RRSP Numbers
November 1, 2008 by admin
There are two main benefits of an RRSP.
1) Immediate tax savings
2) Tax-free compounding.
Most people only focus on the immediate tax savings.
Immediate Tax Savings:
Example: Place $2,000 in an RRSP
Taxable Income for BC Marginal Tax Rate (BC )
$20,000 20.35% $407 Taxes Saved
$40,000 30.15% $603 Taxes Saved
Tax Free Compounding:
- Example: $10,000 earning 10% for 10 years
Taxable Income Marginal Tax Rate (BC )
Compounding inside RRSP
- $20,000 20.35% $25,937
- $40,000 30.15% $25,937
Compounding outside RRSP
(interest)
- $20,000 20.35% $21,519
- $40,000 30.15% $19,644
What Investments are eligible for an RRSP?
- GIC’s
- Mutual Funds
- Stocks – Self-Directed
- Bonds – Self-Directed
- Property – Self-Directed
Does it Make Sense to Borrow To Fund Your RRSP?
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 71, 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. This is likely to get you $45,230 at RRIF age. (based on the 10%) So borrowing can make sense.
Be sure to get qualified financial advice before proceeding with any kind of borrowing money to invest. Even for RRSP lending.