First today a question from blog dog Bob. “My brother has a First World problem,” he says. Indeed he does.
“During the nasty recession in 81 he left Canuckistan for a job in the USA. He had a job with an engineering firm in Vancouver and when they downsized they sent him to their SanFran Office. He was pretty young at the time but had managed to sock about $25K into an RRSP. Well, here we are almost 40 years later and that little chunk of money has grown to over $300K. (That’s about a 12 fold increase whereas the $200K house he sold at the time would probably only have increase by about 6 to 8 times as much).
“The tax implications are serious though. In a few years he’s got to start winding his RRSP down and paying tax on it at a high marginal rate. He’s a Washington resident now and so doesn’t pay state income tax, but he will have to pay federal tax and Canadian taxes. Is there an optimal way to minimize income tax? How quickly does he have to convert the RRSP to something else after age 70? Or should he just bite the bullet, pay the price, and be happy that compounding has weathered inflation. I’d be interested to hear your perspective on the best way to dismantle an RRSP.”
Okay, so bro has enjoyed $275,000 in growth sitting in a Canadian tax shelter without contributing anything to the country’s finances, and wants the money paid out sans tax? Does he not realize this is a glorious socialist state now and we expect all comrades to pony up their share? Outrageous.
Well, here’s the scoop. RRSPs can stay in place until the last day of the year in which you turn 71. Then a choice – cash the plan in and pay tax (ouch) or convert to a RRIF and take an income trickle. That’s a ‘registered retirement income fund’ and the government mandates that you withdraw a little over 5% of the plan in the first year, with an upwards sliding scale thereafter. By age 98 the RRIF is usually kaput, and along the way the withdrawals are added to taxable income – but all funds in the plan continue to grow tax-free.
A RRIF can be set up at a younger age, if you want, with a lower withdrawal minimum (about 2.5% at age 55, for example). But remember that once a RRSP morphs into a RRIF no more contributions are allowed. This won’t stop you from contributing to your spouse’s plan, however, so always marry a young thing.
Taxes? Suck it up and pay. For Canadians RRIF withdrawals are added to all other income, which determines the tax rate. For Americans and other infidels there’s a 25% withholding tax on lump-sum withdrawals (of RRSPs or RRIFs) and 15% for periodic payments. The distributions must then be reported on bro’s US tax return.
By the way, we hate him.
Stock cowboys got all aroused again on Thursday with news the China-American trade deal is on again. So says Trump. And he never lies.
Anyway, for those who think a 3% GIC with taxable interest is orgiastic, understand what kind of year 2019 has been for investors in equities and those with low-volatility balanced & diversified portfolios. After the late-2018 plop, markets have ascended to new levels with ample reason to believe the party will continue well into 2020.
As this is being scribbled the Dow is ahead 20% for the year, to a record high. So’s the S&P 500, which has added 26%. The tech-heavy Nasdaq has gained 32% (also at an all-time high) and on Bay Street the TSX has sprouted 19%. Investors who hold an ETF-based, 60/40 balanced and diversified portfolio are positive 13%, with all assets gaining ground – even those beaten-down preferreds are back in the black as interest rates sneak higher. So this is a 32% portfolio advance over the past four years – +10.8 in 2016, +8.5% in 2017, -3% last year and +13% now.
But, the skeptics cry, what about next year? Surely after 20% gains markets have to swing back. I’m scared!
Sure, anything can happen. However remember that 2020 is a US presidential year and throughout history markets have plumped during this period. And while Trump is a quixotic, weird, unpredictable leader, he’s a political animal seeking re-election. His proxy is the stock market, which depends on a hot economy and no trade war. There’s not much doubt what he’s going to do to ensure the Dems are smoked in November.
And, hey, listen to what the Fed said when rates were put on hold this week:
“The Committee judges that the current stance of monetary policy is appropriate to support sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee’s symmetric 2 percent objective”.
Wow. No more rate cuts. Economic expansion. Lots of jobs. Contained inflation – not too hot, not too cold. A soft landing, in other words, after all that ill-informed and alarmist talk about a recession, inverted yield curve and market mayhem. Meanwhle Beijing did not invade Hong Kong. Europe is coming back. Chinese data’s getting stronger. US unemployment’s at a 50-year low. Corporate profits just beat expectations to a pulp. Adele’s still not touring. Life is good.
Says Bay Street analyst Ed Pennock: “The newest acronym replaces FOMO. Fear of Missing Out is now Fear of Joining In. Markets have done so well that it’s got to be over soon. Say the market ends up 25% this year then it can only be up 6% or 7% next year. It can’t possibly be up 20% next year. The problem with this opinion is that there’s no causality. ‘Cause it was so good It can’t be good again. Thus FOJI.”
Actually 2020 could repeat 2019. More growth, profits and rising markets. Be scared if you want, but don’t bitch about the results a year from now. Remember the credo: invest when you have the money. Spend it when needed. Do nothing in the middle. You’ll be fine.
The right stuff: Andrew Scheer made the correct decision. Progressive Conservatives rock.