If any of you are familiar with the Canadian investment accounts, you will have likely heard of an RRSP. An RRSP is a Registered Retirement Savings Plan, which is designed to help people save for retirement in a tax deferred investment vehicle.
The RRSP is similar to the 401(k) in the US and Superannuation here in Australia. For the most part, you contribute to the account with pre-tax dollars and the amount you contribute is subtracted from your taxable income. You only pay tax when you withdraw from the account.
If you withdraw money from the RRSP while you're still working, the money is added to your taxable income for the year it was withdrawn. Depending on your tax bracket, you could be hit with well over 30% tax if you withdraw. The are certain circumstances that allow you to withdraw without such a big tax hit but we won't go into them in this post.
Unlike the 401(k) and Superannuation, there are no extra penalties if you withdraw from an RRSP. The tax is the only thing that you're on the hook for if you withdraw. Ideally you wouldn't want to (or need to) withdraw from this account until you retire.
But I'm not retired, yet I'm withdrawing. Why? We'll get into that. First I want to give you a bit of insight into my RRSP.
My RRSP back story
When we first moved to Canada back in 2017, I started work and began working with HR to complete all of my onboarding requirements. Part of that was to set me up with a "savings plan", as most companies do with their new employees.
Given we weren't recognised as residents of Canada at that point, I couldn't open up an RRSP. We had to be working in the country for 3 months (I think) before we had access to the RSSP option. So in the meantime, I was placed into a NRSP, which is Non-Registered Savings Plan.
The contributions to an NRSP aren't tax deductible like the RRSP (i.e. they don't reduce your taxable income) and the withdrawals aren't taxed. The downside of this account is that the gains are taxed. This wasn't a big deal though, because once my 3 months had elapsed I opened an RRSP and began contributing to that and stopped contributing to the NRSP.
When enrolling to the company's RRSP, employees at my old company have an option to select how much of their salary will be deducted each pay to fund this account, either in dollars or as a percentage.
My old company offered a "matching plan", which stated that they will match your contributions dollar for dollar up to a cap of 7% of your salary. That means if you contributed 7% of your salary to the RRSP, the company would also contribute that same amount on your behalf. This is basically free money.
I could've contributed even more than 7%, but every dollar above that threshold wouldn't be matched by the company. I stuck with the 7% for the duration 3 years and then increased my contribution during my final year in Canada.
By the time we packed up and left the country, the equivalent of 14% of my gross salary was contributed to the RRSP each year, with only 7% coming from me. It allowed me to quickly grow my portfolio over the 4 total years I spent living in the land of the great red maple leaf.
We had a choice of what to do with our accounts
We moved back to Australia in February 2021, still having assets tied up in Canada. We managed to sell the house fairly quick and only had the NRSP, RRSP and a few bank accounts still active.
There were two options we were faced with. Option A; Leave the NRSP and RRSP alone and let them grow until we were ready to retire, or Option B; Liquify the assets and bring them across to Australia.
Option A seemed fairly straightforward. Just forget about the accounts until 30 years from now and figure it out when we retire. That seemed pretty risky to us because we don't know what's going to happen in the future in regards to tax laws, trade agreements between our countries, etc. We wanted to have control over our money.
Option B seemed like a better choice for our circumstances. Bringing it to Australia meant we'd be the ones in control of it and would eliminate the risks from Option A. However, bringing it to Australia wasn't as straight forward as we first thought.
Withdrawing from my RRSP
At first, we tried to see if it were possible to simply rollover the RRSP into my Superannuation account and avoid the tax hit from withdrawing. This would have been the ideal scenario and would allow the compounding machine to keep churning growth for years to come. Unfortunately that wasn't a possibility.
The only option for us was to withdraw the funds from the RRSP into a Canadian bank account. Luckily for us we still had our accounts open and were able to do so. The downside is we'd be hit with a 30% withholding tax for doing so.
That sounds pretty high, but it's a much better rate than what I'd have to pay if I was still a resident of Canada, because that would be added to my taxable income and taxed at my marginal tax rate of over 40%.
We had to live back in Australia and prove we were residents of Australia for tax purposes before we could be classed as "non-residents" in Canada. The benefit of withdrawing when you're a non-resident is that tax is capped at 25%. I know I said 30% in the paragraphs above, which might seem confusing because it is.
The Canadian system withholds 30% tax until you file your taxes the following year, which is when you can claim back the additional 5%, bringing it back to a total of 25%.
If I were a lower income earner in Canada and my marginal tax rate was less than 25%, there wouldn't be a a benefit to being a non-resident before withdrawing because my tax rate wouldn't have been higher than 25%. Because my tax rate was so high in Canada, it was more beneficial for me to wait and then withdraw once being in Australia for a while.
The choice of what to do with the money
Like everything in life, a bunch of options leads to one choice, then that one choice leads to another bunch of options. This was the same with our RRSP situation.
We had the choice to leave it in Canada and grow, or to withdraw it when living back in Australia. We chose to withdraw it and then we have choices as to what we do with the money.
One option we tabled was to invest all of it into our Australian brokerage account. Another option would be to pay a chunk off our Australian mortgage. Another option would be to buy an investment property. Yet another option would be to put it towards a house deposit.
Choices. Choices. Choices!
What we're using the money for
After much deliberation and conversation, Allanah and I agreed a plan for our RRSP money. We're going to put it towards a house deposit to buy a new primary place of residence in our new home town.
The market range we're looking at is anywhere from $700k to $1M, where the $700k properties are pretty old and need a bit of work, and the $1M properties are turn-key, live in straightaway properties.
We like nice things and we want to be comfortable in a home, enjoying what it has to offer. But $1M dollary-doos is a heck of a lot of money to throw towards something that doesn't pay you to own it!
Buying a house to live in is more of an emotional decision than a financial one most of the time, and the reason we've chosen to buy instead of rent forever is stability. Check out my blog posts about the benefits of owning your home and the benefits of renting for more on this topic.
We want something we can call our own and spend the next 10+ years living in. In our area, the market is likely to go up over that time, but we're not buying for an investment. If it turns out to be a good investment then that will be a bonus for us.
The total that we have from both mine and Allanah's RRSP is around $70k (that's post-tax dollars), excluding the 5% we could claim back at tax time. We still have quite a bit of saving to do in 2022 to add to the $70k we now have in our bank account. Ideally I'd like to have over $120k to go towards a deposit, agents fees, and stamp duty costs for a property.
That means we'll need $140k in our bank account before we think about buying anything. The extra $20k is for an emergency fund (which everyone should have. If you don't, go build one now!) for any unplanned expenses that might creep up along the way. If we dip into the emergency fund, the priority is to then build it back up and not touch it until we NEED it again.
If I'm realistic about a timeline, it will likely be the end of 2022 before we're seriously in the market for a house. That means we'll need to sign another lease in May of 2022 for the current house we're renting. Not sure if we will look for a 6 or 12 month lease at this point.
Some final words
Withdrawing from any retirement account should be your last resort if you need cash in the short term. They are designed to grow your wealth over time thanks to the power of compound interest. If you interrupt this process, you're robbing yourself of future gains.
In saying that, there are some circumstances that make sense to withdraw from a retirement account and I believe our situation is one that "makes sense". If we weren't to withdraw our RRSP funds to put towards a house deposit, we might be priced out of the market by the time we've saved a $100k deposit over a 2+ year timeframe.
With the way that house prices have escalated in such a short time in our area (I'm talking more than 30% in 12 months kind of growth), this is a very really possibility.
We're comfortable with the decision we've made and have a plan on how to make it possible. Wish us luck!
Blake
FIRE with a family