039 – Non-registered accounts, are you ready?

In this episode, the guys discuss what to do once your registered accounts are full. Paying tax isn’t always a bad thing – maybe you want to keep doing what you were doing before your registered accounts became full. On the other hand, this might be the right time to add a new asset class? Here in the FI Garage, we’re all on the path to FI, however, we consider the RE part optional. #FIRE

Beers – [1:15]

Taxable Accounts [7:25]

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  1. Anyone having trouble downloading the file? In both my podcast app and on the site, I’m getting 404 errors when I try to download the file.

  2. Good discussion. Love taxtips and use the tax calculator to do some rough tax planning all the time. I think that people don’t understand the difference between marginal tax rate (tax on next dollar earned) and personal tax rate (tax on every dollar). We need to be aware of marginal rate but we actually don’t pay marginal tax rate on all our income – we pay personal tax rate. This is because of the various tax deductions and tax credits. People need to learn to think in terms of how much they owe on every dollar and it’s not their marginal tax rate. We were in a 25% marginal tax bracket in 2019 but only paid a personal tax rate of 6.6%.

    1. Yes, there is still always a big mystery when it comes to tax rates and the understanding of where you fit in. Optimize you taxes and understand how you can jig your returns to ensure you keep your share. Cheers!

  3. Great episode guys! I think the Mechanic brings up a good point re: starting the Smith Maneuver once your registered accounts are maxed. It seems like the next optimal (though, more risky) step after your registered accounts are full. I think I might end up going that route as I should have my registered accounts mostly maxed out by the time my current mortgage term ends.. we’ll see! Thanks for the fun and informative podcast, as always :).

    1. We’ve talked about risk on the show before. Although SM isn’t really more risky, it is converting our existing debt, and continuing to carry that debt. Which for some create cash flow risk. Although if you account for long term market gains, you shouldn’t ever be out of pocket for a leveraged account at our current rates (with a diversified portfolio). I think using 100k or so in SM fashion towards the end of your mortgage takes advantage of the manoeuvre and is an acceptable level of debt to carry with market investments. It also allows you to deploy other equity into other assets like real estate investment. Cheers!!

  4. Just a random comment about alcohol and the pandemic. Watching someone with substance abuse issues go through withdrawal is one of the scariest things you can imagine. It is very dangerous and life-threatening, and would have put a serious strain on the health care system.
    You guys are doing a great job and it isn’t something I would have considered if I hadn’t seen it first hand.

  5. My understanding of the “plain Jane” Smith Manoeuvre is that you don’t need to wait to have maxed out your registered accounts to start doing it, nor do you have to choose one or the other. If you have a mortgage payment on a property you own, then start your Smith Manoeuvre right away. It doesn’t need to take any extra money out of pocket, it just uses the marginally increasing equity built by mortgage principal paydown that is part of your regular amortized mortgage payment.
    If, through your investing you eventually get to the point where you have maxed your TFSA (and RRSP if it is right for you), then you can use one of the Smith Manoeuvre accelerators and direct your extra available money toward mortgage principal paydown and then draw it back to invest. You will end up with a paid off house sooner, a tax refund, and hopefully a bigger investment account due to growth.
    I am no SM expert, but I initially made the logical fallacy of thinking starting SM would delay oŕ reduce my registered account contributions….but this is not the case.

    Another key point to note is that you have more investing options and flexibility for your money outside of registered accounts. You can not hold property in a TFSA, but rental properties and some other assets can be good investments. The nore you know, the more you can make. Knowledge can help you offset “risk”.

    1. Kevin, I totally agree, and thanks for speaking up when I forgot to!

      As I understand the SM it is something you can use to get a jump on your non-registered accounts while you are still working towards maxing out your registered accounts.

      Maybe MM was thinking that if someone had dismissed the SM earlier on their path they might reconsider it after maxing out registered accounts in combination with aggressively paying down the traditional portion of their mortgage, but I won’t defend him any more than that.

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