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This year, we did our first ever portfolio withdrawal.
It’s been a wild few years to say the least. In the first year of our retirement, the oil crash of 2015 happened which screwed our portfolio over and forced us to execute one of our backup plans: eating into our cash cushion. Then in 2016 things recovered as an Obama-led economic recovery took hold and ushered us all into an era of safe, stable prosperity.
Then Trump got elected.
Which briefly made the Dow plunge 500 points, but then inexplicably, start going up.
And up and up it’s gone. Against every expert opinion, against every prediction, the stock market has done nothing but advance since that fateful day that idiot got elected.
I really have conflicting feelings about this guy. On one hand, he’s clearly an idiot who doesn’t know what the Hell he’s doing.
On the other hand? I’ve made a lot of money under his presidency because of my investments in the US index. This year alone I’ve made over $100k. That’s…confusing.
But back to the withdrawal. Why did we need to do one? And why are we writing about it?
Well, to answer the first question, our cash cushion is running dry. We saved up 3 years of cash cushion before we retired to weather any storms that may have come after we pulled the trigger. And the first year, we wisely spent it weathering the oil crisis. But in the second year, we idiotically spent it on something called the “Investment Workshop” where we invested it, took screenshots of it, all in an ill-informed attempt to teach our readers how to invest. What idiots we were.
So this year, for the first time, we were staring at our dwindling cash balance and decided, “You know what? We should really do something about this.”
Hence, our first portfolio withdrawal!
Show Me the Money!
When we retired, we shifted out portfolio towards higher-yielding fixed income assets. This created what we like to call the Yield Shield. This Yield Shield combined with our cash cushion theoretically protected us from temporary market dips screwing over our retirement. In reality, it totally worked.
The Yield Shield for our $1 million portfolio was 3.5%, equaling $35k. The intent of this, combined with our cash cushion, was to protect us against an unfortunately timed market downturn that would screw us over. That market crash happened, but because of that Yield Shield, we emerged unscathed. Instead, we invested as markets collapsed and ate into our cash cushion instead, with the idea that would buy us into time to make it to the next uptick.
So now, with another year behind us, we are sitting on an up year. Instead of losing money we made money, to the tune of over $100k. And through it all, that $35k Yield Shield amount kept getting generated.
It was time to make a withdrawal.
To Make a Withdrawal
Why am I writing this article? Because…
a) As it turns out, withdrawing cash from your portfolio isn’t nearly as straightforward as you think it is and…
b) Most FI bloggers just end up making too much money from their blogs and never have to do a portfolio withdrawal ever! So I figured it would be interesting for people to see how it’s REALLY done.
Great. So here we go. Here is what my actual, personal retirement portfolio looks like.
Yeah, that’s a lot of accounts, but let me walk you through them. First, at the top, we have Wanderer’s RRSP, which is our Canadian version of an American 401k. Then, in the next row, we have FIRECracker’s retirement accounts, which is a combination of a LIRA (Locked In Retirement Account, which FIRECracker has because of her old job’s pension plan), an RRSP (equivalent to a 401k), and a Spousal RRSP (which I created because it allowed me to contribute to her RRSP at my tax rate and withdraw at her tax rate). These are all very Canadian account types, and I’m sorry about that (ooh, an apology! Also very Canadian!), but hopefully you can map it to your country’s tax codes.
Anyhoo, next is both of our TFSA’s, which is similar to American Roth IRA’s, and finally our two Investment Accounts, labelled Regular #1 and Regular #2. There are two because one is denominated in Canadian dollars and the other denominated in USD.
So over the year, our Yield Shield has been hard at work generating income that we need to survive. We ended up generating $35k, and that’s great! I mean, the 4% rule suggests that we can withdraw more, but we’re projecting our year’s living expenses to be around $35k, so $35k is enough.
The only problem? Our cash looked like this:
Yup. Our cash was scattered all over the place. And many of those accounts were retirement accounts which had restrictions preventing me from accessing that cash tax-free.
Well, joke’s on them because I got all that cash out tax-free after all. Here’s what I did.
Buy/Sell Swaps
Normally, you can’t transfer cash from one tax-deferred account to another. So despite the fact that FIRECracker had cash in her LIRA, there’s really no direct mechanism for getting that money out. Or is there? Hint: Yes there is.
By using the stock market itself as a transfer mechanism, we can get that cash out without incurring any taxable event! It’s super simple.
First, pick an ETF that’s held in both accounts. Then, in the account with the cash you want to get out, buy as much of that ETF that you can. Then, in the account you want to transfer the cash into, sell the exact same amount of units as you bought, at the same price.
If you do this correctly, your buy/sell orders will match up on the stock market, and when your orders go through you will have essentially sold into the market in one account, then bought those units back in another account. You will have essentially used the market to transfer your cash, and because you’ve done it in your tax-advantaged accounts, there will be no tax consequences!
In my case, I used this technique to transfer cash from FIRECracker’s LIRA to her Spousal RRSP. I then repeated the process, picking an ETF I own in both her RRSP and her Spousal RRSP and doing a buy/sell swap on the open markets with the same unit price.
Now that we have all the cash we want where we want it, it’s time to do a withdrawal. For us Canadians, any amount we withdraw from an RRSP gets added to our taxable income, which is similar to what happens to Americans when they rollover money from a Traditional IRA into a Roth IRA.
So this amount that we withdraw becomes taxable income. Only thing is, when you’re early-retired like us your taxable income drops to zero, so any income like this you can shelter underneath your personal exemption (or standard deduction if you’re American). And given the tax changes that just passed Congress, this amounts to about $10k per person on both sides of the border! So that means assuming no other income, you can withdraw $10k per person from your tax-deferred accounts tax-free! For Canadians, this withdrawal can be done straight, while for Americans this has to be done as a 5-year Roth IRA conversion ladder. But the end result is the same.
For us, we noticed that our $10k tax-free RRSP withdrawal was more than the actual amount of cash we had available to withdraw. For example, in Wanderer’s RRSP, he only had $8000 cash free. But it we withdrew less than $10k, that room would have just been wasted. So we decided to withdraw some assets as well. CRA (and IRS) rules allow you to withdraw either cash or assets in-kind, meaning you don’t need to sell them before you withdraw. So we picked $2000 worth of assets that we wouldn’t mind being outside our tax-sheltered accounts (in this case, a Canadian Preferred Share ETF with the ticker symbol CPD).
We then transferred that $8000 of cash and $2000 of CPD out. In Canada, when you transfer out $10k from your RRSP (whether it’s cash or ETFs), you get hit with a 20% withholding tax. Americans can elect to get out of this withholding tax, but we’re stuck with it. Fortunately, this tax is only temporary because while the tax gets imposed on withdrawal, if you have no other income you can report it on your tax return in April and get that money refunded back.
So that’s what happened. We did the transfer, part of that money got withheld, and we’re now expecting that money will get refunded to us the next time we file a tax return.
Next, we did the same with FIRECracker’s Spousal RRSP. After realizing that the amount we wanted to withdraw from the RRSP exceeded the amount of cash it contained, we nominated an amount of ETFs that we wouldn’t mind being in a non-tax-advantaged account. Coincidentally, we again chose CPD.
And $10k ready to go, we did our withdrawal.
Last but not least, there was some cash (about $700) that had accumulated in each of our TFSA’s. Canadian TFSA’s are similar to Roth IRA’s in that they contain after-tax money that doesn’t get taxed on further investment gains. And those accounts work equally well for Buy/Sell swaps to move the cash into an account you can actually spend. That’s what we did, as shown here.
Finally , with all the money we needed to withdraw out of our tax-deferred accounts, it was time to make our final withdrawal.
There you have it. Our first portfolio withdrawal. Most of it I got in in cash, and some of it I’ll have to expect back at tax time, but that is how you pull of an early-retirement portfolio withdrawal.
Let us hear it in the comments. Does this work for you?
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This is EXACTLY what I was wondering about. Thank you, thank you, thank you.
Of course, it’s so complicated that I’m going to have to read it repeatedly to wrap my head around it, but I’m so glad you and FC are here to walk us through the wilderness.
Are “regular 1” and “regular 2” individual investment accounts? If so, why leave them alone first while going after RRSP and TFSA first?
And if someone has a corporation, do you recommend taking money out of the corp before RRSP/TFSA?
Basically, I’m looking for an algorithm of which accounts are most advantageous to draw out of first. You’ve explained how to take the money out tax-free, which is hells bells awesome, so I wonder if you can help me with the other piece.
Thanks again for this holiday present! You two are the best. No joke.
Melissa
P.S. You should try and have this added to Physician on Fire’s drawdown strategy blog ring. Your post is exactly what I, and I’m sure others, were looking for. https://www.physicianonfire.com/drawdown/
Regular #1 and Regular #2 are joint investment accounts. And we didn’t “leave them alone.” We transferred money from registered/TFSA accounts first into the regular accounts, and then withdrew into our personal checking accounts.
As for the corporation stuff, consult your accountant. That is not my area of expertise.
Right, I understand that the regular account was a flow-through and that I should talk to my accountant.
But both you and Tawcan mention drawing down on your RRSP first, whereas this article says the opposite: “To begin, tap the non-registered savings barrels. (This is money in your savings accounts and any investment accounts that aren’t pensions, RRSPs/RRIFs or TFSAs.) Tap these barrels early, because this money isn’t classified as income by the government, so there’s no tax on it, and you’ll be less likely to trigger the dreaded Old Age Security “clawback.” https://www.sunlife.ca/ca/Learn+and+Plan/Money/Retirement+savings/Whats+the+best+way+to+tap+your+retirement+income?vgnLocale=en_CA
Thanks for any further insight.
Relevant to Canada:
Return on capital in non-registered accounts are not taxed. Capital gains are taxed (50% of it is taxed at your marginal rate). If you buy 1 share of ACME stock or 1 unit of ACME ETF for $100 and sell it in the future for $100, you have no gain therefore no tax. If you sold it for $200, you generated $100 of capital gains (*In the case of the ETF, the distributions and possible reinvestment may change your cost basis, so it’s a little more complicated).
I suppose if you have investments that never appreciated in value, you would have “saved” on the tax. One reason people might not want to generate capital gains is that the dividend tax credit makes eligible dividend income a lower tax rate than capital gains for their situation.
That’s for regular retirees (65+).
For them, they should empty out their non-reg savings first without making RRSP withdrawals until as late as possible. That’s because RRSP withdrawals count as regular income, with creates clawbacks in OAS/GIS income.
For early retirees, this doesn’t apply. You can withdraw $10k each every year for free, so it makes no sense not to.
Hi Wanderer,
Your technique of explaining ideas with detailed diagrams are amazing!
One question, couldn’t we move the cash portion of the withdrawals from RRSP accounts straight to Bank account without going through Regular #1 /#2?
Thanks
Melissa,
Did you find out why “… this money isn’t classified as income by the government..”?
I believe this was written in context to, how in unregistered account, the withdrawals will be mostly “Return of Capital” for example out of 10,000 $ withdrawal, say 7000 $ will be the Return of Capital and only remaining 3,000 $ will be reported as taxable income (these are just some numbers I have used as example, they are not actual numbers). While 100 % of the 10,000 $ withdrawal from RRSP will be reported as taxable income. Later will reduce OAS and GIS.
This is why as Wanderer mentioned, if you are FIRE stage, better to deplete RRSP first and post 65+ age, better to deplete unregistered account first.
Please share your thoughts/discoveries if any.
Hi Paresh, I believe Wanderer is correct in that the article I read was talking about OAS clawback, which only affect 65+ y.o. who receive old age payouts, not FIRE people.
I found this article very helpful for a drawdown strategy, especially for anyone with a corporation: https://www.moneysense.ca/save/retirement/can-a-1-7-million-portfolio-last-a-lifetime-if-this-couple-retires-in-their-40s/
Thanks for walking us through this. I will have to do more research on the buy/sell swop approach. To confirm, nothing transfers between the accounts your are doing the buy/sells, you’re just performing transactions in each account that off set each other with out really moving money? Keep the info coming!!! Thanks!
I think what’s being implied here is that if you use limit orders, you may end up being both the buyer and the seller in the transaction… effectively, you’re selling equities to yourself, but in a different account. Correct me if I’m wrong.
That is correct, BikeMike!
Excellent article, your diagrams are great and make fairly complicated processes easy to follow. Keep up the great work!!!
Currently my wife (income $50) has a TFSA and I (income $88k) have an RRSP, we aren’t in a position where we can max out either of them. Would you ever recommend a spousal RRSP in this situation or would it only make sense after mine was maxed?
Your incomes aren’t THAT skewed that a spousal RRSP makes sense. It only made sense for us because FIRECracker’s DB pension ate up most of her RRSP contribution room, so she COULDN’T contribute to her RRSP even though she had the money. In that case, it made sense for me to contribute
Could you please elaborate on that? If she didn’t have more RRSP room because of the DB pension then how were you as a spouse able to contribute to her RRSP? Wouldn’t the same limit apply?
I have a question. The 100,000 gains, all of that was in a tax shelter? What proportion of your investments r in a tax shelter? I imagine some gains are in regular investments, wouldn’t that require you paying capital gains tax? Our early retirement has been funded largely by rental property, but we also have tax sheltered investments that we try to get out and into a tfsa whenever we can. (As in the years we lived on cash cushion) We have been toying with the idea of selling one property(since value has gone up incredibly) to diversify our portfolio, but wonder if it would be worth it to, first of all pay the capital gains tax, plus how to invest the proceeds in the best way to minimize taxes?
Capital gains aren’t taxed until you sell. I made no sells this year, so I owe no capital gains tax. I DID incur dividends in my preferred shares, but because I’m in the first tax bracket I pay no taxes on dividends at all.
So there are no early withdrawal penalties for Canadian retirement accounts? That would be great if Americans had that without using the rule of 72t.
The penalty is that you pay income tax on whatever u take out If you are above the approximately 11,500 personal exemption limit.
You can get it out tax-free using a 5-year Roth IRA conversion ladder. Click the link in the article to read how to do it.
Awesome, thanks! Read the link and RoG’s write-up, this will be my strategy if needed. Crazy how much you can save in taxes with the right information.
RoG’s just so great, isn’t he?
Another great post, Wanderer. Really appreciate these straight-forward, instructional type of “How-to” posts. Too many blogs focus on the social, theoretical, and “accumulation” phases of FIRE – your post is the type of essential, practical information we need to be able to close the loop and properly go about enjoying the fruits of those disciplined years of saving and investing.
Love what you guys are about and what you are doing for the FIRE community!
Awww, thanks!
Thank you for letting us readers see behind the curtain of your own accounts in such detail!
I’m curious about holding CPD inside an RRSP. Some people say to keep it in the cash account due to the preferential tax treatment. I guess it’s still better in the RRSP assuming you can withdraw it tax free as you’ve done here?
I had some CPD in an RRSP just because I had some extra room. But it’s equally tax-free outside, so that’s what I decided to move out.
Hello,
Great article. What if you need to withdraw much more than the tax exemption? In our case, our expenses are around 60K-70K a year (in Toronto), hopefully a little lower when we retire ….I am still trying to figure our the order of withdrawal from RRSP, TFSA, and Taxable.
Then you’ll have to pay taxes.
But honestly, your retirement plan shouldn’t be based on how much you can withdraw tax-free from your retirement accounts, it should be based on the yield you can get from your portfolio.
If you are going to pay taxes then what should be the order of withdrawal from RRSP, TFSA, and Taxable?
First the yield in your non-reg. Then the yield in your TFSA. Then any amount you can get out of your RRSP tax-free.
This is super helpful Wanderer! I’m assuming you and Firecracker receive your dividend yields in cash (vs. having them automatically re-invested as a DRIP)? I currently re-invest my dividends in all my accounts through a DRIP because I am still in the wealth-accumulation phase, but I think I will switch to receiving the cash once I hit retirement. That way I can just take the cash without having to sell the capital. Would you say this is the best plan?
This is a really great concept that I never thought of.
I would like mention to your reader that they will incur a buy/sell charge, a small fee for the exchange.
In addition set the buy/sell price a little bit higher than market, else you risk the order being fulfill by other.
Realizing this may be unpopular with our hosts, but one possible way to mitigate some of the tax pain involved may be through leverage, although it’s important to be careful with how you structure this. In Canada, interest on loans taken to buy investments is tax deductible. Depending on the exact numbers involved, you can take out an investment loan to buy dividend yielding investments (eg: preferred shares) and then use the interest you’re paying on the loan to offset the taxes you pay on the dividends and potentially the taxes you’re paying on the withdrawals.
Part of the benefit here is, in my understanding, that you get to deduct the interest expense at the full marginal rate, but the dividends are taxed at a lower rate.
http://www.taxtips.ca/personaltax/investing/interestexpense.htm
I have read those articles, but I just can’t get my head around taking on debt just for tax reasons.
Erp. Replied to the wrong message.
I think the answer is that it really depends on your particular situation. In my situation, for example, my marginal tax rate is 47% and for 2018 I’m about $100k away from the next lowest tax bracket, so RRSP contributions only get me to about $74k off the next tax bracket.
If I take on $100000 of margin debt my borrowing cost is 3.35% (https://www.rbcdirectinvesting.com/pricing/cash-margin-rates.html#margin-balances-debit). I’ll be paying $3350/year in interest. Let’s assume I put that $100000 into CPD at 4.36% that’s paying me $4360/year in dividends.
Now, on the tax side of things… that $3350 is deductible at my full marginal rate of 47%, resulting in a net interest cost of $1775.50. The eligible dividend rate for me is 31.3%, resulting in a net dividend of $2995.32. Tax discounted = $1574.5, tax paid = $1365. Net tax benefit = $209.5
If you’re further down the tax ladder, it’s actually more favourable. If you’re at the threshold where you’re paying 38.29% for example, your net interest cost is $2067.29 and your net dividend is, at 18.31%, $3561.68. Tax discounted = $1282.71, tax paid = $798.32. Next tax benefit = $484.39
When you’re talking about an unleveraged portfolio of $1000000, even a very simple 1.5:1 leverage ratio could result in $2500 in tax savings in a year for someone making around $100000. That’s already 10% of the their income tax payable. We’re not talking about 20:1 bets like you see in real estate :). Plus you’d also be adding another $7500/year in dividend income. In my case, the overall benefit is less effective, but still worth a few thousand a year.
All that said, it does somewhat increase your risk, so it depends on your overall picture.
Great advice. Thanks for that!
Hey Wanderer,
This is something i’ve been meaning to ask for the past few articles but I keep forgetting to do so =) what are the actual ETF’s that you and Firecracker have in your main portfolio? I know some of them differ from the investment workshop ETF’s and I would like to know if you don’t mind sharing?
We swapped our VAB for higher-yielding assets like preferred shares (CPD) and REITs (XRE). We also moved towards corporate bonds (XCB), but keep in mind that these moves increased our volatility in exchange for yield. You have to be OK with that if you do what we did.
my route too , i know all the reasons for bonds but i don’t like them in this long term interest rate up swing
like you i did experience a downturn in my portfolio and didn’t sell and panic , and later saw it all rise like crazy .
so i am fine with volatility too .
i wish people knew that drops in the stock market are so short term , violent yes , but right after is a big swing back up
as for ETF’s ; i chose ZRE instead of XRE . it has more diversity i found after doing some research
and i prefer ZPR over CPD …. due to most probable rate rises
XAW .. is the best etf of all … and my main one
Wondering if this would work if your TFSA and RRSP are with different banks? I’m assuming its a market order so it would get fulfilled anyways just with buy/sell fees.
It should work the way you described it.
OMG I love you guys. I’ve been thinking about this topic for a while, specifically around dividends that I receive in my tax-advantaged accounts (I’m American). Since the dividends have to be reinvested I will basically be doing what you detail above: “buying” stocks in an account I can’t access and then selling the exact same amount in my taxable account for a net zero transaction that allows me to access that money! Thank you so much for detailing this so clearly. I love the charts. It makes it super simple. And thank you for being so thorough! I think y’all have just become my #1 investing resource (sorry JLCollinsNH)! Sensational. Thank you so much.
Whoa whoa whoa. I’m good, but not JLCollins good. Let’s not go NUTS.
“If you do this correctly, your buy/sell orders will match up on the stock market,….”
How do you actually do that part? Do you submit both sell and buy orders as close together as possible and hope for the best?
I think you mentioned that you are still with Garth & Co at Raymond James. Are they doing this for you or is this something you do on your own?
Limit orders. You can specify an exact price.
Would you be able to show limit orders via an example using screen caps in questrade like you did in the investment workshops?
Thank you in advance!
Withdrawal, a dirty word! 🙂 you’re right though, a lot of FIRE bloggers just live off their blog income.
What percentage of your portfolio is after-tax?
Sam
Sam! We missed you at Fincon!
And to answer your question, about 60%.
This is very smart, especially the idea of selling one stock at market value and buying the same one immediately in another account to maintain desired proportions and get the cash where you want it. I’d never even thought of it that way.
I assume you then top up the freed up contribution room in the TFSAs by making a contribution from your regular taxable accounts? Oh wait, I see now, the same buy/sell swap works to avoid taxation while not having a second step to top up the TFSA. Smart.
Of course. Once the new year rolls around we each get $5500 of new TFSA contribution room, which we will use be moving more in-kind ETFs into it.
Just off topic
What is your take on Bitcoin and Ethereum?
Not off topic, because we get daily emails about this.
DO NOT TOUCH BITCOIN.
This is a massive speculative bubble and you should have nothing to do with this.
Thank for that info!!! Really do appreciate it. I was curious and had to read a bit before understanding Bitcoins. Still not sure I totally understand but my gut feeling was not to get involved in it.
The buy/sell swaps do not have to be the same security (ETF) – you might want to use the position change to rebalance if that is important/relevant.
The reason for this – the buy/sell are in independent accounts which don’t ‘talk’ to one another. All that is really happening is you are changing where the cash positions are in your series of accounts using a ‘buy’ (of the cash amount value) in the account that you want to reduce the cash in and a ‘sell’ (in the same cash amount value)in the account where you want to increase the cash position – what vehicle (security) you use to this, in a given account is not relevant nor is the timing critical – it’s only nice in that you keep everything in apples or oranges rather than a mixture.
Also you should perhaps place greater emphasis on your transfers out of the registered accounts (RRSPs) being tax-free ONLY due the fact your are in a no tax bracket situation due to you not having any other income (in your example) and your personal exemption covers off the transfer amount.
This transfer becomes taxable (albeit at a perhaps lower rate) if there is other taxable income (eg. your blog income, dividend or interest income from non-registered accounted (regular #1 and #2) in your example) being generated during the year . For older retiree where there is CPP/OAS income or other real pension income this transfer is most definitely NOT tax free – it may be low tax though.
Nope. The transfer is tax-free as long as the buy is in a tax-free account and the sell is in a tax-free account. The only taxable event is the withdrawal.
Although the rules vary province-by-province, the LIRA can be unlocked if you leave your domiciled province for a period of 2 years.
Correct. Great catch! But for tax purposes I’m choosing to remain as a factual Canadian resident.
Hi Wanderer,
My wife and I are about to do a plan almost exactly the same as yours starting next year. ($1M CAD, and perpetually travelling)
I am confused about whether we will be factual residents or deemed residents of Canada. You said you CHOSE to be a factual resident. Can you just choose this? This also implies provincial residency… Do you just choose a virtual mailbox in the province with the best tax system or something?
Thanks!
While you *can* withdraw from RRSP tax-free like this, I’m not sure if everyone *should* right away, since it means you now pay taxes immediately on gains instead of continuing to have those taxes deferred.
If you can do it for free, you should absolutely do it. Can’t get lower than 0%.
The vast majority of Canadians should long, long before they actually consider doing so. Do you have any idea how long it takes to ‘melt’ an RRSP/RRIF, particularly since once CPP kicks in you’re effectively bumped into a higher tax bracket? And sorry, don’t agree that “you’re taxed immediately on gains” – eligible dividend earnings would remain negative to negligable unless you were making far, far more than Wanderer. Capital gains, sure, when they’re realized…but hey, use some of them to make your donation to charity and…presto! Problem solved.
Wait too long to melt your RRSP/RRIF on the other hand, and you won’t have enough years left to spread withdrawals out enough to still be in a lower-than-earnings-years tax bracket (nevermind Wanderer’s bracket 🙂 ). Plus your heirs will hate you as they see 54% of their inheritance evaporate with your final tax bill (everyone carps about estate taxes, but at least in Ontario, that’s merely the final empty glove-slap-on-the-cheek insult after RRSPs have already been creamed by the final tax filing).
you guys are so clever .. bravo
i don’t bother with RRSP’s … we have 2 TFSA’s … mostly ETF Equities .
I reinvest the dividends and max out every year .. its a gift .. up 16 % this year
my non reg accounts with ETF’s , i simply withdraw and live on the dividends …
also up 100 K this year
and i have a cash reserve for buying low or living on etc.
and looking at how cheap real estate is in parts of UK now . and cost of living . .food is basically 50% cheaper than expensive BC with great choices
i might move back to UK .. escape the upcoming earthquake too ..
Very well presented as others have said! I guess since you are doing the sell in a Tax Deferred account and then the buy in a taxable account the these do not risk being flagged by systems as wash trades?
As someone else also commented I do find it surprising that you hold CPD in an RRSP account? I am trying to organize my own strategy and my idea was to hold my Preferred shares ETF and CND Equity in my taxable accounts for the dividend treatment and then in the RRSP hold mostly US/INT Equity ETFs along with bonds. My portfolio is about 70% RRSP/TFSA and 30% taxable investing accounts you are probably more taxable accounts since I am wee bit older than you. That way all my cash generated in taxable accounts is Canadian Dividends and the US/INT/BOND Dividends and Interest are in RRSP with spill over in the TFSA.
Would be interested to hear your allocation of investment types across all accounts to make things tax efficient. Another question is won’t think strategy be hard to do every year as it will make balancing your allocation harder?
A “wash trade” is term used to describe a trade made exclusively to book a capital loss. You can’t book capital losses inside an RRSP, so those rules don’t apply here.
And yeah, we held CPD inside an RRSP because our portfolio is already 100% tax-efficient. You can’t get lower than 0% tax!
And no, tax efficiency and rebalancing don’t interfere with each other. Those are completely orthogonal decisions.
How come you needed to withdraw because of using the cash cushion on the investment workshop? Didn’t you just withdraw all those funds out back into your cash cushion at the end?
The workshop portfolios are still invested. I haven’t decided what to do with them yet, in all honesty.
Just love you guys!! Wish you were around 20 years ago. I am laughing at this comment…..
…… On the other hand? I’ve made a lot of money under his presidency because of my investments in the US index. This year alone I’ve made over $100k. That’s…confusing.
Yes, this guy “Our US President” is an idiot to everyone watching him but as a business man making millions he surrounds himself with the best people possible to get things done and demands the best of those people. He is a workaholic at age 70+. I would let his accomplishments speak for me as actions are louder than the words of his critics.
US index funds are up 24% this year. The Dow is up over 5000 points this year. This is all based on consumer confidence. And now he is about to sign into law the largest tax cut plan since 1986 and companies are already handing out bonuses and planning on investing in America. There are people in the US that are happy there is a non-politician in the White House, they are confident that a business man that runs things efficiently can help the country and maybe drain the swamp.
I think he is an idiot when he gets in front of TV and when he is on Twitter but I am totally confident in his business management and ability to look for the right people in the right positions to help advance his ideas to Make America Great Again and because of that I am willing to let Trump be Trump.
I am also up 100k+ this year and looking forward to more gains in 2018. Thanks again for leading the charge for FI!!
I know! In front of a camera he’s like the most illiterate moron ever, but he seems to know what he’s doing on the business front. Again, super conflicted on this guy…
The Trump tax cut, without cutting expenses, is estimated to increase the deficit to $1.4 trillion over 10 years: http://www.cnn.com/2017/11/27/politics/cbo-score-senate-tax/index.html
A running account of the environmental damage the Trump presidency will cause, including proposing auctioning off the oil and gas leases on the Gulf of Mexico, estimated to release “28 billion tons of carbon dioxide to the atmosphere—more than *five* times the United States’ total carbon footprint in 2016”: https://news.nationalgeographic.com/2017/03/how-trump-is-changing-science-environment/
Trump’s attack on education includes making it financially untenable to attend graduate school (http://time.com/5032079/gop-tax-plan-graduate-students-waiver/)
Most people don’t own stocks, present company excepted. Only 52% of American adults owned any stocks in 2016, and the richest 1% owned 38% of all stocks in 2013 (https://www.npr.org/2017/03/01/517975766/while-trump-touts-stock-market-many-americans-left-out-of-the-conversation).
Warren Buffet, among others, credits the U.S. itself for the stock market rally, not Trump (http://www.smh.com.au/business/markets/its-not-you-its-america-buffett-tells-trump-after-sharemarket-rally-20170627-gwzzin.html). The stock market has largely been going up since 2009.
The tax cut, the oil drilling, the attack on students–all short term gain that results in a depleted planet and impoverished, uneducated citizens while only the rich become richer. Math THAT shit up.
Observer, You make all good points if you have a different point of view on making America Great Again. With all the links you really want to get your point of view out there. Great Job!!
Hey, I agree with you, man! This whole Trump tax cut thing is a short-term-gain for a long-term-pain deal. The ironic thing is that the people short-term benefitting from his policies is ME, a Canadian Millionaire Early Retiree. But his constituents who are poor, working-class, coal miners in the Appalachians didn’t saw a nickel from their policies.
Again, conflicted…
I would hardly call Trump an idiot or say that he doesn’t know he’s doing.
His success in multiple industries over several decades indicates a high level of intelligence. These industries include, reality TV, construction, real estate, casinos, etc.
His economic plan is quite cogent. Indeed, you are benefiting from very sound MAGAnomics.
The cognitive dissonance you’re experiencing about Trump is the falsified perception of him created by the leftist media, which is in cahoots with Hollywood, music industry, political establishment and other elites.
Much like you guys have rebelled against the system by quitting your 9-5 jobs and gotten negative heat from it, Trump is rebelling against the globalists, the elites, the establishment.
Normally, I would yell at you and call you an idiot, except you’re absolutely right. He sounds like an idiot, yet he’s made alot money, and his tax cut just made me alot of money. I entered the beginning of this year convinced that idiot would spin us all into an economic depression, yet here we are. Maybe I should get one of those MAGA hats…
It’s Trump’s way of appealing to the masses.
“All propaganda has to be popular and has to accommodate itself to the comprehension of the least intelligent of those whom it seeks to reach.” – Hitler
Not the best guy to quote, but it’s apt and concise.
Recently, someone pointed this out to me:
If you look at Trump’s television interviews from the 1980s, you’ll see that he speaks quite intelligently and nothing like how he speaks today. Big words are lost on many people.
I also learned that he took the time to learn the intricacies of a video camera. Undoubtedly, he used the above knowledge to rile up crowds.
As for mainstream media such as Bloomberg, they called Trump’s tax cut a “fantasy” and that it couldn’t work. Hours later, the following companies announced investments, hiked wages, special bonuses because of the bill:
– Boeing
– AT&T
– Fifth Third Bancorp
– Wells Fargo
– Comcast NBCUniversal
– Washington Federal
I can only conclude that the elites have their own agenda, don’t want to see the average person succeed and are afraid of losing such power.
I would conclude similarly. And to be honest, I’ve also noticed the fact that he sounded smarter and more likeable in older interviews, while now he’s just a yelling racist grandpa. Yet his popularity has SOARED. Maybe he’s hyper-intelligent and just playing to the crowd. It’s just bloody hard for my to square the two personas.
I’m just curious as to any examples of his success in the multiple industries. From everything I’ve read, he has bankrupted everything he’s touched, but gets to keep certain assets after bankruptcy that benefited him, but hurt the companies and workers. I live in NJ. So, I’ve heard that this is what happened in Atlantic City, NJ and other places.
Goddammit, me too. I don’t know what mechanism he’s using to go bankrupt while getting richer, but I want that shit in MY back pocket!
I have to think about this some more but at first glance this looks like an awesome strategy. I just retired this fall and plan to live off of dividends only. I will be receiving a chunk of these dividends in all of my accounts including my RRSP’s and my LIRA. I was thinking that I would need to convert my LIRA to a LRIF (I am 57) to be able to access the cash (since you cannot withdraw cash from a LIRA) but your strategy may enable me to avoid doing that. This is HUGE!!! I can simply sell assets in my RRSP and acquire them in the LIRA and then withdraw the cash from the RRSP. I don’t know why I never thought of this but you guys have opened my eyes!! This is a much more flexible approach since I will not have to worry about minimums or maximum withdrawals in the LIRA. It does mean that the LIRA will accumulate shares (as I sell them out of the RRSP) but I will have the option of unlocking 50% of the LIRA when I finally convert to a LRIF so I will still have some flexibility after that point in time. You have really given me something to think about….thank you so much for this!!
That’s exactly the approach we are planning. Keep the shares you pile into the LIRA income-oriented rather than growth-oriented and should be able to get most of if out under the 50% rule, the hopefully the small-balance rule.
Nice post as usual Favorite Couple of FIRE!
Simple and effective way to get all your $35k of accumulated dividends / Yield Shield out of their respective accounts into your regular taxable account. Now, all we in the US need is for our friends at Financal Samurai and Oblivious Investor to convert this to 401(k), Roth IRA, IRA, and US tax laws (preferably post recent changes). Not greedy am I? Best of wishes to all readers for the upcoming holidays. Enjoy your FIRE while you can!
You want me to convert this to American accounts? Done. Stay tuned for next week 🙂
Hi folks,
I love, love, love your posts!!
I understand the concept and a very smart idea I must say but have a hard time understanding what you mean by your taxable income drops to zero? You’re info doesn’t indicate if you have any investments outside of your sheltered accounts TFSA, RRSP etc. I assume you do with the size of your portfolio. Therefore wouldn’t you be taxed capital gains from non shelter accounts? Just curious as I’m ready to be FI within the next 6 months and need all the help I can get. Thank you so much for all your amazing posts. Can’t wait to read your next travel post too!! All the best!
Nope. You only get taxed capital gains when you sell.
This is an excellent post. I just started thinking about withdrawal and taxes. I don’t understand the money you are pulling out of the non tax sheltered accounts though. In order to get the full withholding tax back isn’t your withdrawl at the end limited to a maximum of double (2 people) the personal exemption amount? I figure I am missing something here but I am not sure what it is.
Nope. Withdrawals from non-tax-sheltered accounts are not counted as income. After all, you’re just moving money from one savings account to another.
Thanks so much for the info!!!
Wondering if you could help me with something?
I was wondering what I should draw on first when I reach FI. I’ll be 50 in January and planning to be FI by June. I have an RRSP, TFSA, LIRA and savings account with Tangerine. I was going to wait till I have zero income for a full year then draw from my RRSP. Wondering if that would be a good idea? I’ll continue to make my annual contributions to my TFSA.
** side note ( you can negotiate you interest rate with Tangerine, I have been doing it for a few years). I have been getting at least 2.5% interest for the past 2 years. They will give it to you for a time period, you just need to remember to call them back and renegotiate a new rate when it expires. I remember getting a little over 3% one time.
Love you guys!!!
What you described is exactly the strategy we’re doing.
Awesome!!! Thanks so much for the input, glad I’m thinking in the right direction.
Interesting concepts. Just to make sure: how do you avoid taxes when moving money from non-TFSA accounts to TFSA? Isn’t any money withdrawal from a regular, non-TFSA account a taxable event? Or are you saying that by transferring money directly from a regular (investing) account to a TFSA account, there is no tax because this is not a sell ? (it would be great)
A direct transfer from a non-TFSA into a TFSA IS a taxable event. You will be taxed on that as regular income.
What I’m describing is a process to free cash sitting in a TFSA into a non-reg account, so opposite direction.
Great post! Wondering since you mentioned the reason for the withdrawal is because your 3 year cash cushion is depleted and you’re only pulling out 35k or 1 year of living expenses then do you plan to forego the cash cushion and just make annual 35k withdrawals? I’m curious because I thought your original withdrawal strategy of the 3 buckets was great idea.
The cash cushion was meant to get me out of the danger zone of an immediate ill-timed economic collapse within a 3 year period. Now that that period has passed any my portfolio is higher than when I started, and I’ve positioned myself for income, I’m comfortable taking out $35k – $40k each year from now on.
Your complex and wonderful strategy boils down to, “take money from taxable accounts, then rebalance to the proper asset allocation in your tax deferred accounts.” This works as long as the taxable accounts hold out.
Have you thought ahead to when the taxable accounts are depleted? How do Canadians withdraw from the RRSP, et. al. before government defined retirement age? Mad Fientist has done a great comparison of Roth conversions, 72(t) withdrawals, and the like for us Yanks. A companion piece for the great white north would be valuable.
That’s a great idea. And that will be my next article 🙂
talking of withdrawing …
i started with an RBC DI account . .it has my TFSA’s and non – reg account
and thanks to you i opened a Questrade account this year
i love the free trades in it and so I now hate the $10 trade fees in RBC accounts
is there any way i can transfer all my RBC accounts to Questrade at this stage ?
much obliged
The only accounts you have with RBC are TFSA and non-Reg? Just withdraw to cash, take your check, deposit in Questrade, and re-establish. You should be able to do that with no fees. Though make sure that if you withdraw from your TFSA in December, that you wait until January to re-deposit.
Again an excellent post! I have one question regarding the income of $35K generated. If your portfolio is 60/40 split between stocks and bonds, then is the $35K income generated on the bonds portion only? Are you also picking stocks that return dividends as well? What’s the trade-off between stocks that generate dividends (slower growth) vs. higher growth stocks (eg. in tech) that don’t give dividends but appreciate, hopefully at a faster rate? I’m working towards FI and trying to understand the income generating strategies. Thanks again for sharing step by step guides and answering follow-up questions in detail. Happy Holidays!
The $35k is a combination of income coming from fixed income/preferred shares as well as dividends coming from common shares.
As for the trade-off, more mature companies tend to pay higher dividends while growth stocks tend to reinvest their profits in an effort to produce higher capital gains. Generally, you want to go high-growth when you’re further away from retirement but then transition towards higher-yielding fixed-income or dividend stocks as you get closer to retirement.
Do you need money now or later? That’s how you decide.
MAGA
FUCKOFF
The blogging and index fund community has broken down the barriers to invest, but it’s really hard to understand how to withdrawal money in early retirement in a tax efficient way. It’s of supreme importance because a friend who has just retired told me she is getting killed in taxes withdrawing from her RRSP. Thanks for this post! I’d love to see more like this!
Your name is LadyDividend. Aren’t you supposed to understand taxation?
You can control your taxation from your RRSP because you can control how much to withdraw. Unless your friend is too old (65+). In which case you have to obey the required minimum withdrawals (RMW’s)
Trump’s policies haven’t kicked in yet. You’re making money and benefiting from a good economy due to Obama-era policies.
I must be missing something. :-). Why are the swaps necessary? Aren’t you using the accumulated cash to buy securities in an account that you can’t withdraw from? And aren’t you selling securities in an account that you want to withdraw from? I don’t see why these two transactions need to use the same security. Isn’t this scenario tax free because of the dollar amount you are withdrawing from your RSP (i.e. <$10K)?
Help!
I was in a similar situation last year, I had not used my personal deduction fully, but opted to leave the RRSP in there, primarily for the reason that I didn’t need the money, and this way it could continue to grow tax free. I’m curious if you ran the numbers at all? My back of the envelope says at 7%, 10k after 25 years would be 55k, and outside the RRSP you’d have ~22.5k of capgains to pay tax on, vs 5.5 years of slowly drawing down your RRSP tax free (or 55k of income to pay tax on in one year).
Now, the problem is you obviously can’t just draw 10k a year from your RRSP, especially if you’ve just been letting it grow for 25 years and only have maybe 30 years life expectancy left, so then you’ll have to pay some income tax.
As I only had a few thousand in room, and there were situations and arguments that could show either case being the beneficial one, I left it alone, but am curious if someone(you?) ever ran the numbers as to in which situations which would be the wiser course.
The real brilliance to the strategy Wanderer outlines is that he’s got the $10K room/year NOW because he has no other ‘income’ to eat that room. For most Canadians, if you let it ride in your RRSP too long, then all withdrawals hit a minimum 20% tax rate because other ‘income’ earnings like CPP/OAS, DBP payouts etc. kick in at about age 65 (67 if you delay), eating up the $10K room. So when this kicks in, you suddenly go from a ‘no tax’ scenario to a ‘double the capital gains tax rate’ scenario for the same $10K withdrawal. Canadian taxes have the deck so highly stacked against ‘income’ earnings, even if Wanderer were re-investing in his cash account (instead of living off the withdrawals), it still works…as long as he didn’t re-invest it all in bonds 🙂 .
Thanks for the info Wanderer. I’m a fellow Canadian at early stages of FIRE, early 30s. A friend and I were recently researching the withholding tax and having a hard time getting clarity from the CRA. To clarify, the 20% withholding tax, this isn’t IN ADDITION to the regular tax we would pay at our tax rate when withdrawing, correct? This is the gov’t holding an amount back to ensure we do pay them whatever tax rate is appropriate for our annual income at withdrawal – which, we’re all intending will be much lower than 20% and we will get back at tax time.
So, for anyone holding ETFs in an RRSP and looking to withdraw in our before age 60, our only cost to do so would be the fee charged by Questrade, and our tax rate when we withdraw?
Sorry if this is obvious or meant to be assumed – at my stage this would have a significant implication on my target NW if this withholding tax was in addition to, or if there were other fees I’m just not aware of.
Thanks again for your insights.
Mike
Sorry to comment on an old post but question on withdrawing.. So you withdrew your full year of living expenses ($35k) at one time (through a series of purchases/sells). My question would be is that going to be the best option for withdrawals or would it be better to withdraw smaller sums every month or quarter? (lump sum withdrawals vs dollar cost averaging withdrawal??)
I love your blog! Thank you for all the great information.
I really enjoyed this article. A lot of us haven’t worked through this because we’re not there yet, so it’s really helpful to have this guide.
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Hi Wanderer,
I’m close to FIRE and wanted to know if there’s a free online calculator or something that will tell me my expected taxes owed when I withdraw from my RSP early and also have dividend income. I know you said you can withdraw 10K from RSP each year tax free if you have no other income but I’d like to know how my dividend income will affect my taxes in combination with different amount of RSP withdrawals. I also live in Ontario.