Investment

How best to pay the investment management fee for your RRSP

Published

5 years ago

February 11, 2020

It seemed a victory for investors when the federal government allowed the cost of having RRSPs, RRIFs and TFSAs managed by an adviser to be paid with money from an outside account.

If your adviser works on a fee-based arrangement, you might pay 1 to 2 per cent of the value of your assets to have an account managed. Wouldn’t it be better to leave that money to grow over the years in your registered account and pay those fees with outside money?

The answer is yes for tax-free savings accounts, a new report from the tax and estate planning people at the Canadian Imperial Bank of Commerce says. For registered retirement savings plans and registered retirement income funds, it may actually make sense to pay your fees from within your plan. According to CIBC, it all depends on your tax bracket, age and the rate of return you’re targeting over the long term.

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“If you’re expecting high rates of return and your time horizon is in the decades, then it may make sense to pay RRSPs on the outside,” said Jamie Golombek, CIBC’s managing director of tax and estate planning and a co-author of the report with Debbie Pearl-Weinberg and Tess Francis.

The federal Department of Finance gave the all-clear to pay RRSP, RRIF and TFSA fees with outside money last fall after a review of whether people doing this would have an “unfair advantage” that artificially shifts value into a registered plan. A stiff penalty can be applied to an unfair advantage.

The analysis by CIBC notes that when you pay RRSP fees with outside money, you’re using after-tax dollars. If you pay from within an RRSP, you’re using pre-tax dollars. Remember: You get a tax deduction when you contribute to an RRSP, and you pay tax on your withdrawals later on in retirement.

CIBC built an example using someone who pays $100 in RRSP fees and is in the 30-per-cent tax bracket while working and in retirement. If this person pays the $100 fee from an outside account, then that’s the cost, period. If the fee is paid from within the RRSP, CIBC argues that the real cost is only $70.

Here’s CIBC’s reasoning: When you pay the $100 fee from within the RRSP, you never take that money out of the plan and incur a tax hit of 30 per cent. You could say that you’re paying $70 of the $100 fee and the government is paying $30 via the amount it would have taken as tax if you withdrew $100.

The counter-argument is that paying fees out of your RRSP depletes the amount of money that can compound in your account over the years on a tax-sheltered basis. The CIBC report said it’s possible to calculate a break-even point where you get more benefit from paying fees outside your RRSP than you do from inside.

Someone in the 30-per-cent tax bracket who pays $100 in fees in Year One from within an RRSP that has an initial value of $10,000 would need 25 years to break even on those fees, if we assume average annual returns of 5 per cent. With a higher rate of return, the break-even point comes sooner.

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Your tax rate also affects the break-even point. The higher your tax rate on RRSP withdrawals, the better the tax savings from paying your fees from within your plan.

For TFSAs, “it seems pretty clear they should be paid from outside to maximize the tax-free growth from within the plan,” the CIBC report concludes. “For RRSPs and RRIFs, this is not an easy question to answer, as it will depend on your investment time horizon, expected rates of return and tax rates.”

All of this suggests it may be fine to continue to pay fees from within an RRSP if you’re retired. You might have decades ahead of you, but your portfolio is likely to be conservatively built and not generating big returns. Younger people, with many decades ahead of them and more aggressive portfolios, should consider paying their RRSP fees outside the plan.

Paying your RRSP advice fees isn’t a make-or-break thing, though. “Many, many people would be just fine over the long term by keeping things as they are, which means paying from the RRSP,” Mr. Golombek said.

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Investment

Tesla shares soar more than 14% as Trump win is seen boosting Elon Musk’s electric vehicle company

Published

1 day ago

November 6, 2024

Anne Joseph

NEW YORK (AP) — Shares of Tesla soared Wednesday as investors bet that the electric vehicle maker and its CEO Elon Musk will benefit from Donald Trump’s return to the White House.

Tesla stands to make significant gains under a Trump administration with the threat of diminished subsidies for alternative energy and electric vehicles doing the most harm to smaller competitors. Trump’s plans for extensive tariffs on Chinese imports make it less likely that Chinese EVs will be sold in bulk in the U.S. anytime soon.

“Tesla has the scale and scope that is unmatched,” said Wedbush analyst Dan Ives, in a note to investors. “This dynamic could give Musk and Tesla a clear competitive advantage in a non-EV subsidy environment, coupled by likely higher China tariffs that would continue to push away cheaper Chinese EV players.”

Tesla shares jumped 14.8% Wednesday while shares of rival electric vehicle makers tumbled. Nio, based in Shanghai, fell 5.3%. Shares of electric truck maker Rivian dropped 8.3% and Lucid Group fell 5.3%.

Tesla dominates sales of electric vehicles in the U.S, with 48.9% in market share through the middle of 2024, according to the U.S. Energy Information Administration.

Subsidies for clean energy are part of the Inflation Reduction Act, signed into law by President Joe Biden in 2022. It included tax credits for manufacturing, along with tax credits for consumers of electric vehicles.

Musk was one of Trump’s biggest donors, spending at least $119 million mobilizing Trump’s supporters to back the Republican nominee. He also pledged to give away $1 million a day to voters signing a petition for his political action committee.

In some ways, it has been a rocky year for Tesla, with sales and profit declining through the first half of the year. Profit did rise 17.3% in the third quarter.

The U.S. opened an investigation into the company’s “Full Self-Driving” system after reports of crashes in low-visibility conditions, including one that killed a pedestrian. The investigation covers roughly 2.4 million Teslas from the 2016 through 2024 model years.

And investors sent company shares tumbling last month after Tesla unveiled its long-awaited robotaxi at a Hollywood studio Thursday night, seeing not much progress at Tesla on autonomous vehicles while other companies have been making notable progress.

Tesla began selling the software, which is called “Full Self-Driving,” nine years ago. But there are doubts about its reliability.

The stock is now showing a 16.1% gain for the year after rising the past two days.

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Investment

S&P/TSX composite up more than 100 points, U.S. stock markets mixed

Published

3 weeks ago

October 16, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 100 points in late-morning trading, helped by strength in base metal and utility stocks, while U.S. stock markets were mixed.

The S&P/TSX composite index was up 103.40 points at 24,542.48.

In New York, the Dow Jones industrial average was up 192.31 points at 42,932.73. The S&P 500 index was up 7.14 points at 5,822.40, while the Nasdaq composite was down 9.03 points at 18,306.56.

The Canadian dollar traded for 72.61 cents US compared with 72.44 cents US on Tuesday.

The November crude oil contract was down 71 cents at US$69.87 per barrel and the November natural gas contract was down eight cents at US$2.42 per mmBTU.

The December gold contract was up US$7.20 at US$2,686.10 an ounce and the December copper contract was up a penny at US$4.35 a pound.

This report by The Canadian Press was first published Oct. 16, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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Economy

S&P/TSX up more than 200 points, U.S. markets also higher

Published

4 weeks ago

October 11, 2024

Anne Joseph

TORONTO – Canada’s main stock index was up more than 200 points in late-morning trading, while U.S. stock markets were also headed higher.

The S&P/TSX composite index was up 205.86 points at 24,508.12.

In New York, the Dow Jones industrial average was up 336.62 points at 42,790.74. The S&P 500 index was up 34.19 points at 5,814.24, while the Nasdaq composite was up 60.27 points at 18.342.32.

The Canadian dollar traded for 72.61 cents US compared with 72.71 cents US on Thursday.

The November crude oil contract was down 15 cents at US$75.70 per barrel and the November natural gas contract was down two cents at US$2.65 per mmBTU.

The December gold contract was down US$29.60 at US$2,668.90 an ounce and the December copper contract was up four cents at US$4.47 a pound.

This report by The Canadian Press was first published Oct. 11, 2024.

Companies in this story: (TSX:GSPTSE, TSX:CADUSD)

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