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I live in Canada. I am mortgage-free/debt-free, have maxed out my RRSP contributions, and have some extra cash outside my RRSPs. I don't have a company pension plan - my only retirement income will be from RRSPs and our modest Canada pension, which in total will be rather modest.

My question is how I can make the most of the extra cash I have now to bolster my income upon retirement, which is only a few years away. What other vehicles besides RRSPs are available that can (hopefully) minimize tax impact now and improve my retirement picture?

EDIT:

I should add that my current earnings are in the mid-to-high level tax bracket, so I am exploring other means of tax deferral besides RRSPs, if they exist. In other words, any other way to shift my tax burden into retirement years where my income and marginal rate would be a lot lower.

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TFSA! Any gains you get out of it is Tax free. You probably need to talk to an Investment Advisor if you are not comfortable making your own investments. They would also make sure you do not overcontribute.

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There are a few ways on top of RRSP's to gain tax reduction / deferral; for other readers, some of these options may be preferable to RRSP's themselves for various reasons.

(1) Tax Free Savings Account - Like RRSP's, this is an investment 'vehicle', and you can put just about everything inside it like you can RRSP's. Contributions don't give you an immediate tax deduction, but earnings on those investments will always be 100% tax-free. When you cash in and take money out of the TFSA, no further tax is owing. Particularly for people near retirement, TFSA's are often better than RRSP's, because the full elimination of tax is usually better than a tax deferral of a few years.

(2) Registered Education Savings Plan - while you are near retirement, if you have children yet to complete their education, contribution to an RESP can be advantageous. Contributions do not give an immediate tax deduction, but earnings on the investments are deferred until the money is taken out (and those earnings are partly attributable to your children, who likely will have minimal other income and thus minimal tax if any). As well, you can get a small government grant for each year contributions are made (about $1k per year in value).

(3) Invest in long-term assets that grow in value, rather than provide annual dividends or interest. I assume your RRSP's are relatively diversified, so let's take a look at what asset classes would be best held outside of a tax-efficient vehicle (like RRSP, TFSA, or RESP). If it is an asset that gives you annual income, you pay tax on that immediately every year. If it is an asset that you can control the disposition of (you decide when to sell it), then you can defer recognition of income until you need the money, or until it is otherwise tax-advantaged to do so. Keep in mind that growth-focussed items like this may be in a higher risk class than other investments, so this solution is mostly geared towards those already well diversified and willing to take on additional risk!

This can mean investing in property (where your operating expenses often nearly offset your annual income, meaning you pay minimal tax until you sell, so the true value is often in anticipated property value increases), or non-dividend paying stocks (but be careful that often non-dividend stocks are junior ventures without sufficient cashflow to immediately afford dividends, so risk can be high here), or even investing in precious metals (though the benefit of investing in precious metals is debatable). In general, all these asset classes will also be classified as capital gains when sold, meaning 50% taxable, so there is a benefit to holding them outside of an RRSP [where all income is taxed as 100% regular income when ultimately withdrawn], or TFSA [where all income is tax-free anyway].

Whether any of this makes sense for you will depend more on your risk profile and exact circumstances.

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  • To clarify a point in your answer: there is no vehicle other than RRSPs that I can use to defer tax on my existing income? So having max'd out my RRSP contributions, I have no choice but to pay tax at the marginal rate on my current income (less the RRSP contributions)? In other words, there is no other way to reduce my current taxable income? – Anthony X Aug 21 at 21:38
  • @AnthonyX There are some ways, all legal, but typically that gets into very specific advice suited to your available funds to invest, level of risk tolerance, and specific tax situation. The best way to get that level of advice is to pay for it - go to a big 4 accounting firm and ask for a free consultation - they will happy to have you if you at a high enough income level to be worth there time. – Grade 'Eh' Bacon Aug 24 at 12:51
  • An example would be the following investment possibility: from time to time there are junior resource companies that issue limited partnership interests rather than stock IPO's; this setup can sometimes allow initial resource spending by the venture to be taken as a deduction by those who invest, because a partner of a company gets allocated a share of losses (or income) and adds it directly to their annual return. For junior resource companies that front-load losses as they build out mine sites, search for oil, etc., that means you might have losses in the first few years as income deductions – Grade 'Eh' Bacon Aug 24 at 12:53
  • However that is very risky - can be basically the same level of risk as investing in penny stock junior oil & gas, because the presence of initial losses is a signal that there may never be profit. So to take advantage of this from a tax perspective would mean you would need to be comfortable with a very high level of risk - and typically these offerings require you to go in for 50k+ at a time. The partnership interests may or may not ever be publicly traded, so 'cashing out' can also be difficult, even if a moderate level of success is made. – Grade 'Eh' Bacon Aug 24 at 12:55
  • Similarly, you could even start your own sole proprietorship (unincorporated business), like a restaurant, and claim losses against your income in the first few years. Whether any of this or other options makes sense for you would really depend on far too many factors to convey by this format, and you should get professional advice if you have this much on the line. What I've outlined above is pretty concrete, but as you say, doesn't give an immediate income deduction. I feel you may be undervaluing the benefits of the advice by framing it that way, however. Professional advice would suit you. – Grade 'Eh' Bacon Aug 24 at 12:57
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to lessen your taxes you can also maximize your charitable and political party contributions. Now, you say you have no company pension plan. This is a benefit. How? You can maximize your RRSP contributions (27K+); but since TFSA's were introduced you should look at reducing your RRSP contributions and maximize your TFSA contributions. If you have never contributed in a TFSA, then for 2020, you have a $69500 contribution room. With your TFSA you can invest in stocks and make tax free gains to buffer your retirement. If you plan it, you can retire at age 60, defer your CPP till 70, convert your RRSP to a RRIF, and slowly withdraw up to 12k+ per year tax free. And based on your investments in your TFSA and how your investments performed, you can make withdraws to supplement your $12+ RRIF withdraws.

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  • This is a good answer but could benefit from more explanation so someone at the OP's level of experience could truly understand - ie: why retire at 60, but defer CPP to 70? Why convert the RRSP to a RRIF? I also think you have made some assumptions that are a bit of an overreach - if OP locks away 70k in a TFSA (probably a good idea if he has that much in non-tax-advantaged accounts), supplementing 12k of RRIF withdrawals up to, say, 50k would only last him 2-3 years depending on how well his TFSA performs in his short window left to retirement. Explaining assumptions allows the OP to clarify. – Grade 'Eh' Bacon Aug 24 at 13:01

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