My question to you Lou, is should I keep putting money into them or would that money be better used against my line of credit which is major until things turn around?

Thank you for your time Lou and your answer in advance.

Dave

Hi Dave,

Thanks for this question. Its one that comes up often and I even address it in my Introduction to Finance classes at Sheridan Institute.

The virtuous circle when it comes to personal cash management is to contribute your maximum to your RRSP then take the tax rebates and use it to pay down debt. In your case it would be the line of credit.

Let me walk you through a simple example. Lets assume you are in the highest tax bracket which for this exercise we’ll say is 50%and you are allowed to put $10,000 into your RRSP. By simply putting the $10,000 into your RRSP you will generate a $5,000 tax rebate which you can then use to pay down your line of credit.

In effect you have turned $10,000 into $15,000 by making the right choice. If you had paid down your line of credit you would have missed adding $5,000 to your free cash flow. After you have paid off the line of credit and assuming you have paid off the mortgage then sock the $5,000 tax rebated into a Tax Free Savings Account which is a further extension of the virtuous circle.

This is a simple example so you are best to run through the numbers with your accountant. The idea with the RRSP is to build a portfolio of assets, feed the cow, and then draw down on the pool, milk the cow, at a time when your income is lower and the tax hit on the drawings are reduced.

If you are uncertain as to where to put your savings in these turbulent times, remember you can always hold the contributions as cash or a GIC. Not very exciting but in these markets are we looking for more excitement?

Happy capitalism!

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