Hello and welcome to RRSP contribution season!

 

Around this time of year, we tend to receive questions around the efficiency or usefulness of making RRSP contributions, and we’ve done some work on this for you!

 

This article compares investing in an RRSP versus a regular investment account when considering the following: a 6% annual return, a 40% marginal tax rate, and a $10,000 RRSP contribution versus $6,000 after-tax in a regular investment account. The main point is that an RRSP can be very useful by reducing taxable income upfront, allowing investments to grow tax-free, and providing a higher net return over time compared to a taxable investment account. An ideal situation is that when you're retired, you’re pulling money from the RRSP at a lower tax bracket compared to when you contributed to the RRSP.

 

We built our own custom-calculator that allows us to compare RRSPs with investing after-tax money into a regular investment account. played with variables like rate of return, time horizon, tax rate and even the nature of the income being generated.

 

Under all the scenarios we considered, the RRSP consistently outperformed the alternative (of investing after-tax money in a regular investment account). To be clear, we wouldn’t recommend an investor in a low tax bracket today, contribute to an RRSP if they’ll likely be in a significantly higher tax rate down the road when they need those funds.

Here are a few key findings:

• After 10 years, an 8% return (instead of 6%), provides the RRSP with 35% more growth versus the alternative.
• After 20 year if we consider a marginal tax rate of 53.33% (instead of 40%), the RRSP outperforms by 84%.
• After 20 years and maintaining a marginal tax rate of 53.33% and with a mix of 50% capital gains and 50% interest, the RRSP is 56% more favorable.

Taking full advantage of the RRSP is often a powerful tool in growing your retirement savings. If you'd like to see how this works for your specific situation, don’t hesitate to reach out. We’re happy to demonstrate how this strategy can help you reach your long-term financial goals.

 

Looking forward to hearing from you,

Perry