1. RRSPs: Introduction
  2. RRSPs: The Benefits
  3. RRSPs: Eligibility
  4. RRSPs: Contributing - Part 1
  5. RRSPs: Contributing - Part 2
  6. RRSPs: Investment Eligibility
  7. RRSPs: Growth
  8. RRSPs: Withdrawals
  9. RRSPs: RRIFs
  10. RRSPs: Registered Plan Strategies
  11. RRSPs: Conclusion

The growth of an RRSP is determined by its contents. Simply having money in an RRSP is not a guarantee that you may retire comfortably; however, it is a guarantee that the investments will compound without being taxed, as long as the funds are not withdrawn.

As mentioned earlier, tax-free growth is one of the biggest advantages of RRSP contributions. Here we show you just how powerful both tax-free contributions and tax-free compounding can be, by contrasting Joe, our RRSP contributor, to Jane, our RRSP non-contributor.

The examples below make several assumptions about Joe and Jane:

  • Joe and Jane are both 21 years old and have recently graduated from university.
  • The province in which they reside has a flat 10% tax rate that applies to everyone.
  • Both of their incomes increase on a yearly basis.
  • They each have a salary that starts at $24,000 at age 21 and grows to $180,000 by the time they are 69.
  • Both Joe and Jane change 7.3% of their portfolio every year.
  • Joe maxes out his RRSP contributions every year, while Jane invests the same amount in a non-RRSP account.
  • We assume inflation of 3%, which raises Joe's RRSP contribution ceiling.
  • Their portfolios consistently return 7.5% per year.
  • Both Joe and Jane hold the same portfolios made up of 50% common stock, 16% preferred shares and 34% bonds and guaranteed investment certificates (GICs).
  • They each receive a return of exactly 11% per year on their common stocks.
  • They each receive a return of exactly 4% per year in capital appreciation, plus 3% of the value of their preferred shares in dividends.
  • They each receive 4% interest on their bonds and GICs.
In our first example, we've compared the amount of income tax paid by Joe and Jane.

As you can see, the difference is staggering: Joe's income tax is significantly lower than Jane's. Contributing to an RRSP reduces tax liability not only because these contributions can be deducted from the contributor's earned income, but also because the returns on these investments are exempt from any capital gains tax.

We've charted the difference in size between Joe and Jane's portfolios.

As the graph shows, the difference between the two portfolios is huge. In fact, given the assumptions we've made, it amounts to more than $3 million! There's a very clear difference between the way money grows when it is sheltered from taxes and the way it grows when it is taxed every year. In an RRSP, the money that would have been spent on taxes is actually invested back into the portfolio, rather than being taken out of the portfolio and given to the government.

Don't get overwhelmed or distracted by the different assumptions made in these examples. The core idea you should take away from this section is simple - contributing to an RRSP benefits you in two ways: 1) it reduces the amount of income tax you must pay each year, and 2) it allows your investments to compound tax free (a huge advantage).

RRSPs: Withdrawals

Related Articles
  1. Financial Advisor

    Maxing Out Your RRSP (Canadian)

    Increasing your savings will provide tax benefits - and peace of mind.
  2. Retirement

    Registered Retirement Savings Plans (RRSP)

    Learn how the Canadian government makes saving for your post-work years easy. We take you from your first contribution to your first withdrawal.
  3. Taxes

    Canadians: Smart Ways To Use Your Tax Refund

    Taxes are an annoying annual chore akin to going to the dentist. Luckily, however, some of us get a nice tax refund after the process. It's important to use this refund wisely though, and Canadians ...
  4. Financial Advisor

    Contributing to a Roth IRA Regardless of Income

    Savers of all income levels can get money into a Roth IRA, though there may be an extra step involved in the process.
  5. Retirement

    What's The Difference Between Retiring In Canada And America?

    American and Canadian governments provide many of the same types of services, but the subtle differences between the two countries are worth noting.
  6. Investing

    Trader Joe's Stock Doesn’t Exist. Here’s Why

    Learn about Trader Joe's and how it operates. Understand why Trader Joe's has chosen not to be a public company and why it should remain that way.
  7. Financial Advisor

    Washing Trades In A Canadian Registered Account

    For Canadian RRSP accounts, washing same-day trades and using money market funds to bridge the gap over a multi-day trading period saves investors the exchange fee and will help their bottom ...
  8. Insights

    Warren Buffett's Moat: How Sustainable Is Trader Joe's Competitive Advantage?

    Understand the factors that have led to retail grocer Trader Joe's competitive advantage over some of its notable competitors, including Whole Foods.
  9. Trading

    Understanding Currency Carry Trade

    In a currency carry trade, an investor sells a currency with a low interest rate and then uses the funds to buy a different currency that’s yielding a higher interest rate.
Frequently Asked Questions
  1. Depreciation Can Shield Taxes, Bolster Cash Flow

    Depreciation can be used as a tax-deductible expense to reduce tax costs, bolstering cash flow
  2. What schools did Warren Buffett attend on his way to getting his science and economics degrees?

    Learn how Warren Buffett became so successful through his attendance at multiple prestigious schools and his real-world experiences.
  3. How many attempts at each CFA exam is a candidate permitted?

    The CFA Institute allows an individual an unlimited amount of attempts at each examination.Although you can attempt the examination ...
  4. What's the average salary of a market research analyst?

    Learn about average stock market analyst salaries in the U.S. and different factors that affect salaries and overall levels ...
Trading Center