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The Triple Maximizer

Many Canadians have incorporated leverage strategies in their retirement plan and have been very successful in increasing their net worth. Leverage strategies are good for individuals who have a stable cash flow and can handle volatility of the markets. If the risk profile is suitable and you have a long-term investment horizon leverage loan (investment loan) might be a good strategy.

What should I do to minimize taxes or increase my net worth?

This is very common question that every Canadian asks themselves. Contributing to RRSP gives you an immediate tax refund but you might fall into a tax TRAP in your retirement years. On the other hand, if you want to increase your net worth you might have to let go some of the RRSP contribution and invest into more tax preferred investments.

What is the best strategy to minimize taxes and maximize net worth?

Well, there is no best strategy as every individual tax situation is different. You can always optimize it by having a meeting with your financial advisor. For sure we can do a case study and see how much an individual can net out by using different strategies. But again, there are so many variables like investments horizon, rate of return, age, retirement age, the sequence of withdrawals etc.

What should I do, should I take an investment loan or invest in RRSP?

Well, the answer is a bit of both. If you really want to minimize your taxes the triple maximizer is the best strategy. For example, if a client is 40 years of a age and is in 47 % MTR and has a budget of $1000 a worth to savings the following might be one of the scenario for him. Over a 20-year period.

The individual can take $300,000 interest only investment loan (some condition apply) and can invest in mutual funds or segregated funds. Assuming the borrowing cost at 4% the total cost of borrowing is $12,000 a year. Also, assuming that this investment is generating an 8% rate of return annually the total value of the portfolio after 20 years will be $1.4 million. Also, the $12000 annual interest cost can generate an additional tax refund of $6000 (approx.) and can be invested into RRSP. This $6000 RRSP contribution will generate another $3000 in tax return and can be invested into TFSA.

Adding all the investments together the individual will have the following portfolio at the age of 60 years. Nonregistered = $1.1 million, RRSP = $324,503 and TFSA $162,251.

What is the risk associated with a strategy like this?

Every investment comes with a certain degree of risk. Your risk increases when you borrow the money to invest, potential negative returns can derail your investment objectives. Historically capital markets have generated 12 to14% annual rate of return. But again, the returns are not guaranteed.

What if I want to cancel this strategy and do not want to continue for 20 years?

You can redeem the investments and pay all the loan any time. Before doing that, you should call your advisor and find out if there are any fees associated with the transactions.

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