Which is the better in the long run to invest in RRSP or Non RRSP?
Assumptions:
- you will retire in 20 years
- average rate of return is 8%
- tax rate now & retirement is 39%
- lump sum one time purchase of $10,000 not inside a TSSF.
What is the better investment to make or keep money in your pocket?
$10K into nonRSP account will grow to $46.6K [assuming no taxable distributions along the way] and then tax on gain at capital gains rate will leave a net of $39.5K.
$10K into RSP can be grossed up to $16.4K [borrow $6400 to add to $10K and tax savings will be $6400 to bring net to $10K invested] and this grows to $76.4K which after taxes leaves $46.6K.
NB. Tax leakage [e.g. dividends, realized gains, interest payments, etc.] in taxable account over the 20 years will reduce the net amount at the end for the taxable account.
Also, if your tax rate in retirement is lower than your rate at time of contributing the RSP becomes even more attractive.
Thus, aftertax net worth under these assumptions would be greater using the RSP.
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Btw, taxable account investing might merit consideration of corporate class mutual funds that allow you to: reduce [and perhaps eliminate] distributions over the years; switch among different investment pools without triggering gains [allowing opportunistic or defensive moves]; and converts all growth into capital gains [even if some of the underlying growth was from higher taxed interest or dividends].
I will now defer to the imminent screed about scandalous mutual fund fees and the dishonest advisors who promote them solely for their gain... [Hi Hinz].