The Wealthy Barber Podcast - #12 — Mark McGrath: TFSAs vs. RRSPs (15ish Minute Money)

Episode Date: March 18, 2025

In our very first 15ish-minute episode, we cover a big question: TFSAs or RRSPs? To help answer it, we’ve got Mark McGrath—Associate Portfolio Manager at PWL Capital and co-host of the “Rational Reminder” podcast—who’s spent plenty of time looking at all of the pros and cons. In this podcast, Mark and Dave break down key points including why RRSPs get a bad rap (but shouldn’t), how RRSP withdrawals can actually be tax-efficient and why a TFSA’s flexibility isn’t always an advantage. All that, and more, in a fast-paced, insight-packed episode. Don’t miss this one—20 minutes could save you thousands in retirement savings!    Show Notes (00:00) Intro & Disclaimer (00:55) Intro to Mark McGrath (02:27) TFSAs vs. RRSPs (05:19) Comparing Tax on TFSAs vs. RRSPs (09:09)  Why RRSP Withdrawals Can Often Be At a Lower Tax Rate (14:53)  What if The Government Raises Taxes in the Future? (17:31)  How the Canada Child Benefit (CCB) Changes the Math (18:40)  TFSAs Are More Flexible—A Double-Edged Sword (20:47) Conclusion

Hey, it's Dave Chilton, the wealthy barber and former dragon on Dragon's Den. Welcome to the Wealthy Barber Podcast, where we'll be hosting some of the top minds in the world of personal finance. Yes, that's going to balance me out. The podcast is about making the subject not just easy to understand, but dare I say, even fun, honest. Whether you're trying to fund your retirement, figure out how to build a down payment, save for your kids' education, manage debts, whatever, we'll be here to help you do it.

Before we jump in, a quick but important note. Nothing we discuss here should be taken as investment advice. We don't know you and your personal financial situation, so we're not here to tell you where specifically to put your investment dollars. We're here to educate, get you thinking, and we hope entertain. But please do your own research and or consult with your financial advisor before taking any action. Hey everybody, it's Dave Chilton, the wealthy barber hosting our first ever 15 minute podcast, new format, outstanding first guest, Mark McGrath. I'll give you a little background on him.

Interesting guy. He's an associate portfolio manager at PWL capital. We've had Ben Felix and Dan on the show from the same entity and they're fantastic, great communicators. He lives in Squamish BC. He has a two-year-old daughter and a seven-year-old son. He talks to the seven-year-old son on his podcast as I'm in high-risk, triple leverage ETFs, extremely irresponsible parenting.

But he did use Forge documents to open up a TFSA for a seven-year-old. So that balances it out a little bit. Very talented guy. He's one of the hosts of the fantastic podcast, Rational Reminder. I think the best Canadian investment podcast. In fact, maybe the best investment podcast I listened to anywhere, Canada or the States. He also had a book come out recently called Wealthier. It's a field guide for Canadian millennials to make them better investors.

I've read the book cover to cover. It's excellent. Short punchy chapters, very understandable. It hits all the basic points that investors need to know. I wish all young people, 20s and 30s will grab a copy. Where's it available, Mark? Oh, thanks for that, Dave. It's available on Amazon, obviously.

It was on Chapters Indigo for a while there as well. I'm not sure if it's still available there, but Amazon's the primary distributor. Good. Well, it's very, very well done, and I think it can help a lot of people. And thanks for coming on the show. Interesting background to how this one came to be.

I have spoken for years about how Canadians do not have as good an understanding as they should about the merit of RSPs. In fact, the public's almost started to turn against RSPs saying, Oh, they're no good. I shouldn't have done that. I'm paying tax on withdrawal. They've lost sight of the basic math. They've lost sight of the fact that these for most of us are in fact, very fine

vehicles. So you and I are going to take a look at RSPs versus TFSAs. Why you? Because many people told me that you would throw in yourself into this area, done an excellent job of grasping all of the subtle nuances. And most importantly, you and I agree on all of this. Why have conflict? Let's just get two smart people coming together. So here we go. of grasping all of the subtle nuances and most importantly you and I agree on all of this. Why have conflict?

Let's just get two smart people coming together. So here we go, a lot of pressure. 15 minutes for you to impart wisdom on us about RSPs versus TFSAs. What's the first point you want to make? Yeah, well thanks for the great intro and thanks for the nod to the book. It means a lot coming from obviously the OG as we like to say in our circles, personal finance. The old guy. Yeah, RRSP versus TFSAs, you know, it can be a really really big topic, but I think you nailed it.

RRSP are deceptively complex, right? On the surface, they seem relatively simple. You put money in, you get your taxes back, you pay tax on the way out. That seems easy to grasp, but there's so many moving parts when you actually kind of dive into it. And especially now that we have the TFSA to kind of compare it to, which is relatively simple, the TFSA, you earn your income, you pay your taxes on your income, you stick the money in a TFSA, you never pay tax again, right? And they're great. Like, let me just get that out of the way.

I love TFSAs. But RSPs are this kind of underdog now. When I discuss this with people, whether it's friends or I spend a lot of time on Twitter talking about this kind of stuff, I inevitably always get people saying that RSPs are a scam, which is the extreme view. I just had it today. There you go. A scam.

And come on, like, okay, they're nowhere near a scam. But 99.9% of the time time it's a misunderstanding of the benefits. And I would say most of that is attributed to the fact that we have this sort of myopic view of the tax on the way out, right? So we spend years and decades even compounding our returns inside of an RRSP and then we become laser focused on the tax on the way out without realizing that the whole reason the RRSP got to some certain size in the first place is largely because of the tax benefits that you earned when you contributed along the way, right?

So if you lose sight of the benefits that you received for the contribution and for all that tax-free compounding in the RSP, then it becomes easy to focus on the potential for a big tax bill on the way out or a potential for a tax bill through your estate, right? And people, I get it, we hate taxes, nobody wants to pay tax. But if you look at it only through that lens, you're going to completely kind of disrupt your own understanding of how RSPs work, and it becomes very difficult, I think,

to just explain that concept to people, because it really takes a long-term view to understand the benefits of the RSP. It's amazing how people don't grasp that if you contribute the money at a marginal tax bracket of X and then you pull it out Years later at that same marginal tax rate the RSPs and the TFSAs are essentially the same They result in the same after-tax number now

There are some subtle nuances you and I'll talk about in a minute, but can you explain why that is a little bit more? Yeah for sure So the the first mistake that people make is they compare an after-tax contribution to a TFSA versus an RRSP, right? And I understand that because most of us are employees and we have payroll taxes withheld at source. And when you've got your bi-weekly paycheck that lands in your account, that's net of those withholding taxes from your employer, and you're faced with a decision.

Do I take this, let's call it $1,000 for the sake of the example, do I take this $1,000 and contribute it to an RSP, or do I contribute it to a TFSA? And if you make that comparison, $1,000 to either of those two accounts, and you assume some rate of return and some tax rate on the withdrawal of the RSP, the TFSA is always going to come out ahead. Always. The problem is that's the wrong comparison to make. Absolutely.

And the reason for that is because the RSP is pre-tax money by definition. And I think the easiest way to grasp this is to think of somebody who maybe owns a rental property, or maybe dividends that you're taking out of a corporation, for example. And the reason I mention those is because there's no taxes withheld at source.

So let's just say for this example, I've got a rental and it pays me $1,000 of income. Now I'm going to owe tax on that income for sure, right? But I've got the $1,000 in hand and no tax has been withheld or paid on that. And my decision now is I can take that $1,000, which is taxable income, and I can put the whole thing into an RRSP. And if I put the whole thing into an RRSP, then I won't owe taxes on that $1,000 come tax time this year. But if I'm going to contribute that to a TFSA, I need to hold back some of that money, because I'm not going to get a deduction for contributing to the TFSA.

And so, and we'll just use round numbers here, let's just assume 50% tax bracket because that makes it easy to understand. So the $1,000 goes into the RSP, great, $1,000 starting point. But if I'm going to put it into a TFSA, I have to keep $500 in my pocket, because I'm going to OCRA $500 on that $1,000 of income, and I'm only going to have $500 to contribute to the TFSA. So, that should actually be your starting point. The RRSP is totally pre-tax.

Once that money is in there, you must accept that it has never been taxed before. But the TFSA is a post-tax contribution. So, if you start with $1,000 in the RRSP and then five hundred dollars in the TFSA in this example, and to your point if you hold your tax bracket constant throughout your life and you assume the same rate of return in each account, you're going to end up with the same after-tax income at the end or the same after-tax amount net of the withdrawal. And it's very easy to kind of prove that. Let's just assume you double that money over time. Your thousand dollar RRSP becomes a $2,000 RRSP. Pre-tax your $500 TFSA becomes a thousand dollar TFSA.

Post-tax the $2,000 RRSP you withdraw, you pay 50% tax. You've got a thousand dollars in your hand. The TFSA is tax free. It's a thousand dollars in your hand. So when I talk about the RRSP returns being tax free, yes, there's some nuance there. You do have to make assumptions like the tax rate is going to be the same on withdrawal and who knows about that. But the after tax equivalent is the same if you accept that RSP contributions are pre-tax.

Okay. So you are like a younger, better looking version of Dave Chilton. Oh, well, thank you. Because that's exactly how I explain it. And you got that exactly right. And I'm amazed that we've gotten away from understanding that. I actually think this is one of the only things in financial planning that most people understood better

10 years ago. Interesting. Now you're getting the confusion because to your point, the baby boomers are taking money out of the RRSP and only focused on the tax they're paying, forgetting they wouldn't have that much in the first place, had it not been working the way you described it.

Here's my argument, that usually with proper planning, you can pull the money out of the RRSP at a lower tax rate than what you put in it at. Not always, but usually. Make some points why you think I might be right. Yeah, so generally I do agree. Now there's a few things to consider here during your working life. Ideally, you're going to earn some promotions. You hopefully jump up some tax brackets, right?

Right. If you think about maybe in those earlier years, maybe just sort of university first job type of thing, if you're contributing to an RSP, your marginal tax rate might be lower or around here. And as you get yourself promoted and maybe switch jobs or start a business or something, maybe your tax rate goes be lower or around here. And as you, you know, get yourself promoted and maybe switch jobs or start a business or something, maybe your tax rate goes up, right? So the actual tax deduction that you earned on average for making contributions to the RRSP over your lifetime is going to be some average marginal tax rate deduction, right?

But to your point, when you withdraw, there's a couple of things that you have going for you. You've got one, the ability to split income from what we call a RIF, a Registered Income Fund. So for those who are not aware of an RSP at some point, the government says it's time to pay the taxes and you must convert it into what we call a Registered Income Fund or a RIF. Now RIFs are considered pensions for the purpose of pension income splitting. So if you're married, if I've got a million dollar RIF when I retire and my wife has zero, if I need to take money out, I can attribute up to 50% of that withdrawal to my spouse for tax purposes, right?

That allows you to take advantage of those lower tax brackets for both of you and equalize the taxes. So you contributed at your own personal marginal tax rate, but you get to withdraw potentially at a combined very low tax rate because you're spreading it out across those really low tax brackets. Key point that doesn't get enough attention. Yeah. And I totally respect that not everybody has a spouse.

We don't know how long ourselves or our spouses are going to live, so you don't know what the time horizon is. But at the same time- The way you're recklessly investing your son's money, you may not have a spouse, frankly. She doesn't know about it. I hope she doesn't listen to this podcast because she has absolutely no idea. Seem hiding things is the key to a good marriage, so well done. Well done.

Well done. Thank you. Thank you. Yes. I shouldn't talk about it on the rational reminder either, I guess. So that's one benefit is the ability to split income from the RIF account. The other thing is, this is a small thing, but it can compound over many, many years is something called the pension income tax credit.

So there's a federal and a provincial tax credit that you get on eligible pension income. So if you don't have something like a defined benefit plan, which is the kind of, you know, that gold standard lifetime income retirement plan or pension plan, then you get a tax credit. And it depends on the province that you live in, but the federal tax credit is worth about $300 in terms of your taxes owing. You can reduce your taxes owing by about $300. Federally- It adds up.

It adds up and that's an opportunity cost there too, because if you didn't have that tax credit, it would be more expensive over long periods of time. So there's an opportunity cost in not having that, right? So it can compound out into some pretty reasonable numbers. Now the one that I think is potentially the most interesting that a lot of people miss is that we often, because of the modeling we've done on Canada Pension Plan and old age security, for example, it's often optimal to think about deferring those plans to age 70.

So you have a choice as to when you take those plans to some degree. You don't have to take them at age 65. You can defer them up to age 70. You can defer them longer, but there's no benefit. But if you defer them, those plans, those two plans pay a higher amount of income per year for every month you defer taking it. And so if you think about like a traditional kind of retirement, if you will, at age 65, and if you're going to defer your CPP and your old age security to age 70,

you have this interesting little five-year window there where you don't have any income, right? I mean, you might, you might have some kind of pension income, maybe you're working part-time, you've got some taxable income, whatever, but you've got these really low tax years before your fixed income jumps because of those pensions. And during those years, if you can make RSP withdrawals, and especially if you can split them with your spouse, you can get those out at really, really low tax rates.

In fact, the first $15,000 of income is basically not taxable, called the basic personal amount. And that amount is indexed to inflation. Right? And so when I was running these, these kind of models in a planning software we use called Conquest Planning, I found that that five-year window for a couple in what we call future dollars for like a 30 or 35-year-old starting today, it's in the hundreds and hundreds of thousands of dollars of income that you can earn tax-free just in those five years of retirement.

So I do agree with you. I'll make one other point. RSP is if you contribute, let's say, $10,000 today, ideally if you've invested that responsibly, it's going to compound into a pretty big number, right? If you're 30 and you let that compound for 35 years. Now, when you withdraw it, you might be withdrawing it over multiple tax brackets, right? Because that $10,000 contribution might have grown to $40,000, and because of how tight some of these tax brackets are, it's not all taxed at your marginal tax rate, right?

You might have $30,000 of other income, and then a $40,000 RRSP withdrawal could be taxed across multiple brackets. So it's actually not quite the average tax rate that you're withdrawing your RRSP money at, but it could be a combination of tax brackets, not necessarily at the top bracket. I couldn't agree with the importance of that point more.

In fact, if you have a lot of young people and you mentioned you start out lower on the pay schedule, they go the TFSA route, then as they move up a little bit, they move over and do the RSPs and they're getting the bigger deduction, they're the higher marginal rate. But in retirement, to your point, they're pulling it out across the average, and it's not quite average, but let's use that. Of various tax brackets, it's almost always lower than the bracket they put it in at. What I find when I've run models and goofed around with this is the RSP

actually beats the TFSA in most cases. And for some reason, people don't want to hear that. They love the simplicity of the TFSA. I love TFSAs. IfSA. I love TFSAs. If you don't love TFSAs, you're weird. But the RSP actually wins the competition in a fair number of instances. What about the concern people bring you though, when they say, I don't trust the government not to constantly raise tax rates.

They're going to keep raising them or raising them with the TFSA, I don't have that risk. Yep. So, so to a degree that's true, right? You're, you are trading off tax uncertainty with the TFSA, I don't have that risk. Yep. So to a degree, that's true, right? You are trading off tax uncertainty with the RRSP because you're deferring the taxation of that money to the future. So there is some, anytime you defer a decision to the future, there's uncertainty because anything can happen between now and the time that that decision has to be implemented.

So there's definitely some uncertainty with the RRSP, whereas with the TFSA, I mean, okay, we could argue there's some uncertainty there because they could get rid of the plan or they could cap balances or something like that. But we know reasonably well that we've paid our income tax today. And so we've dealt with the uncertainty or we have certainty over how much tax we had to pay today on our income to get the after-tax money to put it into the TFSA. So I do respect that kind of trade-off between certainty and uncertainty. But I think one thing a lot of people don't realize is that our tax brackets federally are indexed to CPI, the consumer price index, right?

So people often in these kind of discussions that I have with them online will kind of do like a straight line projection and say, well, no, I'm going to be jumping tax brackets because my income is going to be too high without realizing that by the time you get there your $100,000 tax bracket today, 30 years from now, that tax bracket might start at $185,000 or something like that, right? Because they are going to inflate how much income you can earn at a certain tax bracket. And so that inflation mechanism, and some provinces do this as well. I don't have the list in front of me, but BC, I believe, where I live, inflates tax

brackets. I believe Ontario does as well, but there might be some caps at certain brackets. But again, there's some uncertainty there and that could change between now and the time you need to withdraw it. But I think the inflation of tax brackets is a big thing. The other thing is people over are overconfident in A, their ability to earn returns and B, in their ability to save and invest money over long periods of time. And I will say in my experience, and maybe there's some selection bias here, but in 15 years of giving people advice, I find it incredibly rare without some kind of injection of capital, like an inheritance or like a windfall of some kind, that you can out save and invest

your way into a higher taxable income in retirement, especially during your prime working years. I work with a lot of physicians. Many of them make, let's say, $300,000 or $400,000. To devise a portfolio that's going to have taxable income of $300,000 to $400,000 in retirement in present value terms, again, because those tax brackets are going to be inflated, we're talking more than an eight-figure portfolio

and just very, very few people are able to get there on their own. No, not impossible, but you're absolutely right. It's rare. Okay, a couple more quick points. Sure. The child care benefit, why should we pay more attention to that? I mean, by making an RSP contribution early, lower your taxable income and may qualify for that.

Yep. That's exactly it. So the child care benefit is an income-t benefit, and it's tested on your income after considering RSP contributions, right? So if you make an RSP contribution, you're bringing your income down for tax purposes by the amount of that contribution, and it's that after RSP contribution, that income is what's looked at when qualifying for the child care benefit. So if we think of a concept called effective tax rates or effective marginal tax rates,

this includes some of these kind of hidden maybe credits and benefits that you actually give up by having an income that's too high. So I don't have the scales in front of me, but the number of children you have and the age of those children determines what the childcare benefit amount is. So if you can lower your income, the more kids you have, the more young kids you have, the lower your income is, the more you're gonna qualify for the child care benefit. So those RSP contributions, not only are you getting your taxes back, but you might qualify for more child care benefit and that's cash flow and a family's pocket, right? And last thing, you and I both love TFSAs.

Correct. And I've always said to people, if you're maximizing either one of these, let's say you can only do one, we're thrilled. And let's not get too caught up in the nitty gritty of which one's better. But I do think that RSPs are getting hit a little bit too hard now from some people who haven't thought through the math like you and I have. So hopefully we help them to see it a little bit differently. I will ask you one more question. Do you worry with the TFSA that people are more inclined

to go in and grab money out of it for a trip or whatever else? They're less likely to do that with the RSP where they have to face the tax consequences immediately. Yeah, that's a great point. So one of the major benefits of the TFSA, of course, is the flexibility that you have with it, right? With the RSP, as you point out.

And here's another misconception, there's no penalty for withdrawing from the RRSP. You're not penalized, you just have to pay the taxes. So you have to pay the tax. And that is a massive barrier to access of your RRSP, which can be certainly a good thing. On the TFSA, to your point, you can take it out at any time. And not only that, you don't lose the contribution room.

With the RRSP, you take it out, you lose the contribution room forever. The TFSA, you take it out, not only is there no tax, but you get all that contribution room back the next year. Major benefit if you can behave. A lot of people to your point, I think will use the TFSA as the first place they go to get money when something comes up. Maybe that encourages some people not all,

but to spend more than they should or need to, because it's a readily available source of tax-free income, right? So to your point, that new car, that new trip, whatever it is. Now many of these people will do that and then promise themselves they're going to refill it the next year by over-saving. And if you know much about how people behave with their money, it rarely happens. So I think the flexibility of the TFSA is a double-edged sword and that it can be a massive

benefit when used effectively. It's like debt, right? I have clients where it's like, hey, you need to pay off that line of credit. And they're like, okay, we're going to do that. I'm like, but if you're going to pay it off only to borrow it back and spend more later, then we've got a real problem. You need to pay it off and close it, you know, because you've got a spending problem. With the TFSA is a similar kind of frame of mind. You need to dip into it, great, but you've got to make sure you refill it, right? Very, very well said. Look, we went more than 15 minutes. Oh, sorry. We went about 19 or 20. Did you charge a tariff? Was that four or five extra minutes a tariff of some sort? That's right. Yeah, you should. My invoice is in the mail.

Yeah. We'll get you the money. Listen, that was a great pleasure. You really did a good job of covering that off. And we're going to get you back on the show to talk about the book and your broader thinking around financial planning and investing at some point. But thanks for doing this. Yeah, it's been an honor. Thanks very much for having me. Thank you.