RRSPs Provide Important Tax Advantages
First, you get tax deductions now! For example, if you're in a 40% tax bracket and set aside $5,000 a year of your gross income, you'll receive $2,000 in tax savings that year.
Second, you get tax-sheltered growth for as long as you hold your investments! Investing in an RRSP has a much bigger impact on your savings than investing outside one, because both the amount you contribute to your RRSP and the income it earns are sheltered from tax as long as the money stays in the plan.
But don't forget that your RRSP assets will ultimately be taxed when you withdraw them. At that time, payout strategies can be used to minimize the tax consequences.
Investing in an RRSP compared to an unsheltered investment
When you have an unsheltered investment (that is, an investment outside an RRSP), you could pay as much as 50% in tax on the income the investment earns. This reduces the positive impact that compounding can have on your investments.
The table below shows how $5,000 invested each year grows faster if invested in an RRSP. With both plans earning 8% annually, the money inside an RRSP grows to an amount more than 60% larger than the unsheltered investment after 25 years!
| Time invested | Total amount invested | Non-RSP | RRSP |
|---|---|---|---|
| Initial investment | $5,000 | $5,000 | $5,000 |
| After Year 5 | $25,000 | $28,839 | $31,680 |
| After Year 10 | $50,000 | $65,296 | $78,227 |
| After Year 15 | $75,000 | $111,384 | $146,621 |
| After Year 20 | $100,000 | $169,648 | $247,115 |
| After Year 25 | $125,000 | $243,303 | $394,772 |
Note:
The information provided in the above table is for illustrative purposes only; actual rates will fluctuate over time. In the case of the unsheltered investment, income is assumed to be interest income and the initial investment after tax, with tax applying annually to subsequent interest income earned. The unsheltered investment is based on a 40% tax rate.