Janet is 25 and her marginal tax rate is 32%. She is planning to invest $5,000 per
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Janet is 25 and her marginal tax rate is 32%. She is planning to invest $5,000 per year into her RRSP until she retires at 65. The money will be invested in a Canadian ETF that is expected to return 10% per year. Assume that she will withdraw her RRSP in one lump sum at 65 and that the marginal tax rate at 65 is 50%.
- Instead of making the annual RRSP contribution in (A), she would use the $5,000 per year to service an interest-only investment loan to create her self-created tax shelter. The rate of interest on the loan is 6%. She will invest the money in the same Canadian ETF that earns 10%. The expected rate of return of 10% on the mutual fund is all capital gains and no dividends.
Required
- How much money will she have after taxes if she invests in the RRSP?
- How much money will she have after taxes if she invests in the tax shelter?
- In (B), if the expected rate of return on the mutual fund is only 6% (i.e., the same as the rate of interest on the loan), how much money after taxes will she have at 65?
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