Comments on: RRSP Contribution

By: Daniel

Daniel — Tue, 14 Aug 2007 10:38:43 +0000

1. You do have some fixed income. Put that in your RRSP, or else pay your mortgage instead.

2. After fixed-income, you should definitely max out your RRSP with your US equities even if you retire at a higher tax rate.

Let’s do an example. Suppose that:
1. Your US stock grows at 8% of which
2. 5% is capital gains and
3. 3% is dividend
4. Your tax rate right now is 30%.
5. Your tax rate when you retire is 40%.

(a) Let’s invest $1000 pre-tax outside an RRSP. That means that after tax you have $1000 x 70% = $700 to invest. US dividends are taxed as regular income (unlike Canadian dividends) so you only get 3% x 70% = 2.1% for dividends. So your effective rate is 7.1%. After 30 years it’s grown to $5480 of which $2325 is capital gains. Now you pay capital gains tax on that:

$2325 x 50% x 40% = $465

So you are left with $5015.

(b) Now invest the same in an RRSP.

You invest the $1000 pre-tax at 8%. So in 30 years it grows to $10,062 but now you have to pay 40% tax on the full amount. So your tax is:

$10,062 x 40% = $4,025

Undoubtedly high, but you are left with $6,038.

In other words, you are better off by $1,023 inside the RRSP even if you cash out the entire RRSP at once at a 40% tax rate.

But there’s no reason why you have to cash out the RRSP. You can transfer the money to an RRIF to continue receiving tax-deferred growth longer.

If your tax rate when you retire is not higher, the math becomes much more compelling. And in the case of fixed income, the math is MUCH MUCH more compelling.

By: Investorial » Blog Archive » Portfolio Update

Investorial » Blog Archive » Portfolio Update — Mon, 06 Mar 2006 06:09:39 +0000

[...] I haven’t gone off the deep end yet. Investorial is not a Blog about my own portfolio. I also don’t share the propensity to divulge my investment practices as other bloggers do. But I did enjoy reading The Dividend Guy and Investing Intelligently provide updates about their portfolio decisions. [...]

By: The Dividend Guy

The Dividend Guy — Sat, 04 Mar 2006 01:21:45 +0000

The reason is simple…I don’t hold too many interest bearing investments. I am relatively young and therefore try to reduce my exposure to bonds etc. If I did invest in bonds or bond funds, yes I would definately put them in my RRSP. In terms of only investing individual stock outside of an RRSP – I don’t think that one has to only do that. I invest in an RRSP to get the tax deductions and tax deferal.

By: Investorial

Investorial — Fri, 03 Mar 2006 05:31:47 +0000

Why are you investing individual stocks within an RSP? You cannot get the advantage of capital gain taxation that individual stock investing allows you to have. Such a venture would be better if left outside of your RSP account. If you follow an asset allocation strategy, invest your interest bearing securities in the RSP while keeping capital-gain producing securities outside.

I wouldn’t mind hearing your rationale behind this decision.