To RRSP or Not to RRSP, That Is The Question

Date: Feb 11, 2016
By: Joel Lazer, FCPA, FCA, CIRP

It’s RRSP season.  Many of us invest in our RRSPs annually almost out of habit.

Let’s toy with some numbers.  Here are some assumptions.  For the RRSP I assumed rates of return of 4% and 8%.  I assumed a modest contribution of $10,000 per year for 20 years.  And I assumed the RRSP was cashed at the end of the 20th year and the tax was paid.  Finally I used the 2015 personal tax rates which will increase in 2016.  (I am hopeful the government over the next 20 years will see fit to lower rates.)

If you invest $10,000 a year in an RRSP for 20 years at 4%, you will net $252,411.  If you achieve a return of 8%, your net will increase to $338,084.  It’s worth paying attention to the return.

If you do not put the money in an RRSP, you will only have the after-tax funds to invest.  Using the same $10,000 example, the amount available to invest is $5,360.  Earning interest at 4% and paying the tax annually will yield $132,118 at the end of 20 years.  At 8% the amount is $164,000.

If you were to invest in stocks which yielded dividends, the tax would be reduced as the tax rate on dividend is 32.3%.  At a 4% dividend yield, the net is $139,823.  At 8% it is $185,229.  Finally if your investment only resulted in a capital gain at the end of 20 years, there would be no annual tax and the effective tax rate on the gain at the end of 20 years would be 23.2%.  The result at a 4% return is $147,451.  At 8% it is $213,249.

Comparing the RRSP against a Tax Free Savings Account, at 4% the result is $159,611.  At 8% it is $245,284.

What can we learn from this?  Make RRSP contributions.  Be cognizant of the return.  There is an $85,000 difference in my example between 4% and 8%.  If the contribution is $25,000 a year, the difference grows to $214,000.  And if you can achieve 12%, the increases are $225,000 and $566,000 –  almost double.

I am happy to discuss further at your convenience or share my worksheet with you.  Have a great February.

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