“RRSPs Are a Scam” (No, They’re Not)

RRSPs are far from a scam, but you have to understand the timing of their tax benefits and take a long-term view. Mark McGrath and I clear it up in the latest episode of The Wealthy Barber Podcast—a 15ish-minute episode about TFSAs vs. RRSPs. Listen now on all platforms!

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Like, let me just get that out of the way. I love TFSAs. But RRSPs are this kind of underdog now. When I discuss this with people, whether it’s, you know, friends or I spend a lot of time on Twitter talking about this kind of stuff, I inevitably always get people saying that RRSPs are a scam, right? Which is the extreme view.

I just had it today. There you go. A scam, right? And come on, like, okay, they’re nowhere near a scam. But 99.9 percent of the 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. It’s 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 RRSP Then it becomes easier 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 RRSPs 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 RRSP.

It’s amazing how people don’t grasp it 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 RRSPs and the TFSAs are essentially the same. They result in the same after tax number.