22 July, 2022 Total Client Experience

How to save $2,000,000 in Taxes with Planning

Paul and William at an event

Clients and friends,

How can I get better portfolio returns? It’s the driving question for most who wish to create more wealth and a better life for themselves. What could be more important to creating more wealth than better portfolio returns?

Case Study on Real Wealth Creation.

One of our clients was fortunate enough to be able to retire in his late 50s. The family had had a seven-figure portfolio that included non-registered assets, RRSPs, TFSAs, and a defined benefit pension.

Was it possible to create more family wealth through strategic retirement income planning instead of taking more portfolio risk?

We compared two retirement income strategies. The first, (the traditional rule of thumb) was to draw income from the non-registered portfolio first and then registered (RRSP/RRIF) afterwards. The theory here is that since substantially less tax is paid on withdrawing from non-registered assets, less cash withdrawals are needed to provide the same after-tax income during early retirement. This would result [all things being equal] in a larger portfolio later in retirement thus allowing the potential for either more income or a larger estate.

Rather than depending on the default strategy we created a detailed after-tax analysis comparing the long-range implications of the default strategy (taking income from their non-registered positions first) vs. withdrawing from the registered portfolio first and then from the non-registered later [the opposite].

I almost fell off my chair with the results. Using the default and most common strategy of withdrawing non-registered assets first, the client’s net after-tax estate would be $5,767,139. Withdrawing the registered assets first and paying more tax initially, resulted in the client’s net after-tax estate of $7,858,943.

WOW - an extra $2,091,804 in after-tax estate created through detailed long term tax planning.

Let’s think about this for a moment. Over $2 million in potential additional after-tax family wealth was created without the need to reposition the portfolio to POTENTIALLY generate higher portfolio returns and incur MORE portfolio risk at the same time.

One must keep in mind that with all long-term projections, actual results will likely differ substantially. However, detailed analysis can help us decide which route will most likely provide a better after-tax return.

During my many years of radio work I continually emphasized the huge importance of planning in building serious wealth. Although, my sense is that this often fell on deaf ears and that most wanted to focus almost exclusively on better portfolio returns. It reminds me of Warren Buffett’s analogy of why should one try to jump over an 8-foot pole when you can jump over 1-foot pole accomplish the same thing?

Keep in mind that there are numerous variables to this and withdrawing registered assets first may not be the best strategy in your situation. Variables can be the existence of pensions, your age at the start of retirement income, marginal tax brackets, longevity, the size of both non-registered and registered portfolios etc..


Paul and William at an event

William and myself at the recent “Cover Me Urban” charity event in support of “Youth Without Shelter” (Hint: William is the tall slender one)