# RRSPs vs Unregistered



## Franko (Mar 31, 2012)

Hi all,

So I'm a fairly young investor (27) - I'm currently debating how much to sock away into RRSPs every year. I was previously pretty gung-ho about it, but after doing more reading and giving it some thought, I'm now considering the merits of an unregistered account too. I thought it'd be nice to hear thoughts from seasoned investors?

Bit of background: 

My TFSA is maxed - this is the first thing I'll be maxing every year. 
I make enough yearly to break the third tax bracket, so my tax rate is ~30%.
I'm planning to do a couch potato portfolio and my outlook is long-term.

So yeah, RRSPs have some considerable disadvantages that I observed:

- Everything that comes out is taxed at the normal rate, including capital gains and dividends which would otherwise have preferential tax treatment. This is the main reason for my reluctance.
- The money is locked away essentially for life - although I'm "keeping more" for myself with the tax deductions, in reality I have access to less money now because it has disappeared into the RRSP. While the money is still mine, I feel that with my conservative approach to spending, plans to invest and a good income, I don't have too much to worry about for retirement. My biggest fear is saving too much for old age and not enjoying my life while younger.
- The whole gamble is that I'll be at a lower marginal tax bracket when I retire...but this may not be the case.

So, am I being foolish for not wanting to max out my RRSPs? For those of you who have made these decisions in the past, I'm curious what your decisions were, and why you went the way you did?

Thanks in advance for the advice!


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## Lephturn (Aug 31, 2009)

Franko said:


> - The whole gamble is that I'll be at a lower marginal tax bracket when I retire...but this may not be the case.


For me it came down to this. I still put considerable resources into my RRSP because the risk is one sided - I mean that if I wind up poor in retirement without enough money that's really bad and I can't fix it, where as if I end up in a high tax bracket because I have lots for retirement... well if the worst case is that I pay a bit more in taxes that's not such a bad scenario. I want to make sure the bad outcome doesn't happen, so I put more into RRSP.

The other benefit of the RRSP is that you get some return very quickly - your deduction from the RRSP will mostly come back as a refund which you can use to enjoy living more now.  Essentially from a cash flow and risk reduction standpoint RRSP is a nice combination of those two.

Some unregistered is good - and I have some unreg. money, but that's after my TFSA and RRSP savings.

In regards to saving too much and not enjoying life... well there is certainly a line there, but enjoyment of life overall has little to do with cash flow vs. savings and much more to do with attitude IMO.


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## andrewf (Mar 1, 2010)

The fact that the withdrawals are taxes at your marginal rate is compensated by the fact that you get to leverage your investment and compound it for decades. Compare investing $10k in a nonregistered account to $13k in an RRSP (both scenarios cost you $10k in after tax cash flow assuming 30% marginal rate). Assume 20 years with 8% price appreciation, you have 46,609.57 in the non-registered account, and 60,592.44 in your RRSP. After tax, assuming same 30% marginal rate in retirement, you get (46,609.57-10000)*(1-30%/2)+10000=$41118.13 in your non registered account, and for your RRSP you would have 60,592.44*(1-30%)=$42,414.708.

Not a big difference, and this is being generous in assuming that your investment had no turnover to generate capital gains, and no other distributed income along the way that would need to be taxed before it was reinvested.

Does this clear things up?


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## slacker (Mar 8, 2010)

Look at the positives as well as the negative.

1. Tax deferral. You have 30-45 years of tax free growth. The benefit is not just that you may or may not be in a lower tax rate. The tax free compounding should not be underestimated
2. You get to invest with pre-tax dollars, which means you get a bigger amount to invest to begin with, leading to a bigger portfolio.
3. It's easy and convenient to withdraw. It's almost as convenient to withdraw as the TFSA. You can access your money in a few days just like the TFSA. And there is no penalty for withdrawing either.

Your fear of saving too much is well founded, especially for someone with your earning power. Yes, we've been bombarded with the message that we are not saving enough, but that message is for the average Canadian, not for folks on CMF.

Calculations on how much to save, whether to save in TFSA or RRSP, or both are difficult, chaotic, and counter intuitive. Even if you end up having a higher tax rate when you retire, the benefit of tax free compounding may still overhelm the higher tax rate.

You need something like RRIFmetic: http://www.fimetrics.com/

The author of this software (steve) frequents this forum, and does forecasts for free sometimes. But it's also free to try. I particularly like the "incoming smoothing" feature, which can tell you how much you should save now, on order to maintain the same amount of after tax, after savings income every year.


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## slacker (Mar 8, 2010)

Lephturn said:


> ...
> The other benefit of the RRSP is that you get some return very quickly - your deduction from the RRSP will mostly come back as a refund which you can use to enjoy living more now.  Essentially from a cash flow and risk reduction standpoint RRSP is a nice combination of those two.
> ...


Bad...

RRSP Tax Refund is not return of investment. Spending the tax refund as "free money" will net very poor after tax total return on investment


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## Lephturn (Aug 31, 2009)

slacker said:


> Bad...
> 
> RRSP Tax Refund is not return of investment. Spending the tax refund as "free money" will net very poor after tax total return on investment


Although it is not an investment return, it is cash flow positive. Given that one of the OP's concerns was saving too much, this feature of RRSP savings would seem to help in that regard. Spending is always bad if you are going for maximum return on your money!


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## Sampson (Apr 3, 2009)

Lephturn said:


> Although it is not an investment return, it is cash flow positive. Given that one of the OP's concerns was saving too much, this feature of RRSP savings would seem to help in that regard. Spending is always bad if you are going for maximum return on your money!


Its not as simple as that. The withdrawals will be taxed as income X years down the road, so could be greater than if you used after tax dollars invested in a non-registered account and had those returns taxed over X years (due to favorable taxation on investments of Capital gains, Canadian dividends etc).

We need a Time-Value calculation, stat.


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## andrewf (Mar 1, 2010)

^ I already did the math.


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## steve41 (Apr 18, 2009)

Just did a quickie calc. 27 yearold with 100K in RRSP, earning 65K, retires at 60. In one instance he maxes his RRSP, in the other instance he only contributes $5K annually to his RRSP and diverts the rest to nonreg. Nonreg growth is taxed as all dividends.

In the 1st case (max RRSP) his 'die-broke at 95' after tax income comes in at $42,882 annually. In the reduced RRSP case, it comes in at $42,437.

Pretty close, however the 'max RRSP' strategy does prevail.


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## hystat (Jun 18, 2010)

steve41 said:


> Just did a quickie calc. 27 yearold with 100K in RRSP, earning 65K, retires at 60. In one instance he maxes his RRSP, in the other instance he only contributes $5K annually to his RRSP and diverts the rest to nonreg. Nonreg growth is taxed as all dividends.
> 
> In the 1st case (max RRSP) his 'die-broke at 95' after tax income comes in at $42,882 annually. In the reduced RRSP case, it comes in at $42,437.
> 
> Pretty close, however the 'max RRSP' strategy does prevail.


In the rrsp scenario, what did you do with the tax refund?

i.e. Are we comparing a $10K non reg investment to a $8.5K RRSP investment as $1500 comes back as refund and is reinvested (8.5Kintial + 1.5Krefund reinvest = 10K)


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## steve41 (Apr 18, 2009)

RRIFmetic's methodology starts with a spending (aftertax income) target amount and works backwards. If there is excess available after the RRSP deposit, it gets pushed into nonreg. If the ATI is too high, then the RRSP deposit is reduced. If there is no other source of income (salary say) then funds are pulled from nonreg.... if the nonreg is empty, it will actually draw down the RRSP. 

It is a complex (don't try this with a spreadsheet) calculation.


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## Franko (Mar 31, 2012)

Thanks for the comments everyone!

@Lephturn: That's true, never thought about it as a one-sided gamble. So do you always max out the RRSP before putting anything into unregistered?

@andrewf: Thanks very much for doing those numbers! Is there any website or program that you use to expedite the number crunching, or do you do it all by hand? So it seems like investing in an RRSP vs unregistered almost turns out the same in the end, with perhaps a small nod to RRSPs. If this is the case, then it seems to me that unregistered still wins out, given the flexibility that an unregistered account affords - I can withdraw the money as needed for a rainy day or to put towards other opportunities that arise, etc.

@slacker: I'm curious what you meant by "no penalty to withdrawing"? From what I understand, there is a withholding tax if withdrawing early? 

@steve41: Thank you also for running those numbers! They seem to confirm andrewf's calculations that there isn't a big difference between the two options.

So there seems to be a lot of debate over whether or not to do RRSPs. Is it wishy-washy for me to do some RRSPs and some unregistered? I definitely don't want to tie most of my income down inside an RRSP, but on the other hand, having some sitting there growing and guaranteed for retirement isn't a bad thing either.


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## steve41 (Apr 18, 2009)

Remember, the nonreg was taxed as 100% dividends. If the taxation on the nonreg had been all interest, the results would favour the RRSP even more .... $42,699 to $41,576. That's almost $100 a month.... a significant amount of beer.


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## andrewf (Mar 1, 2010)

Franko, the results are only close in that I assumed you bought and held the same investment for the entire period, and only realized the capital gain at the end. You never sold and reinvested in something else. You never rebalanced. You never received dividends or capital gains distributions along the way. If none of these things are true in reality, RRSP becomes even better.

RRSP allows you flexibility to rebalance, or change investments without tax implications.


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## andrewf (Mar 1, 2010)

Oh, I used a spreadsheet. Google Docs has a free web-based spreadsheet program, or you can use excel if you have it. 

The formulas are pretty easy to do with a scientific calculator. The hardest part is 1.08^20.


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## steve41 (Apr 18, 2009)

andrewf said:


> Oh, I used a spreadsheet. Google Docs has a free web-based spreadsheet program, or you can use excel if you have it.
> 
> The formulas are pretty easy to do with a scientific calculator. The hardest part is 1.08^20.


 I should have elaborated that the treatment of income tax, the changing of tax brackets over time, the effect of clawbacks, surtaxes, dividends.... and the requirement that tax needs to be crunched from the bottom up.... "How much $ do I pull from my RRSP in order to net exactly $X", rather than from the top down, makes for extreme complexity. Spreadsheets are not suited for complex recursive math.


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## Eclectic12 (Oct 20, 2010)

Franko said:


> [email protected]: I'm curious what you meant by "no penalty to withdrawing"? From what I understand, there is a withholding tax if withdrawing early? ....


The with-holding tax is not a penalty. It is just to make sure that there isn't a big tax bill on the tax return filed for the year of the withdrawal.

The way it works is that the withdrawal from the RRSP is included as income, for that tax year (i.e. withdrawn $5K in 2014 means that in addition to whatever income was made, another $5K has to be added).

When the tax return is filed, if the final taxes deducted is more than owed on the income (including the RRSP $5K withdrawal), there will be a tax refund issued. If not enough was taken, taxes will be owed.

If you know taxes won't be an issue when withdrawing, some advise to withdraw from the RRSP smaller amounts (ex. $4500) as a series of withdrawal and ideally from separate RRSPs to avoid the withholding tax. If one does this, just be sure you are prepared for the taxes.


The only penalty I am aware of is that once deposited and withdrawn from the RRSP, the contribution room is gone forever.


I'm also curious as what slacker meant.




Franko said:


> ...So there seems to be a lot of debate over whether or not to do RRSPs.
> 
> Is it wishy-washy for me to do some RRSPs and some unregistered? I definitely don't want to tie most of my income down inside an RRSP, but on the other hand, having some sitting there growing and guaranteed for retirement isn't a bad thing either.


Nope ... I've been doing similar for years. 


Cheers


*Edit:* If you really are sure you'll be in a higher tax bracket in future years, then consider focussing on investing in a taxable account now and make the RRSP contributions when you are in the higher tax bracket.


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## Hawkdog (Oct 26, 2012)

good stuff.

Quick question that is related. My spouse and I only contribute to RRSPs enough to get the max tax refund. We use a tax software - just plug in the numbers and it shows whether contributing more will increase the refund. The contribution increase would be on top of the matching rrsp program at work.
Is this a reasonable thing to suggest to Franko?


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## steve41 (Apr 18, 2009)

For the typical individual -"working, saving for retirement, retiring and living off the savings"- it almost never happens that the tax rate in retirement is higher than prior to retirement.


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## 1.5M (Apr 21, 2012)

Maximize both TFSA and RRSP and put the rest into unregistered. It's easy to optimize rrsp withdrawals to pay zero tax if you retire early and also have TFSA and unregistered accounts.


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## andrewf (Mar 1, 2010)

No need to hold off investing in RRSPs. You can contribute now and claim the RRSP income deduction later, provided you have the contribution room.

It makes sense, too... Why not have your investment compound in your RRSP rather than hold non-registered, sell, trigger a gain, and then contribute to RRSP?


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## Franko (Mar 31, 2012)

1.5M said:


> Maximize both TFSA and RRSP and put the rest into unregistered. It's easy to optimize rrsp withdrawals to pay zero tax if you retire early and also have TFSA and unregistered accounts.


Is this done by withdrawing under the basic personal amount each year, or is there some other trick to it?

@Hawkdog: When you say max tax refund, are you referring to the 18% of yearly income cap, or is there some other max that I'm not thinking of?

And thanks everyone for the input - I think I will definitely start putting some money towards my RRSP. Just have to crunch some numbers first. If I were to invest in RRSPs, I'd prefer to have them deducted from my 2013 income rather than 2012 - so do I just have to avoid buying any RRSPs in the first 2-3 months of 2013? (As doing so would attribute the claims towards my 2012 income, if I recall correctly).


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## doctrine (Sep 30, 2011)

I concur with 1.5M. RRSPs and TFSAs are very much worth it. If your tax rate now is the same as in retirement, they will both effectively work out to the same no-taxes benefit. An RRSP will effectively provide no tax on your capital gains or dividends over the life of the account. If your tax rate is lower, then an RRSP will work out that much more. The bottom line is that both should be maximized. 

I have been doing this - I save enough to make lump sum payments into my TFSA on 1 Jan, and once my tax refund arrives in April-May, I make the maximum RRSP contribution. Much less stress in January-March in trying to both find a TFSA and an RRSP payment. 

If you have extra money left over, which is not hard if you're a big saver, then start a taxable account. Eventually you might be able to get to the point where your taxable dividends can pay your TFSA and RRSP contributions; then you are on auto-pilot!


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## slacker (Mar 8, 2010)

Franko said:


> @slacker: I'm curious what you meant by "no penalty to withdrawing"? From what I understand, there is a withholding tax if withdrawing early?


Paying income tax on money they have earned is not a penalty. It is taxes owed. RRSP is a special case that the government has set up for your benefit.

Perhaps this is not directed to you, but I see far too many people portray taxes paid on RRSP withdrawal as some sort of punishment that the government is bent on giving you for being a bad saver.

No. The money in RRSP was from income that was never taxed in the first place. Taxing on withdrawal is perfectly reasonable. It's not a penalty, it's not a punishment. It's just taxes you owe the government.


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## andrewf (Mar 1, 2010)

^ This.


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## MoneyGal (Apr 24, 2009)

While we are airing bugaboos, an RRSP has *nothing* to do with retirement. The word "retirement" is in the name of the savings container. That is the ONLY connection to retirement - other than the requirement to convert an RRSP to a RRIF later in life (and a RRIF also has nothing to do with "retirement"). 

I think if the RRSP did not have the first "R" but was just a "registered savings plan" we would not get as many questions as we do about "should I open an RSP or not?," as people would be induced to think through the consequences instead of saying, "it's something for retirement."


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## My Own Advisor (Sep 24, 2012)

You spend the RRSP refund, you are spending borrowed funds. You have to pay them back eventually. Lesson: don't spend the RRSP refund...put it in TFSA, pay down mortgage or back into RRSP.

I like what MoneyGal wrote: "an RRSP has *nothing* to do with retirement."


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## Hawkdog (Oct 26, 2012)

Franko said:


> Is this done by withdrawing under the basic personal amount each year, or is there some other trick to it?
> 
> @Hawkdog: When you say max tax refund, are you referring to the 18% of yearly income cap, or is there some other max that I'm not thinking of?
> 
> And thanks everyone for the input - I think I will definitely start putting some money towards my RRSP. Just have to crunch some numbers first. If I were to invest in RRSPs, I'd prefer to have them deducted from my 2013 income rather than 2012 - so do I just have to avoid buying any RRSPs in the first 2-3 months of 2013? (As doing so would attribute the claims towards my 2012 income, if I recall correctly).


Franko, someone else on the forum will be more qualified to explain the details, I just use the tax program, it has to do with what tax bracket you are in.
I top up my rrsps to the point where there is no more benefit in my tax return, max out my TFSA, than i start putting money on my mortgage. Tax return goes on the mortgage.


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## slacker (Mar 8, 2010)

A RRSP refund is a cash flow, similar to credit card cash advance is a cash flow.

That RRSP refund is taxes owed, that you will pay when you withdraw. (approximately)


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## Franko (Mar 31, 2012)

Hmmm, I think I've just had a bit of an epiphany here - I was previously under the impression that RRSP withdrawals were punished with additional penalties beyond simply paying the owed tax. So just to confirm the process of withdrawal - say I withdraw $5000. I pay $500 up-front as part of the withdrawal tax (10% for that amount), and receive $4,500 into my bank account. At the end of the year, that $5000 withdrawn is added to my taxable income. I then pay tax at whatever my normal marginal rate is (The $5,000 being included as income), and the $500 that was withheld is counted as a sort of credit towards taxes paid - if I overpaid, then I'm refunded some of that $500, and if I underpaid, then I pay the difference still owing. Is this how it actually works?

If that's the case, then I'd definitely be more inclined toward contributions, as there is much more flexibility than I had originally thought. Of course it's still terrible to withdraw anything (permanently losing the contribution room and etc), but it's nice to know that I have the flexibility of taking the money out and paying tax at a much lower rate if I were to not have any income for a year, for whatever reason.

So I guess the absolute worse one could do with an RRSP is to contribute, grow some capital gains/dividends for a few years, then withdrawal and have it all taxed at the marginal rate, right? (As opposed to the 50% capital gains tax benefits in an unregistered account and etc).

And again, a BIG THANKS to everyone on the board here. As a first-timer with all of this stuff, it's very, very nice to have some guidance in sorting it out. I am in your debt!


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## 44545 (Feb 14, 2012)

slacker said:


> Bad...
> 
> RRSP Tax Refund is not return of investment. Spending the tax refund as "free money" will net very poor after tax total return on investment


That's been my understanding in context of RRSPs as well; it's only a good investment if you're actually reinvesting the tax refund.

Here's an article on TFSA versus RRSP that I've found useful:
http://worthwhile.typepad.com/worth.../the-basic-arithmetic-of-rrsps-and-tfsas.html


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## andrewf (Mar 1, 2010)

Franko, the tax withheld from RRSP withdrawals is much like the tax withheld on your paycheque. The withdrawal is added to your income, and the tax withheld is just prepaid tax towards what you might have owed. If you owe less, the withheld taxes are refunded.

Franko, I did an example for you of a capital gains bearing investment held for a long period. RRSP is still better than non-registered.


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## Franko (Mar 31, 2012)

andrewf said:


> Franko, the tax withheld from RRSP withdrawals is much like the tax withheld on your paycheque. The withdrawal is added to your income, and the tax withheld is just prepaid tax towards what you might have owed. If you owe less, the withheld taxes are refunded.
> 
> Franko, I did an example for you of a capital gains bearing investment held for a long period. RRSP is still better than non-registered.


Thanks for clarifying andrew - I was always under the impression that there were additional penalties to RRSP withdrawal other than just paying normal tax. Between that and your math, I'll definitely be dipping into RRSPs in the near future.

Thanks again for the info!


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## realist (Apr 8, 2011)

Franko said:


> Thanks for clarifying andrew - I was always under the impression that there were additional penalties to RRSP withdrawal other than just paying normal tax. Between that and your math, I'll definitely be dipping into RRSPs in the near future.
> 
> Thanks again for the info!



There are often costs associated with withdrawals - but those are from your BANK not the government. It cost me about $60 (service fee, and taxes on the service fee!) to move money from my TD RRSP to PC, which in hindsight may or may not have been worth it in my particular situation.


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## steve41 (Apr 18, 2009)

OK..... to illustrate:- 60 year-old, just retired. Has $800K inside and 100K outside his RRSP.

The question as to whether he starts to attack his RRSP (melt) or continue to shelter it, is complex.

Here is the result based on forcing a constant level of spending of $42000 based on 2% inflation, 4% growth. Taking CPP and OAS into account and taxing the Non-reg growth as 30% capgains, 30% divs, 40% interest.

Notice that the net to estate (NW) favors the RRSP melt if you should die prior to age 83 and favors the 'shelter' strategy if you make it past 83. Net Worth


Notice what income tax does.... it is all over the map. Income Tax 
(you can see why just plunking in a single average rate can be so problematic)


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## slacker (Mar 8, 2010)

Estate Tax is chaotic.


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## james4beach (Nov 15, 2012)

I have 30 to 40 years before I may start dipping into my RRSP. What if taxes are dramatically higher in 2050... you know, the boomers deplete CPP and OAS, government pensions create a huge burden, and taxes rise by a LOT.

So let's say that even a retiring person with minimal income will have to pay substantial tax in 2050, far more than today. Is there a point where RRSPs just aren't worth it at all, since it's only a tax deferral for the future?


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## My Own Advisor (Sep 24, 2012)

RRSPs are great, if you know the tax-deferral today will outweigh the tax on withdrawal later. This implies you know your tax rate 10, 20, 30 or more years from now.

Who on earth is able to predict that?

This is why, RRSPs are great, paying even less tax on capital gains, dividend income and sheltering investments from tax for good (TFSA) is even better.

I like the RRSP, but it's a tool of many.


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## MoneyGal (Apr 24, 2009)

You don't need to know the tax rates 10, 20 or 30 years from now in order to decide whether RRSPs are a good choice for you or not. You do need to be able to set up a basic finance equation and put in your assumptions about tax rates, and then decide if you think the risk (of increased tax rates in the future) outweighs the tax deferral available now. 

(However, it isn't quite that simple in reality, as Steve41 will tell you. What if rates raise, but the basic personal exemption is also raised, or there are new exemptions for seniors, or...)

The reality is that you are implicitly discounting all other scenarios when you choose one scenario. If you are willing to do the calculations, this is a fairly basic personal finance equation. Not knowing the tax rates in the future doesn't mean that you can't work through the mathematical implications of your choice -- because there are implications to *every* choice. 

The choice to use TFSAs rests on the assumption that the taxation of TFSAs will remain constant over the same horizon, for example; and I personally would speculate that TFSAs are more susceptible to legislative change than RRSPs ever will be. 

Make sense?


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## Mall Guy (Sep 14, 2011)

Something else to consider (which I never did). If you think your income potential will be greater in the future, you may want to consider building up some contribution room for when you're in a higher tax bracket. Yes you give up some compounding now, but can shelter higher taxed rate income down the line. I never (ever) thought I would be where I am now, so its a gamble on your future. My employer's contribution to my DC pension maxes out my RRSP contribution, so nowhere to shelter the annual bonus (TFSA aside). Ya, I know, nice problem to have :encouragement:


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## andrewf (Mar 1, 2010)

You can contribute now and claim the credit later.


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## My Own Advisor (Sep 24, 2012)

Agreed MoneyGal, implications with every choice...which is why I prefer to use the RRSP amongst other accounts.

Big fan of the RRSP, but it has a few drawbacks like everything else.


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