So my actual cost per year is $5,000.
It's a point of semantics but, your effective cost may be $5000, your actual cost is $10,000. At the end of the year, I have $10,000 to do something with. I can invest it outside of my RRSP or inside it. By investing inside my RRSP I will reduce my taxable income by the full amount of the investment. If I have already paid tax on that money, I will be entitled to its refund. You are not given an extra $5000, you are allowed to keep $5000 you would otherwise have to cough up. So it's more like this:
A) Inside RRSP: Effective Cost is $10,000
B) Outside RRSP: Effective Cost is $15,000
But now we're comparing apples to oranges because the investment cost outside the RRSP is net of tax and the other is not (yet).
Point number seven in the article illustrates another wrinkle in comparing the two scenarios. In scenario A, the individual will likely be entitled to less (or none at all) of any Old Age pension or other supplement for seniors whose benefits are based on income and not assets. You would have to take this into account in calculating net after tax values.
changes in tax rates would affect both scenarios.
Yes, but not necessarily equally. In your scenario B, you assumed, for simplicity, that the investments were held for the entire term. As, you indicated, in practice, that's not likely. So if capital gains along the way incur tax, they are taxed at the rate and under the rules in effect at the time. The rules and rates 30 years from now may be quite different.
I'm straying from the point I wanted to make. I concur that investing inside your RRSP will, after tax, produce better overall returns. ie. You will have $1.6mm rather than $1mm.
If I have enough discretionary income to max out my RRSP contribution and to invest some outside my RRSP, then I will do that. However, if I don't, I won't worry about maximizing my contributions. That is not to say that I won't contribute at all. I believe in enjoying life as we go along. I don't want to save it all up for when I'm retired and then go on a spending spree. I'd like to have a fine car, a cottage, a boat, a nice vacation now and then. I can achieve these things sooner by investing some money and compounding it with time. You're probably thinking that I'm mortgaging my retirement to do it and I'd have to agree. Yes, I am.
In my opinion, maximizing your RRSP contribution year after year is not the be all and end all of life and I will never again borrow money to do it.
... HubTech |
