Quote:
Originally Posted by mrkajz44
There is alot wrong with this example. For one thing, it is unlikely your marginal rate when contributing will be 25% and 43% when withdrawing; for the vast majority of people, it will be the opposite.
Let's re-do the example with the more realistic tax rates (43% at contribution and 25% at withdrawl). Take the $4,300 saved from the contribution at add it to the orginal stock buy. Now, the stock it worth $1.43 million in the RRSP after 10 years, due to the greater intial stock buy. A tax rate of 25% would leave the RRSP with $1.07 million net; greater than the $1 million in the TFSA. Of course this assumes that you reinvest your RRSP savings, rather than blow it as many people do with their tax refund.
As I said before in this thread, this is why blanket statements regarding which is better, an RRSP or a TFSA, is usually never right. So many factors go into each it is very hard to easily compare the two. Personally, I think you should use both fairly evenly and that will create the best result.
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Whether it's 25% (which I said was just an example) or 43% it's a difference of $1,800 in the first year. Although there is no point arguing over $1,800, the vast majority of people are not taxed at 43%. I'd make a guess the vast majority of people have income closer to $40,000 than $130,000, and thus would be closer to a 25% tax rate.
Of course you can invest the refund in, but if you only contribute the amount and don't get your refund until next year, you might not put it in. You might put the refund into another investment entirely. For my example it was a straight $10,000 investment. I chose to keep the refund out, to keep it simple. The $4,300 you said to reinvest, would also create a refund, which could be reinvested as well. Instead, you might have reduced taxes taken off your pay stub, and thus the $4,300 refund wouldn't even be there. The taxes owing might equal the taxes paid.
Why would the rate when paying out $1M, or in your case $1.43M only be 25%? If you are having income of $1M, you'll be in the highest tax bracket, which I made an assumption would be 43%. I'm not talking about the amount withheld, or the amount from a RIF or any other measures. If you take the amount out in 10 years, it's taxable income and would be subject to the highest income tax rate.
What you've done is give a separate example, including reinvesting the refund. It does not make my example wrong. It's just one scenario. We both agree that blanket statements aren't appropriate when comparing the two. You have illustrated an alternate proposal that could be presented to the investor. Many of these situations should be looked at when investing. What works for one person, will not always work for everyone.