Tax-Deferred
Quick Definition
Growth or income that is not taxed until withdrawal, allowing faster compounding.
Full Explanation
Tax-deferred means that taxes on investment gains or income are postponed until a future date — typically when funds are withdrawn. RRSPs are the primary tax-deferred savings vehicle in Canada. Contributions reduce taxable income in the year made, and investment growth inside the RRSP is not taxed annually. Tax is only paid when withdrawals are made, ideally in retirement when income (and tax rates) are lower. The power of tax deferral is significant: $1,000 growing at 7% annually inside an RRSP vs. in a taxable account at a 40% marginal rate yields dramatically more after 30 years.
Related Terms
RRSP (Registered Retirement Savings Plan)
A tax-deferred savings account for retirement, with deductible contributions.
RRIF (Registered Retirement Income Fund)
A mandatory account RRSP converts to at age 71, requiring minimum annual withdrawals.
TFSA (Tax-Free Savings Account)
A flexible registered account where investment growth and withdrawals are completely tax-free.
Tax-Free Growth
Investment gains that are never subject to income tax, like TFSA earnings.
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