May 15, 2007, 2:48 am

The RIF Meltdown Strategy

by: The Financial Blogger    Category: Leveraging Strategies
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I’m always searching for ways to make money differently. I found another one for retired individuals. Many baby boomers have a ton of RRSP’s and plan on withdrawing their money to maintain their lifestyle. Do you know that when you are withdrawing funds from your RRSP, you are taxed on it? It is government’s pay back time and they can’t wait to get all this fresh money. But there is a way to get around this.

In fact, with the RIF meltdown strategy, you are able to slowly transfer your RRSP’s into non registered assets without paying much taxes. Whoa! This is getting tricky. I’ll outline the main points:

The first thing you need is an investment loan. Then again, leveraging strategies seems to be the key to make money differently. You don’t have enough cash flow to pay the monthly payment? It’s not a problem!

The interest charged on your investment loan is tax deductible. However, the money you are withdrawing from your RRSP account is taxable. Do you see where I’m going with all this? There you go: if you withdraw $6,000 a year and you pay interest of $6,000 on your investment loan, how much would you pay in tax? 0$.

But wait, where all my money go? I just make you lost 6K to give it to the bank… But your investment linked to your investment loan is growing at the same time. Then, if your investment went up by 8K the same year, you just transferred 8K from your RRSP.

However, the technique is not perfect. In fact, you will still have to pay taxes on your investment growth. However, your rate of taxation should be much lower than your regular marginal tax rate.

I’ll cover more of this strategy in the near future. For now, I strongly suggest that you read on taxation or that you get yourself a very good accountant. With all the different way to make money you can find here, you’ll need his help to fill in your tax report.

 

 

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Comments

Ingenious…well not quite…but still very helpful..am gonna print this out and hand it to my grandparents !!

Unless I’ve misunderstood this I don’t think this is the best strategy in the world. If someone borrows $10,000 and pays $600 in interest, this will offset $600 of taxes they would have had to pay (ok, fair enough). If they earn more then 6% on their investment then they have to accept the risks that any such “higher yield” investments will have at a time in their life when they’re least able to deal with risk. If they earn exactly 6% then they pay the interest (600) + tax (600*their marginal tax rate) on the interest in order to save the same amount of taxes (doesn’t seem so good) and if they earn less than 6% they’re losing even more money (since their investment earning can’t pay the interest debt).

The only way I could see this working is if the investment income were taxed far more favourably (but how are you going to earn prime level returns on such an investment? You’re lucky to get 2% below prime right now on a very high blue-chip dividend, and there’s still risk there – look at GM).

Any way you package it leveraging is risky and not for widows and orphans, or most retired people who want income, preservation of capital , and a low stress level so they sleep well at night.You are usually a senior by the time you are withdraing. Beleive me, when you become a senior citizen with a shortened time horizon on this earth, you do not need either risk or stress. Age and health concerns will provide all you need.

Mr. Cheap, they key here is to not invest in fixed income. You will never make this strategy profitable with a 4% yield. I’ll work on an example with figures so we can all appreciate the technique for what it is.
ML, I must agree that this technique is not for unsecured people. You need to be comfortable with all risks around any leveraging strategy. However, several individual might want to use the RIF meltdown strategy if they had leverage in the past and know how it works.

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