I really struggle with RRSPs. I understand they are retirement saving funds but what makes them different then just regular savings?
In: 1
Saving for retirement without an RRSP:
* Invest $100 now
* Watch it grow.
* Get back $500 in the future
**You have $500.**
Saving for retirement with an RRSP:
* Invest $100 now. Government loans you $30. Invest $130 now.
* Watch it grow.
* Get back $650 in the future
* Government says, “You owe us $20, but just pay $8, s’all good.”
**You have $642.**
Why does this happen?
When you invest in an RRSP the government says, “Let’s pretend this $100 is tax-deductible, except you’ll have to reverse the tax deduction when you’re old”. So you have income today and pay 30% income tax.
One day you’re old. The government says, “Okay, we’re undoing $100 tax deduction, so you have to pay income tax on it now.” But now you have a low tax rate — you’re retired with almost no income! Say you pay just 8% income tax, or $8 back.
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