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Bones, do you have your numbers right? 1.1^10 = 2.6, not 2.8. =p
Lets go with 10,000$ and an RRSP and a 25% marginal tax rate:
You earn 10,000$ and put it in an RRSP (thus, not paying taxes on it yet). It grows for 10 years at 10%. You then take it out and get taxed 25%.
You end up with 19453.07$ after-tax money.
You earn 10,000$, pay taxes on it (25%), then let it grow at 10% for 10 years, paying 25% tax on the growth as it happens.
You end up with 15457.74$ after-tax money.
Up your marginal tax rate to 50%, and lower the yield to 8%, and extend the period to 20 years.
10,000$ in RRSP: 23304.79$ after-tax money after 20 years.
10,000$ outside of RRSP: 10955.62$ after-tax money after 20 years.
In general, an investment in an RRSP grows as fast as an investment outside an RRSP with 1/(1-tax_rate) times as much yield, assuming no change in your tax bracket.
Marginal tax rate ---- RRSP multiplier
00% ---- 1.00
10% ---- 1.11
20% ---- 1.25
30% ---- 1.42
35% ---- 1.54
40% ---- 1.67
45% ---- 1.82
50% ---- 2.00
55% ---- 2.22
Damn, I heard about "tax deferral advantage", but never did the math before! That's fucking huge.
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Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.
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