The RRSP Advantage

What is the RRSP advantage, and how you can get the most out of your cash!

The RRSP Advantage

RRSPs are a tax-deferral strategy. This means you don’t pay any income tax on the money you put into your RRSPs until you withdraw your money.

With this strategy, you have two very powerful benefits:

  1. You receive a tax refund in the year you contribute.
  2. Compounding growth that isn’t taxed until it’s withdrawn, which means your investment can grow tax-free for several years, even decades.

Let’s say you want to contribute $2000/year to your investments. If you don’t invest in an RRSP, you will need to earn $3333.33 (assuming a 40% tax rate) to contribute $2000. If you invest in an RRSP, you will only need to earn $2000.00 to contribute to your RRSP because you don’t pay income tax on the money you put in it. With an investment rate of return of 7%, you’ll earn $140 (7% x $2000 = $140) after one year. If your investment isn’t in an RRSP, you might have to pay tax on that growth right away, which means your investment could shrink by the amount of tax ($2140 – $56 = $2084). You will still make money, but not as much as if it had been in an RRSP.
Over time this adds up to thousands of dollars. For example, over 30 years you’ll have $81,282 more if you invest in the RRSP than if you don’t invest in the RRSP!

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