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	49.00%	$980
$50,000	49.00%	$980
$60,000	55.00%	$1,100

Tax Free Compounding:

Example: $10,000 earning 10% for 10 years

Taxable Income	Marginal Tax Rate (Que. '98)	Compounding inside RRSP	Compounding outside RRSP (interest)
$20,000	37.00%	$25,937	$18,421
$30,000	49.00%	$25,937	$16,445
$40,000	49.00%	$25,937	$16,445
$50,000	49.00%	$25,937	$16,445
$60,000	55.00%	$25,937	$15,530

What Investments are Eligible for an RRSP?

Canadian:

• GIC’s
• Mutual Funds
• Stocks - Self-Directed
• Bonds - Self-Directed
• Property - Self-Directed

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?

• To income split more evenly upon retirement,
• To allow the spouse with the higher income take the tax deduction, or
• To remove the funds from the RRSP at a lower tax rate prior to retirement.

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: