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The following article, contributed by BMO Nesbitt Burns, talks about a terrific
opportunity that Canadians have to save taxes while saving for retirement.
Kevin Devine (pictured), an investment advisor with the prestigious Canadian firm,
explains:
“An RRSP is a Registered Retirement Savings Plan.
Somewhat similar to Personal Pension Plans that are available in the UK and elsewhere,
each year you are allowed
to contribute up to a certain amount set by the tax authorities – the
Contribution Limit. All monies contributed to an RRSP remain sheltered from
tax until they are withdrawn – usually as a pension. As you can see from Tina’s article below,
not paying tax makes a tremendous difference to the amount you could have available for a
comfortable retirement. RRSP’s can be held in addition to private or occupational
pension schemes.”
The Benefits of Tax Deferred Growth
An RRSP is one of the last remaining tax shelters available to most Canadians.
Contributions to an RRSP are tax deductible and continue to grow on a tax deferred
basis as long as the funds remain in the plan.
The graph shows the benefit of using an RRSP to save for retirement. This
example shows that a $5,000 annual contribution to an RRSP that earns eight per cent
per annum will be worth $394,772 after 25 years. If invested outside an RRSP,
assuming a 46 per cent tax bracket, an annual contribution of $2,700 earning just
over four per cent per annum will grow to $122,488 after 25 years.
While it’s not a recommended strategy, even if you cashed out your RRSP at the end of
Year 25 and paid 46 per cent tax on the entire $394,772, you would still have
$213,177. That’s over $90,600 more than what you would have saved outside your RRSP.
If you are concerned about saving enough money for your retirement, RRSPs should be the
very first place you begin your savings program.
Tina A. Di Vito, CA, CFP
VP & National Manager, Retirement Planning & Taxation
Tax Disclaimer:
The comments included in the article are not intended to be a definitive analysis
of tax law. The comments contained herein are general in nature and professional
advice regarding an individual’s particular tax position should be attained in
respect of any person’s specific circumstances.
Click here to see how we can help your take control of your retirement savings.
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