My wife and I hold Apple Inc. shares in our registered retirement savings plans. After rising sevenfold, the shares are now worth US$1.25-million. Because we don’t have much personal cash – and because we want to lower our exposure to the stock market – we are thinking of selling two-thirds of the shares and withdrawing the money to improve our home and cottage, and to help our children. Are we crazy? Is there a way to lessen the tax hit? I am 65 and my wife is 57, we live in British Columbia and our combined annual income is about $475,000. About half of that consists of dividends and capital dividends from my company that are split with my wife, but these dividends are unlikely to be as high in the future. Including the Apple shares, my RRSP is worth about $2.3-million and my wife’s is about $1.4-million.
To answer your first question, no, I don’t think you’re crazy. You’re in the enviable position of having substantial income and savings, and it appears you can easily afford to spend a portion of your RRSP nest egg. You might also consider tapping your tax-free savings account first, as TFSA withdrawals are not taxed.
As for your second question, there may be ways to reduce the tax hit on RRSP withdrawals. However, given that you have substantial income and are proposing to withdraw more than $1-million (in Canadian dollars) from your RRSPs, you will almost certainly be sending a large chunk of that money to the government.
How large? Go to TaxTips.ca and click on “British Columbia." You can then pull up a table of combined federal and provincial marginal tax rates for B.C. residents. Note that the top marginal tax rate of 53.5 per cent for “other income” – which includes RRSP withdrawals – kicks in at individual income above $220,000.
Here’s the bad news, according to Dorothy Kelt of TaxTips.ca: “If they’re already in the top tax bracket … there might not be much they can do” to reduce the tax on RRSP withdrawals.
Now for the good news. If you or your wife are not currently in the top tax bracket – or you expect your income to drop in future years – you have more flexibility. You could potentially spread your RRSP withdrawals over several years, with the goal of keeping your income below key thresholds, Ms. Kelt said.
For example, if your individual income – including RRSP withdrawals – is between $214,368 and $220,000, your marginal tax rate on withdrawals would be 49.8 per cent. For income of $157,748 up to $214,368, the rate would be 46.02 per cent. Skipping down a few brackets, if your income were to drop to between $95,812 and $97,069, your marginal tax rate would be just 32.79 per cent. (These brackets are for the 2020 tax year and are subject to change in future years.)
Because you own a private corporation – which may provide other tax-planning opportunities such as reducing taxable dividends from your company – it’s important to get professional tax advice, Ms. Kelt said in an e-mail.
“They should be dealing with a Chartered Professional Accountant (CPA) with extensive experience with Canadian-controlled private corporations, high-income individuals and estate planning. It’s never too early,” she said.
A final thought: Nobody likes paying tax on RRSP (or registered retirement income fund) withdrawals, but remember that the money you originally contributed to the RRSP wasn’t taxed. The bargain you struck with the Canada Revenue Agency, in effect, was that it would let you keep and invest the deferred tax but the government would, in turn, have a claim on the growth of your RRSP. Fortunately for you – and for Ottawa – you’ve done exceptionally well with your Apple investment.
In your column last week, you mentioned that studies have shown that investing a lump sum all at once usually produces better returns than investing in stages. Can you elaborate?
In one study, U.S. money management firm Fisher Investments compared the lump-sum and gradual investing strategies over 20-year periods beginning in 1926 and ending in 2009. The lump-sum investor was assumed to have put the entire sum into the U.S. market at the start of the 20-year period, while the gradual investor deployed the money in stages over the first 12 months, following a process known as dollar-cost averaging (DCA).
Result: Lump-sum investing produced higher returns than DCA in 69 per cent of the 20-year periods examined.
“The reason is simple: More often than not, stocks move higher. You benefit more from being invested more of the time than you do trying to avoid near-term wiggles,” Ken Fisher, chairman of Fisher Investments, wrote in his 2011 book, Debunkery.
“DCA really only helps if you know there is a falling market ahead. And if you could forecast that accurately, what do you need DCA for?”
In another study, Vanguard Group compared lump-sum investing with DCA over rolling 10-year periods from 1926 through 2011. The first period examined was the 10 years from January, 1926, through December, 1935, the second was from February, 1926, through January, 1936, and so on until the 10 years ending in December, 2011.
Assuming a 60-40 portfolio of stocks and bonds, the lump-sum strategy produced better returns two-thirds of the time compared with investing the money equally over the first 12 months. The study also examined the effect of lengthening the DCA period to 36 months from 12. In that case, the lump-sum approach produced higher 10-year returns 90 per cent of the time.
“This is really quite intuitive – if markets are going up, it’s better to put your money to work right away to take full advantage of market growth,” said Anatoly Shtekhman and Brian Wimmer, authors of the Vanguard study.
E-mail your questions to jheinzl@globeandmail.com. I’m not able to respond personally to e-mails but I choose certain questions to answer in my column.
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John Heinzl