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Short Term vs. Long Term GIC's
January 11, 2021
1:35 pm
Bobbyjet11
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Sneaky.
Thank-you for the heads up Norman1.

January 11, 2021
2:49 pm
AltaRed
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As already mentioned, FIs are awash with deposits and lack of loan growth so far. Unless something 'revolutionary' happens, I can't see short term interest rates going anywhere but lower.

I have trouble understanding why 5 year GIC rates are still where they are at given GoC5 yields (<0.5% for months).

January 11, 2021
3:28 pm
Norman1
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AltaRed said

I have trouble understanding why 5 year GIC rates are still where they are at given GoC5 yields (<0/5% for months).

I think the demand for 5-year GIC's has tanked.

People are likely not investing all that new cash in long term GIC's. Instead, people are likely keeping all that cash in savings accounts in case they need it for living expenses.

Banks can't really do much with such savings deposits as they can be withdrawn any time.

January 11, 2021
9:30 pm
Loonie
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SOME banks continue to offer above-GIC HISA rates. They are either finding something to do with it or internationally going broke. And if you pay a superior rate, the money is more likely to stay in the account. Peoples Trust followed this strategy for years with its high TFSA HISA rate of 3$..

If your financial plan states that you will use a five year GIC ladder, then, in my opinion, you should not be swayed by current speculation about where rates may go. The point of adopting the strategy has not changed, namely to average out the rates over time at what is usually the best rate at the time. Historically, this has usually proven to be the best strategy, and, as for the future, we simply don't know.
Most people don't have a clear detailed financial plan. Start there and don't waste time trying to read the tea leaves.
If you truly believe that the sky is falling or that the most glorious Spring in decades is right around the corner or if we start to see rate inversion or your personal situation has changed significantly, then by all means update your plan, but have one and use it.

January 12, 2021
2:31 am
RetirEd
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An outfit like Peoples Trust, which has business concentrated in high-interest credit cards and pre-paid cards, can easily afford higher interest rates for savers. Banks with lots of bonds and mortgages have to be more careful on this.

A post-COVID-19 consumer spending surge could push rates up. Your crystal ball may vary.

When comparing shirt and long terms, remember that a higher short-term rate will give you more to compound at maturity, so it may be worth it.

That's why "escalator" investments do not pay the "average" rate over their life, which the vendors like to trumpet. Your lower first-year yield will give you a lower principal in your second (and following) year.

This does not apply if you are having the escalator pay out interest instead of compounding at year-ends. Year-by-year calculation will show you the best choice.

My rate comparison spreadsheet (where I collect rate quotes) lets me compare END-OF-TERM yields, and they are often surprising. I have escalator models, too, in the sheet. While checking rates at BlueShore (where they sometimes have surprisingly good special offers), I quoted the end-of-term results of their offerings and the agent wanted to know how I got those figures so quickly. I just had to type in each year's rate and they popped up.

But I'm still looking at Index ETFs.
-RetirEd

January 12, 2021
7:19 am
Loonie
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If you are going to be that detailed, you should probably programme in any transfer fees as well. Add $25 for good measure as those fees go up regularly and you have no control.

My calculations have shown that for smallish TFSAs (~6K) or even more, especially on shorter terms, reduces the effective rate significantly. You need to do your own calculations for principal and term to see if the effect of a transfer fee makes the rate unattractive.

January 14, 2021
8:00 am
RetirEd
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Absolutely, Loonie. But for me that's a calculation I make at maturity time, not investment time, other than noting the withdrawal fee. Alas, the fees most often pop up or inflate during the life of the investment!
RetirEd

January 14, 2021
8:48 am
topgun
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Well said Loonie.

Have a Great Day

January 14, 2021
4:01 pm
Loonie
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RetirEd said
Absolutely, Loonie. But for me that's a calculation I make at maturity time, not investment time, other than noting the withdrawal fee. Alas, the fees most often pop up or inflate during the life of the investment!
RetirEd  

I calculate it at the beginning because I have found, over time, that most of my transfers are to FIs that won't reimburse the fee, and it's a fixed cost. It has reached the point where dealing with an FI that does charge is the exception, so the purchase must be justified by offering a healthy reward. It tends to require a premium of at least 25 bps for me to want to be bothered moving my funds to an FI that charges a transfer fee.

These calculations get even more complicated if you have an RIF GIC or will transition to one during the course of the GIC. This is also complicated by the fact that different FIs have different formulas for making the mandatory withdrawals (applicable if you have more than one RIF GIC with the same FI); or if your anniversary date and mandatory withdrawal date don't coincide.
In addition, mandatory withdrawal for the current year must be made, by law, before an RIF is transferred.

January 14, 2021
4:13 pm
topgun
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I created a model to see how much you need to transfer to make it worthwhile. (i.e. if you get 15 bps more for 5 years you need a minimum of $33,334 to break even after 1 year with a $50 transfer fee). Then in 5 years you may have to take it back. Not sure if I want to do that in 5 years time. I have no spare funds in that range.

Have a Great Day

January 14, 2021
5:29 pm
COIN
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Loonie said
In addition, mandatory withdrawal for the current year must be made, by law, before an RIF is transferred.  

Let say you have a self-directed RRIF.
Let say the minimum withdrawal for 2021 is $30,000
Let say you want to transfer 1/2 (not the whole) RRIF to another institution.

Question: In this case is it $15,000 that must be paid before 1/2 the RRIF is transferred?

January 14, 2021
5:48 pm
Norman1
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No, it is still $30,000 that must be paid by the existing RRIF.

The T2033 transfer form only allows assets in excess of the minimum withdrawal to be transferred:

2. For a transfer from a RRIF

Except for enough property to pay me [the annuitant] the minimum amount this year, please transfer, tick one box:

☐ all of the property, or
☐ part of the property in a one-time payment, enter the amount of the payment $_______

I request the transfer of the amount above, which represents all or part of the property of my RRIF identified in Part A, tick one box: ☐ in cash, or ☐ in kind.

In Section III, the transferor financial institution agrees to be responsible for paying out the minimum RRIF withdrawal for the year:

1. We have transferred $______ from the RRSP, RRIF, SPP, or PRPP identified in Part A of Section I to the transferee named in Part C of Section I. If the RRIF property is transferred to another RRIF, RPP or PRPP, we have paid or will pay the annuitant the minimum amount for the year.

January 14, 2021
6:02 pm
topgun
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My understanding is if you transfer part of a RRIF to another FI you must have the minimum withdrawal before the funds are transferred. Say RRIF is $500,000. Assume the withdrawal percentage is X%. Minimum withdrawal $500,000 x X%. Transfer $250,000 to another FI. Must withdraw $250,000 x X%. Transfer amount $250,000 - $250,000 x X%. The rules changed over the years.

Once it stipulated you did not need to withdraw anything the year a RRIF is opened. Transfer RRIF (i.e. whole or part) from one FI to another FI the year you turn 72 or later. No mandatory withdrawal until the following year.

I had a LIF automatically opened in December. Still working out details for completing setup.

Have a Great Day

January 15, 2021
3:41 pm
Norman1
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topgun said
My understanding is if you transfer part of a RRIF to another FI you must have the minimum withdrawal before the funds are transferred. Say RRIF is $500,000. Assume the withdrawal percentage is X%. Minimum withdrawal $500,000 x X%. Transfer $250,000 to another FI. Must withdraw $250,000 x X%. Transfer amount $250,000 - $250,000 x X%. The rules changed over the years.

Not sure where that comes from. One doesn't need to withdraw $250,000 x X% to transfer $250,000 out of an existing RRIF.

If the minimum withdrawal for the year is $500,000 x X%, then one just needs to leave behind $500,000 x X% less any RRIF withdrawals already made in the year from that RRIF. That way, any of the required minimum not already withdrawn can be withdrawn from that RRIF later in the year.

There is no minimum withdrawal required from a RRIF in the year that it is opened. That includes any RRIF opened past age 71 and funded by transferring from another RRIF.

January 15, 2021
4:02 pm
Bill
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Norman1, re your last point above: So if you transfer your RRIF every year to another institution you'd never have to take any out?

January 15, 2021
5:55 pm
Loonie
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That not what Norman said exactly, but the wording is confusing.
You wouldn't have to take a mandatory withdrawal when opening a new RIF anywhere at any time.
However, the FI from which you are moving the RIF is obliged to take out the mandatory amount before they transfer it out, beginning the year after you convert your RSP to an RIF, i.e. no later than age 72.
In other words, it comes out once in every calendar year, beginning the year after conversion, whenever that may be. You can't just hop from one to another attempting to avoid it.

January 15, 2021
7:00 pm
COIN
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topgun said
My understanding is if you transfer part of a RRIF to another FI you must have the minimum withdrawal before the funds are transferred. Say RRIF is $500,000. Assume the withdrawal percentage is X%. Minimum withdrawal $500,000 x X%. Transfer $250,000 to another FI. Must withdraw $250,000 x X%. Transfer amount $250,000 - $250,000 x X%. The rules changed over the years.

For greater clarity, only half the minimum mandatory withdrawal needs to be paid out before you transfer out half the assets? This seems logical but what does logic have to do with tax?

January 15, 2021
7:45 pm
Norman1
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Nothing has to be paid out before an RRIF transfer unless the transfer is happening on December 31.

The requirement is that there has to be enough assets left behind in the RRIF to cover any remaining withdrawals needed afterwards to reach the required minimum withdrawal for the year.

January 15, 2021
8:03 pm
Norman1
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Bill said
Norman1, re your last point above: So if you transfer your RRIF every year to another institution you'd never have to take any out?

That would be tricky to do.

The money would have to leave the existing RRIF before the start of next year and arrive in the new RRIF after the start of that next year.

I don't know if the RRIF admin rules allows the transfer-out date for the existing RRIF to be different than the transfer-in date for the new RRIF, for tax purposes.

If the two dates have to match, then the first calendar year of the new RRIF is the calendar year the existing RRIF is closed. The new RRIF would be liable for the minimum withdrawal come January 1.

January 15, 2021
9:57 pm
Loonie
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Let's say you are moving your RIF from FI A to FI B.
FI A mails it out on Dec 31 2020 or a bit earlier. Their obligation is to make sure the mandatory withdrawal for 2020 has been done before they send it off to B. So, if it was not done earlier in the year, they must do it on Dec 31.

When it arrives at B, B's obligation is to ensure that the mandatory withdrawal required in 2021 is made. This is based on the value of the RIF as of Dec 31 of the previous year, which is the same amount as Jan 1 of 2021, which is//ch is to say that they know precisely hoow much much be withdrawn.

I'm sure the FIs have their computers programmed to accommodate this. If they don't, they would be hearing from CRA. CRA is not going to allow a year to go by without a mandatory withdrawal.

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