An RRSP can allow you to save for retirement on an effectively tax\u002Dfree basis, and no, that\u0027s not a typo, says Jamie Golombek. Find out more
are likely the best way for many Canadians to save for retirement. After all, an RRSP, just like a tax-free savings account , allows us to earn effectively tax-free investment income. And, no, that’s not a typo: tax free, not merely tax deferred.Sign up to receive the daily top stories from the Financial Post, a division of Postmedia Network Inc.By clicking on the sign up button you consent to receive the above newsletter from Postmedia Network Inc.
Let’s start with a basic example. Sarah has three choices when it comes to investing $1,000 of her 2023 employment income for her retirement: a TFSA, an RRSP or a non-registered investment account. Her 2023 marginal tax rate is 30 per cent, and she expects to be able to generate an annual rate of return of five per cent on her investments.
Now, let’s say Sarah chooses to invest that $1,000 by making a tax-deductible contribution to her RRSP. Because of the tax deduction, she can put the full $1,000 to work. Keep in mind that 30 per cent of the funds in her RRSP account effectively belong to the government by way of deferred taxes that will apply on both her initial contribution and on the sheltered income and growth in the RRSP.
In other words, Sarah’s after-tax rate of return of five per cent is exactly equal to her pre-tax rate of return, meaning she essentially has paid no tax whatsoever on the growth of her initial $700 net RRSP investment for 20 years. The RRSP allowed her to save for retirement on an effectively tax-free basis.
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