Friday, 8 February 2013

Is Contribution to RRSP Really Worth it?

Is Contribution to RRSP Really Worth it?

In my profession, as an accountant, I have come across many people who do not believe in contributing to their RRSP despite their large RRSP room.  RRSP room is the amount you can contribute to your RRSP. They argue that the tax you save now you end up paying later in life so what is the benefit? What they are not considering is that the taxes they save through their contribution can get invested and grow.  I have done a rough calculation based on the following facts:

Interest rate 3%, top marginal tax rate 46%, annual contribution $20,000 and number of years contributed 30 yrs

I concluded that after tax cash in your pocket (tax paid) compared to a scenario where you did not contribute at all would be roughly $100,000 more. It is true the $100,000 will be in your pocket 30 years from now but its present value if discounted at 3% less 46% tax (1.62%) would be over $60,000.  The fact is that you will have more in your pocket. Now if the interest rates were 6% money in your hands would be much higher.  In fact the present value of it would be over $120,000.

Of course the number of ears is important and if you are fifty years old you only have 20 years of contribution time and the numbers would be much lower.  The $100,000 would becomes $35,000.
In any case contributions are always worth making as long as you have or will have taxable income.
You can get answers to most of your questions on RRSP by reading my newsletter. Click on the attached link.

RRSP Q&A 2012

This blog is for general information only and cannot replace professional advice.
The reader is invited to contact the writer to discuss the contents of the newsletter.
Readers are advised to seek professional advice before acting on the material
in this newsletter

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