Option 1: An RRSP investor starts at age 25, contributes $1,000 at the beginning of every year, receives an average 8 per cent annual rate of return on the investment, and is subject to a tax rate of 40 per cent. The final contribution is made at age 71.
Option 2: A non-registered investor also starts at age 25, also wants to contribute $1,000 but has to pay tax on this amount first, leaving only $600 to invest at the beginning of every year, receives the same 8 per cent return on investment, and is subject to a tax rate of 40 per cent. The final contribution is made at age 71.
What is the end result? By taking advantage of the tax deferred benefits of a registered account (Option 1), the value of the plan increased to $489,132 at age 71. If the entire amount is withdrawn in that year, the RRSP investor would have $293,479 after paying taxes. This compares to the non-registered account (Option 2) whose value is a mere $213,548 after all taxes are paid. The difference is $79,932 .
This example demonstrates that even though the RRSP savings are subject to taxes when withdrawn, there is still a benefit by deferring taxes until that time.
Growth of a Registered vs. Non-Registered Investment
For illustration purposes only
