A reader that goes by “David” provided a link to an article from AIM called “RRSPs versus non-registered accounts.” Here I quote part of his comment:
There are opinions all over the place on these calculations. A study published by AIM Trimark states that RRSP only come out ahead if the refund is also invested. IF the refund is used for other purposes then the un-registered investment is a better choice. RRSP vs. Non-Registered.pdf. This is what Martin Gale also states — you have to invest the whole $1000 (the $640 you have in hand, plus the refund you get).
This was my reply:
David, thanks for AIM link. Totally makes sense and thanks for bringing up the fact that the refund must be invested, not squandered. This is implicit in Martin Gale’s calculation, as you pointed out “This is what Martin Gale also states — you have to invest the whole $1000 (the $640 you have in hand, plus the refund you get).”
I am writing this blog post just to emphasize this point again. The reinvestment of the RRSP refund was implicit in Martin Gale’s calculations and I sort of missed it the first time I read the article. I understood how he used $1000 in the RRSP and $640 outside (pre-tax and post-tax amounts respectively) but hadn’t fully realized the significance. Remember that you are deferring your income tax until later. The government gives you back some tax that it collected throughout the year but you’ll need that for later, when you withdraw from your RRSP and have to declare it as income. So you better invest the tax you saved now to offset those income taxes you’ll be paying later. As “David” above pointed out, IF the refund is used for other purposes, like a new TV, then the unregistered plan is a better choice. And when we say better choice, we mean a better choice for the long term… but if you get a new TV now, that’s better for the short term (well, if you think TVs are a good thing). Like Jerry Seinfeld said when comparing medicines at the pharmacy “do I want to feel good now, or later?” I think it’s best to try to find a good balance of both.
I have written a lot of old articles having to do with putting your tax refund to good use, so I won’t belabour this point and further.