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 If the entire amount is withdrawn in that year, the RRSP investor would have $293,479 after paying taxes.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This example demonstrates that even though the RRSP savings are subject to taxes when withdrawn, there is still a benefit by deferring taxes until that time.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

Growth of a registered vs. non-registered investment

For illustration purposes only

*This example assumes that the taxable portion of the fund return is 25 per cent, the tax rate on the investment earnings is 25 per cent and the annual income tax payable by the non-registered investor must be paid through withdrawals from the fund.

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