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Benefits of RRSP's
There are two main benefits: 1) Immediate tax savings, and 2) Tax-free compounding.
Immediate Tax Savings:
Example: Place $2,000 in an RRSP
see also definition for marginal tax rate
Taxable Income
Marginal Tax Rate (Que. '98)
Tax Return
$20,000
37.00%
$740
$30,000
49.00%
$980
$40,000
$50,000
$60,000
55.00%
$1,100
Tax Free Compounding:
Example: $10,000 earning 10% for 10 years
Compounding inside RRSP
Compounding outside RRSP (interest)
$25,937
$18,421
$16,445
$15,530
What Investments are Eligible for an RRSP? Canadian:
Up to 30% can be Foreign Content.
Use of a Spousal RRSP
A spouse may contribute to his/her own RRSP or that of his/her spouse. Why would you want to?
Does it Make Sense to Borrow?
Let us assume that you are in the approximate 50% marginal tax bracket (see above).
If you borrow $1,000 the government will give you back $500. Your cost is likely to be prime or prime plus 1%. Let's assume that it is 7% for this example. Over a one year period your monthly payments would be $86.53. The total cost to borrow is $38.36 ($86.53 x 12 - $1,000 = $38.36).
If you are 30 years old and plan to retire at age 65 that $1,000 will grow to $28,102 at 10%. By age 70, when you have to start taking money out in a RRIF it will be $45,230.
So let's add this up. You paid $1,000 but the government gave you back $500 so your net cost is $500. Add to this $38.36 for a total of $538.36. A this is likely to get you $45,230 at RRIF age. It seems to me that it makes sense to borrow.
To check out other interest rates, amortizations, ot loan amounts, use the calculator below:
Simply Complete These Three Columns:
See Your Payment Here
See Your Interest Cost Here
Number of Monthly Payments
Simple Interest Rate
Principal Amount of Loan
Your Monthly Payment Will Be
Your Total Interest Cost Will Be
$