Comment by parliament32
3 hours ago
Not sure if there's a US equivalent, but in Canada, "having the pretax money to grow before paying taxes on it" is a worse deal. In an RRSP/401k you pay full tax on any investment earnings. Meanwhile a normal non-registered investment account is classified as "capital gains" and only taxed at 50% of your marginal tax rate.
At the end of the day though, I'm sure it boils down to having both instead of trying to minmax it. Being able to liquidate a portion of your investments to, say, purchase a house is probably a good idea, which you can't do if you've been putting everything you have into a retirement account.
Idk about Canada - but in the US most people are going to be in a lower tax bracket in retirement (sometimes substantially lower). Is that not the case in Canada? You only pay your marginal tax rate on what you withdraw.
For example - if my wife and I max out our 401k’s - that’s about 50k we are deferring taxes on. If our pre-tax household income is 300k - then that 50k would have been taxed at 24% marginal rate.
In a year of retirement - let’s say we withdrawal that 50k but now it’s doubled (probably more than that since it only takes 9 years to double at 8% annual growth via compound interest). Now we pay 12% and end up with 88k. (Technically we’d have more than that because of the 24k standard deduction - but we’ll ignore that for the sake of simplicity)
Let’s take the non-tax advantaged comparison. We’d have paid 24% up front and invested 38k. It doubles to 76k. We’d pay 0% capital gains - but even then we end up with less investment income.
If you retire in 30 years, and invest that $50k in the S&P500, you'll end up with about $872k (given the S&P makes about 10% annually[1]). The difference is, in the non-registered scenario, you only pay 50% of the marginal tax rate, because it's capital gains. In the RRSP, you pay full tax on all investment earnings (because it's considered "income" at the time of the withdraw). Your tax bracket might be better at retirement, but will it be 50% better? That's the big question for me (not even considering the value of a liquid vs illiquid investment, but that's more of a personal planning problem).
[1] https://www.investopedia.com/ask/answers/042415/what-average...
I would really recommend playing around with Canadian specific financial planning and retirement calculators. Maybe the Canadian system is totally fucked - I don’t know. But your inclinations are a very common misconception about 401k’s in the US and I suspect this holds true in Canada too.
A few things to note:
* In the US at least - you invest your 401k in whatever funds you want. Mine are a mix of S&P500 and Total Market.
* 7-8% is the average inflation-adjusted return of the S&P500 over its history and is general figure you’ll see used in retirement planning discussions
There’s a huge wealth of resources out there on this topic. Look up Canadian specific “FIRE” guidance (Financially Independent Retired Early). I don’t know enough (or anything!) about Canada to really engage on this - but I’ve done pretty extensive planning both myself and with my financial advisor on my own early retirement objectives. For me - the math massively works out in favor of a 401k over non-tax advantaged accounts. I personally have a mix of Traditional (pre-tax), ROTH (post-tax), and non-tax advantaged accounts (because I save more than I am allowed to stuff into tax advantaged accounts per year).