RRSP vs Unregistered investments

Peter Merabian, Vancouver Financial Advisor explains:
We are told to rush out to the banks and stick our money in our RRSP really without questioning it. But before we do let's explore some alternative way of creating the same tax-deferred growth and same tax write-offs as an RRSP would but with a much much more significant end result. Let's check it out. All right so in this illustration here we've got two jars. On the left we have an RRSP jar and on the right we have an open or unregistered jar. Basically what these two containers represent is specific tax rules that the CRA has for specific ypes investments held within these containers. So on the left side here in an RRSP we can have stocks bonds mutual funds seg finds and second mortgages. Things like that. On the right we can have those as well and more. So let's look at how in our RRSP would be treated. In this example using five thousand dollars a year or about four hundred dollars a month. Now let's take that four hundred dollars or so a month into fund XYZ and get a ten percent return on it over twenty years. If we were to do that that money would go to four hundred thousand dollars for retirement. The problem with the RRSP container is that one hundred-percent of the money is taxable. Now it's hundred-percent taxable so what does that mean? On retirement obviously we don't want to pull out four hundred thousand all at once. We want to take out ten percent a year or so to supplement our retirement. So ten percent here is forty thousand dollars. Now before we see that forty thousand dollars, the tax man is going to take his fair share. Depending on where you're at but chances are you going to be in the higher tax bracket. A because has taxes at retirement always seemed to go up. And B because you're a smart investor, you have put your money where it's going to grow and you're gonna have considerable income a year that you need to work with. So let's use a forty percent tax rate and that in this case would be sixteen thousand dollars you've got to take out which leaves you with net twenty four thousand dollars a year for retirement. Not too bad. Well let's compare this to the unregistered scenario where instead of paying the five thousand dollars a year putting it into an RRSP, were going to look at it as five thousand dollars a year interest payment on a one hundred thousand dollar loan. We are actually going to borrow one hundred thousand dollars on day one and invest that money. And the annual interest payment if it's five percent would be five thousand dollars a year. So let's take that hundred thousand and put in the same fund XYZ and have it growing at ten percent over twenty years. Growing at ten percent that money will grow to nine hundred thousand dollars. Much more significant. Why? Because we had a much larger lump sum in the beginning that had much more time to grow and compound over the years. Now on retirement obviously we have to pay back the loan that we originally borrowed which is a hundred thousand dollars which will leave us with eight hundred thousand in this case. But here's the great part. If it's invested in the right type of investment ie capital gains type of investment, only fifty percent of this growth is taxable. So let's see how significant that is. Again, were not gonna want to take all that eight hundred thousand out all once and use it for retirement. So let's take out ten percent or eighty thousand dollars a year. Now, half of that is taxable and half of that is not taxable. On the left is the non taxable side so forty thousand dollars and on the right is the taxable side of forty thousand dollars. Again if we are at the same marginal tax rate of forty percent then we have to pay sixteen thousand dollars in taxes. We take out that sixteen thousand that leaves us with twenty four thousand on the taxable side plus the forty thousand dollars on the non taxable side for a total of sixty four thousand dollars a year that we can use towards our retirement. So where would you rather have your growth on the left hand side in our RRSP jar or on the right hand side in the unregistered jar? Obviously on the right since the growth is almost three times.

Category:

Entertainment

Tags:

• RRSP
• financial
• advisor
• vancouver
• canada
• unregistered
• investments

[RecycleEmotions]

What if you can't pay $5000 for the $100.000 loan and your fund is loosing instead of winning? you're tied to contract.

[InvestingInCanada]

@RecycleEmotions

Correct. This strategy is not for everyone. Only for those with enough cash flow to be able to make consistent monthly payments and be able to absorb fluctuations in interest rates. Since this is a 10+ year strategy, if history is an indicator, funds should perform and appreciate in value.

[InvestingInCanada]

@RecycleEmotions

That can be done and a more advanced way of applying this strategy. You have to be disciplined though to take that CRA refund every year and apply it to the interest cost of the unregistered investment loan.

[InvestingInCanada]

@honda400ex

No. The $5000 a year is the cost of using the $100,000. You would need pay an additional $5,000 a year to pay loan off by year 20. Or just sell $100,000 of your investment in year 20 to pay off loan and end up with 800,000. Again, please remember this is an illustration to compare two possible scenarios. There are no guarantees.

[RecycleEmotions]

@InvestingInCanada I understand that part. I'm talking about the refund money when you contribute to RRSP. I could use both RRSP and un-registered, the refund from CRA will go to un-registered. Or am I missing something?

[honda400ex]

@InvestingInCanada

So I can write off the interest payment?

So at $5000 a year for 20 years I pay off the $100000 and still end up with $800000?

[InvestingInCanada]

@RecycleEmotions

In my example I assumed a 40% tax bracket.

[InvestingInCanada]

@honda400ex

Yes. Plus the annual interest payments ($5,000 in this example) which can be written off.

[honda400ex]

So what your saying is if I go take out $100000 and put it a Open (un-registered) investment. I only have to pay the bank back $100000.

[RecycleEmotions]

You're missing one important thing about RRSP is tax bracket.