Today I want to talk to you about AgriInvest and why you should be withdrawing it.
Leaving it in your AgriInvest Account
When you put money in AgriInvest, let us say $5,000 in this scenario. The government will match your $5,000, for a total of $10,000 in your account. It is not always this straightforward as there are current restrictions on how much you can contribute, but for today’s purposes, let us keep it simple.
As of today, AgriInvest accounts must be invested extremely conservative. Your rate of return may only be 1%, extremely low.
After a year, at a 1% return, you would have $10,100 in your AgriInvest account, of which $5,000 is in Fund 1, and $5,100 is in Fund 2.
The entire $100 of interest is now classified under Fund 2 because that portion is taxable. The government’s contributions, plus your interest, are both taxable under Fund 2.
If you were to withdraw this money, you would have to pay taxes on this $5,100.
Let’s imagine you are in a tax bracket of 33.25%. Your net would be $5,000, in Fund 1 tax-free, plus this taxable portion in Fund 2. Which after tax would be a total amount of $8,443.
Withdrawing Your AgriInvest into a TFSA
Let’s see how this would look if you withdrew your AgriInvest right away and put it inside a Tax-Free Savings Account (TFSA).
An immediate withdrawal would result in you paying tax on that withdrawal. You would have to pay tax on this right away, netting you $8,334, to be invested in your TFSA. Since you don’t have any restrictions for a TFSA, you are not forced to go with a highly conservative rate. You can find a TFSA that easily makes you 2%.
At the end of the year, with a 2% return, you will have $8,504.
Just by having withdrawn your AgriInvest right away and putting it in your TFSA, your net at the end of the year is going to be $8,504 versus $8,443. Don’t forget that any growth inside is tax-free with a TFSA. Any withdrawals will be tax-free.
10 Years in AgriInvest
That is a one-year example. Now let’s look at a 10-year example.
Use the table below as a reference
Source: Colin Sabourin
Starting with leaving it in AgriInvest, we will continue with $5,000 going to the AgriInvest account every year. After ten years, a farmer will have contributed $50,000 to Fund 1 in their AgriInvest account. Fund 2 is the government contributions. As the farmer makes the $5,000 contribution, the government matches that $5,000 contribution into Fund 2.
Fund 2 is growing because the total invested amount is growing at 1%.
That 1% is being added to Fund 2.
Over ten years, Fund 2 will have grown to $54,622, while Fund 1 will be at $50,000. Your AgriInvest account will be $104,622.
When it comes to withdrawing your money, after ten years, your $50,000 in Fund 1 will be tax-free. The $54,000 in Fund 2 is 100% taxable.
This would leave you with $36,460 when you make the withdrawal. Combined, the two funds together would net you $86,460.
Let’s compare that to a TFSA
In year one, we would withdraw the $10,000 immediately after having contributed to AgriInvest, leaving you with a net of $8,338 that can go inside a TFSA.
A year goes by this $8,338 grows by 2%. An additional $8,338 gets added to your TFSA because in year two and so forth, you repeat what you have done in year one, which is contributing to your AgriInvest account. Then immediately pull it out.
At the end of ten years, with that same 2% growth, your TFSA will be worth $91,293, whereas if you left it in your AgriInvest account, it would be worth $86,460.
The reason is $91,293 is net is because your money is sitting inside of a TFSA. There are no taxes on withdrawals from your TFSA.
TFSA at 1% Rate of Return
What if we were to lower this rate of return to match the AgriInvest account rate of return? Would you expect the AgriInvest to do better because you’re investing pre-tax money?
Over time, because your TFSA is growing tax-free, this 1%, even though it’s matching the AgriInvest account, ends up being a better deal long term.
In the AgriInvest account, every 1% that it makes per year is added to Fund 2, which is 100% taxable. At the end of 10 years, the TFSA is still a better option even if it only makes 1% per year.
TFSA at 7% Rate of Return
Use the table below as a reference
Source: Colin Sabourin
What if you go ahead and invest this money inside of a TFSA, and you assume that it’s for your retirement? If you were to buy stocks and bonds in this scenario and make 6-7-8% per year, the TFSA would blow the AgriInvest total out of the water.
By withdrawing money from your AgriInvest every year, investing in TFSA making 7% per year on average, you would end up with $115,195 in 10 years versus $86,460.
TFSA Maxed Out
You might be asking yourself, what if my TFSA is maxed out, and I can’t make any more contributions? Does it still make sense to withdraw my AgriInvest? In most scenarios, the answer will be yes because your AgriInvest is only making you 1% per year. If you can earn 3% or 4%, you’re still ahead of the game even if you don’t put that money inside a TFSA.
AgriInvest inside your corporation
You might be wondering, what if my AgriInvest is inside of my corporation? Does it make sense to withdraw it inside the corporation? Yes, it would. You can move it from your corporation to your TFSA personally, assuming you have a shareholders loan that you can withdraw money from the corporation tax-free or CDA. If you don’t, and you have to keep the money inside the corporation, if you can make 3% or 4% on this money instead of 1%, you will still be further ahead.
Large amount currently in AgriInvest
Lastly, what if you have an AgriInvest account that is $100,000? $50,000 in Fund 1, and $50,000 in Fund 2? Does it make sense at that point to withdraw all your AgriInvest? In that scenario, give me a shout, and I can work through the numbers for you. It might make sense to do it over a couple of years instead of doing it all at once. Remember, when you withdraw money from Fund 2, it is 100% taxable, by withdrawing over a couple of years, you will be able to empty this account in a tax-efficient manner.