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An RRSP is a personal pension plan you fund yourself. Because RRSP contributions are tax deductible and once in the plan continue to grow on a tax deferred basis, RRSPs should be the very first place you begin your savings program.
Compare an annual $5,000 deposit in an RRSP and $5,000 in a non-RRSP investment. Assuming a 46 per cent tax bracket and an eight per cent return per year, after 25 years the RRSP is worth approximately $272,000 more. Even if you cashed out the RRSP at the end of Year 25 and paid 46 per cent tax on the entire amount, you would still have over $90,600 more than what you would have saved outside an RRSP.
To take maximum advantage of tax deferred growth, you should start saving as early as possible. Another critical success factor for investing is to get the best return on your investment while remaining within your risk comfort zone. Very often you can increase your return by one or two per cent with only a marginal increase in risk. A $5,000 annual contribution earning a four per cent rate of return grows to $216,559 after 25 years but will grow to $290,782 at a six per cent rate of return.
Two extra percentage points can make a significant difference to the value of your RRSP.