Yesterday’s post Don’t Give up Free Money elicited this comment:
I’m not sure if a RRSP is the best option. If the tax agency is trying to give you a “deal” you should run away as fast as possible.
I have heard variations of this “the government always gets you” theme over the years. For the vast majority of Canadians who don’t have a defined pension plan at work, there are plenty of advantages to the RRSP.
- Contributions to the RRSP are tax-free. Since capital gains, income and dividends inside a RRSP are sheltered from tax, true compounding is possible.
- It is true that withdrawals from a RRSP are treated as income, whereas capital gains and Canadian dividends are taxed much more favourably. Phillips, Hager and North analyzed three different portfolios with different asset mixes and found that the after-tax estate values were higher in all three, when held inside a RRSP.
- Interest income and dividends from foreign stocks are taxed at the same rate as ordinary income in taxable accounts. The RRSP is a good location for these assets.
Note: Karen from Hamilton, Ontario is the winner of the One Year Anniversary Giveaway. She will shortly be receiving a hardcover copy of A Random Walk Down Wall Street. Congratulations and thanks to everyone who participated.
