Quote:
Originally Posted by Locke
You're assuming that your rate-of-return exceeds inflation and cost of living increases over the same period of time.
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No I'm not, I'm placing a value on the tax I would have had to pay today, rather than pay it in 30 years.
Say I make $100 and my tax rate is 30%.
Option 1 - Get taxed at 30% now and invest the $70
Option 2 - Invest in RRSP and invest $100 now
Over time, the $100 will earn far more money than the $70. Let's say we triple our money by retirement.
Option 1 - I have tax of 30% on my earnings of $140, so $42, leaving me with a total of $168 ($210 less tax of $42)
Option 2 - I have tax of 30% on my entire RRSP amount of $300, so $90, leaving me with $210 ($300 less tax of $90)
I never changed my marginal rate of tax, it stayed constant at 30%. Yet, I've come out ahead in option 2 with the RRSP because I was able to earn income on the $30 that wasn't taxed up front.