The Smith Manoeuvre provides three benefits simultaneously. Firstly, it improves your cash flow by reducing your tax bill. Annual tax deductions mean that you pay less tax, which is lovely. Secondly, it enables you to pay off your expensive, non-deductible mortgage much faster than paying it off conventionally. This too is lovely – very lovely. Lastly, it allows you to build up a significant retirement nest egg that otherwise simply wouldn’t exist. And this all happens simultaneously and with no new cash needed from you on a monthly basis. This is maybe the loveliest of all. But the great results of The Smith Manoeuvre in its most basic form can be improved on significantly.
Speed it up!
There are a number of accelerators for The Smith Manoeuvre which can take many more years off your mortgage, add tens of thousands to your tax relief, and increase your wealth by hundreds of thousands of dollars, one of them being the DRiP Accelerator.
The DRiP Program
When you invest in securities, your investment may have a DRiP option – Dividend ReInvestment Program. When you opt in to a DRiP program, what you are requesting is to have dividends automatically reinvested to buy you more of the stock or mutual fund instead of sending the dividend out to you in cash. And this can be a very effective way to increase the value of your portfolio.
The DRiP Accelerator
However, if you are implementing The Smith Manoeuvre you may want to consider requesting the dividends come to you in cash instead of automatically getting reinvested. The reason is this: if you are receiving this cash flow from your investments, then you have new cash with which to prepay your expensive, non-deductible mortgage. And the more you prepay it by, the faster it disappears. However, once you make this prepayment, you are able to reborrow the same amount and get it invested. Invest in the same stock or fund that sent it to you in the first place or invest in something else. What you’re doing is making these dividends work harder for you by not only getting them invested, but getting them invested AFTER you reduce your mortgage with them. The tax treatment is the same whether you automatically reinvest or take the dividends in cash, so take advantage of this new cash flow to improve your family’s finances.