Comparison investment inside and outside RRSP Duane Pipe has $20,000 cash and considers making an investment into an RRSP. Duane will be retiring in 40 years and will cash out all his investments. Assume a 40% marginal tax rate throughout the investment horizon, and a 25% tax rate in the year of retirement (e.g. the 40th year) and all after-tax cash flows are re-invested in the same investment. Duane only has $12,000 of RRSP contribution room. He is indifferent among three investments (rates of returns have been risk-adjusted):

a. GIC with an interest rate of 6%

b. Shares of ABC with a growth rate of 4% (no dividend)

c. No growth shares that pays annual dividend of 5%. Note that the inclusion rate

for dividend income is 55%.

Required:

A. Please advise Duane on the best investment strategy in order to maximize his after-tax future value wealth. (Please ignore the $2,000 RRSP over-contribution and TFSA considerations).

B. How would your answer in A changes if Duane has $5,000 in TFSA contribution room in addition to the $12,000 RRSP contribution room above (ignore the $2,000 overcontribution on the RRSP)?

C. Is it worthwhile for Duane to over-contribute the $2,000 grace limit on his RRSP? Please provide calculations to support your conclusion.

Answer rating: 100% (QA)

To determine the best investment strategy for Duane we need to compare the aftertax future value wea... View the full answer