The reduced rate of tax on capital gains realized on investments held outside an RRSP might have you wondering about the relative tax advantages of buying equities within an RRSP versus outside an RRSP. Well, wonder no more—Investors Group's tax planning experts have carefully analyzed the tax implications of the inside/outside question for you.
"Whether you are planning for retirement or estate enhancement, it is almost always more advantageous to contribute to an RRSP if the tax benefit from your RRSP contribution is reinvested, or used to pay down non-deductible debt," says Myron Knodel, CA and Director, Tax & Estate Planning, Advanced Financial Planning Support at Investors Group. “However, with the introduction of the Tax-Free Savings Account (TFSA) there may be additional opportunities that should not be overlooked to further enhance your retirement savings depending on your personal situation.”
Use it or lose it
The key is how you use the tax refund or reduced tax payment that results from your RRSP contributions. For example, if you use your tax refund for personal financial expenditures—say, to take a vacation—the benefits of your RRSP contribution are significantly reduced. Repay a mortgage or other personal debt that decreases your non-deductible interest expenses and increases your personal wealth, and it's a different story. You can enjoy the benefit of more disposable income that can be used for investment or to further reduce your debt.
"There is no doubt that significant long-term tax and wealth accumulation advantages come from reinvesting your tax refunds or the extra money from reduced tax payments." Knodel adds.
Finding your answers
Keep in mind that the number of years to your retirement, maintaining an asset allocation strategy that fits your risk profile, your overall tax strategy, and the growing amount of your personal wealth all impact your investment strategy. Scott Rutgers will perform a customized analysis of all these factors and more—and then there will be no question about what's best for you.