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Updated 2mo ago.
Updated 2mo ago.
A tax-deferred account lets you postpone paying tax on your investment gains until later, usually when you withdraw. The RRSP is the classic Canadian example: you deduct contributions from your income now and pay tax when you withdraw the funds in retirement.
You earn $80,000 and contribute $10,000 to your RRSP. Your taxable income drops to $70,000, giving you a tax refund of about $3,000. Your investments (e.g., XEQT.TO) grow tax-free for 30 years. In retirement, when you withdraw $10,000 from your RRSP-turned-RRIF, you pay tax at your marginal rate at that time — often lower because your retirement income is less.
Tax deferral gives you two advantages: an immediate tax deduction AND decades of tax-sheltered growth. It's especially beneficial if you're in a high tax bracket now and will be in a lower one in retirement. The FHSA even combines tax deferral (deduction) with tax-free withdrawal for a first home purchase.