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Yakk · 06-25-2004, 07:14 AM

The penalty you get for taking money out of an RRSP is not being able to put it back in.

It becomes un-taxed when you put it in, and you get taxed when you take it out. So, unless you change your marginal tax rate by a huge amount, it isn't "hugely taxed".

The loss of the contribution room is what really hurts. You can only put 18%(~?) of your income into an RRSP: this room can be held onto indefinately. If you put money in and take it out, you "waste" that resource. There is no other government penalty, as far as I know (other than you having to pay the tax you you deferred).

Money in an RRSP grows faster than money outside an RRSP, simply because the growth isn't taxed.

Take a 10% return inside an RRSP vs outside an RRSP.

Outside, you have a marginal tax rate of say 30%.

After 10 years, the money in an RRSP has grown by a factor of 2.6.

The money outside has only grown by a factor of of 1.97.

After 20 years, the RRSP money is nearly 7 times larger, while the non-RRSP money is only about 4 times larger.

The taxes you pay when you take money out of an RRSP, and the taxes you get back when you put money into an RRSP, basically cancel out.

One last note of caution: capital gains outside an RRSP have tax advantages that are simular to capital gains inside an RRSP. So, it makes some sense if you are diversifying your portfolio to place capital gains assets outside your RRSP and non-captial gains assets inside your RRSP, everything else being equal.

One other amazing feature of RRSPs is their protection against creditors. I have heard they are a shelter if you ever go bankrupt, but I don't know the details nor have I heard a lawyer confirm this.

I am not an accountant, tax lawyer, or in any way professionally related to the investment industry. My knowledge comes from learning about investments for my own personal use, so please take with a grain of salt.

Personally, I've been stuffing money into RRSPs since I was 17 or 18.

Oh yes, and one last thing: when working out your net worth, take ~30% off the value of your RRSPs, to account for the fact you'll have to pay taxes before you can access them.

06-25-2004, 07:14 AM	#3 (permalink)
Yakk Wehret Den Anfängen! Location: Ontario, Canada	The penalty you get for taking money out of an RRSP is not being able to put it back in. It becomes un-taxed when you put it in, and you get taxed when you take it out. So, unless you change your marginal tax rate by a huge amount, it isn't "hugely taxed". The loss of the contribution room is what really hurts. You can only put 18%(~?) of your income into an RRSP: this room can be held onto indefinately. If you put money in and take it out, you "waste" that resource. There is no other government penalty, as far as I know (other than you having to pay the tax you you deferred). Money in an RRSP grows faster than money outside an RRSP, simply because the growth isn't taxed. Take a 10% return inside an RRSP vs outside an RRSP. Outside, you have a marginal tax rate of say 30%. After 10 years, the money in an RRSP has grown by a factor of 2.6. The money outside has only grown by a factor of of 1.97. After 20 years, the RRSP money is nearly 7 times larger, while the non-RRSP money is only about 4 times larger. The taxes you pay when you take money out of an RRSP, and the taxes you get back when you put money into an RRSP, basically cancel out. One last note of caution: capital gains outside an RRSP have tax advantages that are simular to capital gains inside an RRSP. So, it makes some sense if you are diversifying your portfolio to place capital gains assets outside your RRSP and non-captial gains assets inside your RRSP, everything else being equal. One other amazing feature of RRSPs is their protection against creditors. I have heard they are a shelter if you ever go bankrupt, but I don't know the details nor have I heard a lawyer confirm this. I am not an accountant, tax lawyer, or in any way professionally related to the investment industry. My knowledge comes from learning about investments for my own personal use, so please take with a grain of salt. Personally, I've been stuffing money into RRSPs since I was 17 or 18. Oh yes, and one last thing: when working out your net worth, take ~30% off the value of your RRSPs, to account for the fact you'll have to pay taxes before you can access them. __________________ Last edited by JHVH : 10-29-4004 BC at 09:00 PM. Reason: Time for a rest.