Q&A: Tax-free RRSP withdrawals

Question: According to a financial advisor we spoke to, you
can melt down your RRSPs to avoid tax using a mutual fund with no margin call.
What is a margin call? What is your opinion of this plan? What are the pros
and cons? What risks are there with this idea? – A.O.

Gordon Pape’s answer: A margin call suggests leverage –
that means you are borrowing money from the brokerage firm to invest. “No
margin call” simply means that if you suffer a heavy loss, the brokerage
house won’t demand that you put up more cash to cover it. The loss will
simply be added to your debt (and of course will increase your interest expense).

It sounds to me like the plan being proposed is based on using borrowed money
from the brokerage house to create a non-registered investment portfolio. The
interest on the loan would be tax-deductible and therefore would presumably
offset the tax payable on withdrawals from the RRSP.

In essence, you’ll pay interest to the brokerage firm to save taxes on
your RRSP. The net interest costs will likely be higher than any tax you save
and you’ll be adding to your financial risk with a leveraged portfolio.

It’s your decision but, frankly, I don’t believe that someone who
does not know the meaning of “margin call” should be involved in
this kind of sophisticated maneuver.

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