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Did The Unthinkable & Cashed Out My RRSP - ALL OF IT!

Did The Unthinkable & Cashed Out My RRSP

About fifteen years ago I began reading every book I could find about personal finance.

I literally went to WH Smith bookstores for hours, reading everything I could find right in the store.

And then buying the few books that looked the most promising.

I remember driving from Mississauga to downtown Toronto to track down a copy of a book called, Live Rich - Die Broke ... LOL ... I don't recall anything about that book other than at the time I just had to have it.

There's definitely some OCD in me...

...when I get started on a topic I tend to go "all in".

At this point, I must be well over a hundred books deep in the personal finance category.

I've learned about mutual funds, stocks, puts and calls and for I while I was trading call options rather aggressively.

Actually, right around the time Nick and I got pretty serious about Real Estate I was trading options while working at my software job.

At one point I think I asked (aka, begged) my wife to watch some "option trading" videos that I purchased from somewhere ... likely an infomercial.

I'm sure she was thrilled at watching them and learning how much money I spent buying them!

Being the trooper she is she politely watched ALL of them with me.  Funny stuff.  (Thanks, Carol, you're the best!)

And then after a few years of owning real estate, I realized something.

The properties were completely in my control.

We could actually forecast income from a property with a fairly good accuracy rate.

With trading options, I couldn't forecast squat.

I was constantly monitoring different crazy "indicators" that would tell me when to buy or sell.

It was literally like riding an emotional, caffeine-fuelled, roller coaster.

Buy - Sell - Buy - Sell ... ah!  It was never ending.

During this time the properties just kept spitting out cash.

The equity kept building up.

The appreciation would come in spurts, but it happened without any of our own intervention.

So it hit me that I wanted to study this real estate thing and get good at it.

We both started to try different things, flips, "sandwich lease options" (we'll never try that again!), silent actions, "no money down deals", wholesale marketing etc.

After that, we were able to identify a couple "systems" that produced consistent results for us.

So we focused on developing them, practicing them and trying to master them.

That somehow lead us to start and operate our own real estate brokerage.

Trust us, we never set off with the idea that one way we would own and operate a brokerage called "Rock Star Real Estate".

Or that we would be able to help so many investors even a tiny bit.

But here we are and we're grateful for it.

And something else happened.

About seven or eight years ago I said screw it and sold my RRSPs.

All of it.

$5K at a time.  LOL.

Why $5K?

Because that's the most you can sell to get the minimum amount of withholding tax taken off (10%).

Sometimes I would call the bank two and three times a week to take out $5K.

They thought I was crazy I think.

I then had to declare that money as income on my personal taxes so I always tried to do it when I had loses (often from option trading, LOL) to offset any taxes I would have to pay.  So there was a tiny tiny, wee bit of strategy involved.

Here was my thinking at the time:

1. If I can take the tax hit now and use the money to buy assets that I can control my future is in my hands.

2. And I like control.  (Did I mention I may be slightly OCD?)

3. I also had this thought ... I don't think the government is EVER going to lower the tax rate so why don't I pay it and be done with it.

Crazy, I know!!

I can hear the financial planners screaming in pain as they read this and saying something like ... "Ah, he's paying too much tax ... defer, defer, defer!!"

But we gotta tell you something ... I don't regret it for a minute.

There's a certain freedom being "out of the system" ... I mean, I still pay taxes on the income generated from real estate but I know with a fair amount of certainty what my assets are doing and will do in the future.

And it feels good, real good.

One more thing...

For those of you reading this who can't believe someone would do this based on a "feeling" that it was right here's a little data for you courtesy of DebtClock.ca:

Screen Shot 2013-06-26 at 10.50.33 AM

(Source)

And here's Canada's historic GDP numbers:

Screen Shot 2013-06-26 at 10.53.53 AM

(Source)

Looking at these two things doesn't give me any more confidence today, than I had years ago, that tax rates will be going down anytime soon.

I completely realize that my thinking here is very "simple" and doesn't account for tax planning strategies etc.

But sometimes, we've found, simple is best! 🙂

For the record, Nick still has investments inside an RRSP.

So technically only one of us is crazy.

Until next time ... Your Life! Your Terms!

 

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0 comments on “Did The Unthinkable & Cashed Out My RRSP - ALL OF IT!”

  1. This makes perfect sense - I've been thinking about doing this for a long time now. The returns on even the most aggressive (and the most volatile) RRSP accounts (i.e. having a high percentage of highly speculative equity in them with a risk of a complete wipe-out) are extremely low, compared to what you can earn in real estate. Let alone all the tax benefits of now owning a "business". I would say the only scenario where you shouldn't pull your money out of RRSP is if you work in a company where they have a a sponsored plan and match your regular contributions - for instance, mine matches 50% of my contributions, so that's instant 50% return on my investment 🙂 I figured - I can pull these out any time anyway, so for now I'm going to enjoy some diversification and relatively risk-free return. In all other cases - RRSPs (and, hate to say it, even RESPs where the government matches 20% of your contributions) are not worth it - too many restrictions related to the use of your own money and too insignificant returns. Being in control of your money is worth a lot.

  2. I agree with taking out the money from your RRSP and investing in Real Estate. I have a cousin who is a farmer and has never invested in RRSPs but rather he would take his money and buy another farm, so as of today and he is in his early 50's, he now owns 8 farms which he works and pays cash for all the huge pieces of equipment he owns as well as he just bought a cottage (value over 400K) and paid cash..you can't do any of this while your money is in a RRSP earning nothing. I also know of a source that you can use like an RRSP and contribute $55K per year and be able to use this money to buy real estate and everything you profit by using this money will be take free, no maximum on how much you can contribute yearly doing this. You can build your retirement pretty fast this way.

  3. For the record, I am right there with you in "Crazytown" according to my accountant when it comes to RRSPs. I keep telling him that a million in RRSPs is not really a million anyway, and the value of my real estate holdings have far outpaced my existing pension plan (also mutual funds) even with the 50% employer match. I am all for control. Great article!

  4. Great Post!

    I personally have never put money in an RRSP. I decided to save and buy my first rental at 24 and another at 26. I'm 28 now, think its time to buy a 3rd 😉 The money I generate and the assets I own are physical and I am in control. By the time I retire - I plan on having a few more homes (with no mortgages) and the cash flow they generate will be the equivalent to my RRSP retirement. I currently trying to convince my girlfriend to cash out her RRSP and use it to buy her first home!!!

    Hope to meet you guys one day! The weekly reports I paid were extremely useful!

    Keep living on your own terms! - Ricardo from Toronto

  5. I've been considering doing same for the last couple years....at the suggestion from my accountant! at first i was startled to hear him advise I was wasting time and money by putting money in RRSP's but as I listened I got the (initially, uneasy) sense he was making a solid case. shortly after, I stopped contributing but haven't made the next step to actually cash out (that $5k at a time tidbit I'll be exploring). Now that I'm looking to expand into a 3rd and 4th property, this becomes high on the "to-do" list, and your experience and insights are timely. Thanks for sharing!

  6. Recently somewhere in a Rock Star publication it was mentioned that you can actually buy real estate within an RRSP. I took a look at this with one major bank and they can do it. Basically you lend yourself the money to buy a home and then pay retail interest rates back into your RRSP. So you will get a 5% return on your RRSP and pay down your house at the same time. I figured out that I don't quite have enough money in my RRSP to do this (mostly because I have taken out $200k to buy investment properties) but as the properties pay down their portion of my primary residence and when I can make it an even exchange I will execute this plan. Just a further note, at my personal income level whether I take $5k at a time or $50k, I will be hit with the highest marginal rates at tax time (luckily I have no offsetting losses). So withdrawing the money while I am in my prime earning years makes little sense but being my own banker for the next 15 or 20 years looks pretty good to me!!!

    1. Joe,

      Can you really lend yourself money from your own RRSP? I thought the transaction has to be "arms length" and you can either lend money from your RRSP to other people or borrow money from other people's RRSP... Perhaps I am misunderstanding this - did that major bank you are referring to actually suggest you can lend money to yourself?

  7. Great article !

    For the RRSP mortgage question posted by Teymur,

    You actually can setup such a mortgage for yourself and I am seriously researching it for the next time my mortgage comes up for renewal on one of my rentals.

    It would be good to speak to someone who has *actually* done it in recent times though, because from my recent research the reality is that while the CRA allows it under strict rules, the banks have slowly over time have been opting to *not* provide trustee services for these kind of arrangements anymore so things keep changing. Since you can only set it up legitimately with a bank that is approved by the NHA, then it’s becoming more difficult to actually do it.

    I spoke with someone at TD Waterhouse recently, and they do it, and they outlined some onerous steps ... my take from their response if that they really don't want people to do it and they will never suggest it directly as they don't make much money out of the deal themselves ... they certainly make much less than selling you into a mutual fund.

    However, I am determined to do it, and the biggest risk right now is that it is possible that you may have enough funds inside your RSP portfolio but when the bank is processing the loan, they decide that you don't qualify for your own mortgage 🙂 ... kind of ridiculous but they will process your loan application as if you were just anyone else walking in off the street and then add some extra stupid requirements because it is arms-length … so it is very likely that aggressive real estate investors may never be able to qualify.

    I am coming up with my own strategy to pull out as much of my RSP funds before I actually reach the retirement age, but it will be strategic and on my own terms.

  8. Hello,
    Quick question, can arms length rrsp proceeds be used for anything else other that realestate investing, ie arms length funds be used to invest in a business or be used for startup funds. Thanks

    1. Hi Dennis, good question. Not that we're aware of but we've never specifically verified either. If you email our office we'll dig up a contact for you or find the answer. (kayla@rockstarbrokerage.com is where to send it).

      Tom

  9. This was a very useful discussion thread. Tom, thanks for re-surfacing this idea. Does anyone have current information about using your own RRSP's to lend yourself a mortgage for an investment property? Does it matter if your real estate holdings are operating in a corporation? I have been contemplating switching all my mutual funds into ETF's (Exchange Traded Funds) for years now. A.k.a. Money Sense magazine's "couch potato" strategy. ETF's give you tremendous diversity at a very low fees. More recently, Tony Robbins new book "Money" advises strongly against holding any Mutual Funds (due to high management fees eroding any gains). He recommends ETF's like the Vanguard series broad spectrum ones. He also recommends REIT's (most recently the commercial / apartment focused REIT's due to a tilt towards rentals). Oh, and yes Tom, Tony Robbins does recommend Gold, but only as protection against inflation, a security bucket in case governments collapse, paper money disappears (becomes worthless), but needs to be part of a balanced portfolio...SO your idea 15 years ago does not seem so crazy after all!! For the rest of us, who may still have large amounts in RRSP's, especially in mutual funds, we need advice. Has your VIP group looked into this? Any current information would help. Thanks.

    1. Mario!!

      We have looked into the "arms length" stuff a lot over the years. During that time several professionals have told us that they had a way to lend to yourself at "arms length" but each time it turned out to be false. To this day we've yet to meet anyone who knows how to do this and meet CRA's approval. We agree with your comment about mutual funds, check out this post.

      Tom

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