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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
Marginal Tax Rate (Que. '98)
Tax Free Compounding:
Example: $10,000 earning 10% for 10 years
Compounding inside RRSP
Compounding outside RRSP (interest)
What Investments are Eligible for an RRSP?
Up to 30% can be Foreign Content.
Use of a Spousal
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