Choosing Your Savings Vehicle

Unless you participate in a workplace pension plan, you will need to choose a vehicle to hold the investments that will help fund your retirement income. So far, we have been assuming that the funding vehicle will be an RRSP, though that isn't necessarily the case. While an RRSP is by far the most common choice during the accumulation phase, there are several other possibilities, depending on whether you have access to an employer-sponsored plan. (Appendix D summarizes the features of various tax-assisted retirement vehicles.)

You have a number of savings vehicles to choose from, and the best one for your specific needs is not always obvious. The following discussion gives some guidance.

Why Invest in a Tax-Assisted Vehicle?

The biggest drag on an investment portfolio is paying tax. A tax-assisted vehicle reduces that drag because the investment income is not taxed during the accumulation phase. Tax-deferral is valuable because it enables you to earn investment income on monies that would otherwise have been taxed away. This can make a major difference over the long periods of time needed to build retirement assets. For example, if you invest $10,000 at 6 per cent annual interest and do not pay tax on the earnings, your balance will be $32,000 after 20 years. If the same earnings were not tax-sheltered and were subject to a marginal tax rate of 46 per cent, you will have only $21,900.

“Tax-assisted” can also mean you receive a tax deduction when ...

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