TFSA vs RRSP – Which Should You Use First?

Big-picture differences

Both TFSAs and RRSPs let your investments grow tax-sheltered while they stay inside the account, but the timing of the tax break is different.

In many cases, investors use both accounts over their lifetime. The key question is usually which one to prioritize at your current stage.

How TFSAs work

With a Tax-Free Savings Account, you do not get a tax deduction when you contribute. However, your investments can grow and be withdrawn without additional tax as long as the rules are followed.

• Unused contribution room carries forward.
• Withdrawals free up room again, typically in the following calendar year.
• You can hold a broad range of investments, including ETF-based portfolios.

Because withdrawals are flexible, many people use TFSAs for a mix of medium-term goals and long-term investing, as long as they can resist the temptation to raid the account for impulse purchases.

How RRSPs work

Contributions to a Registered Retirement Savings Plan are tax-deductible, which means they can reduce the tax you owe in the year you contribute. Investments grow tax-sheltered, but withdrawals are taxed as income later on.

• Contribution room is generally based on your earned income.
• Withdrawals reduce your available room and do not automatically come back.
• RRSPs are designed primarily for retirement, though there are programs that allow withdrawals for home purchases or education under specific rules.

RRSPs tend to shine when you are in a higher tax bracket now than you expect to be in retirement, because you get a bigger deduction today and may pay tax at a lower rate later.

TFSA vs RRSP: which should come first?

There is no one-size-fits-all answer, but a few rules of thumb can help:

• High current tax rate, stable income: RRSP contributions often make sense, especially if you invest the tax refund rather than spending it.
• Lower income or variable income: TFSAs can be attractive, since you are not giving up a large deduction and you keep flexibility.
• Shorter-term goals: TFSAs usually come first because withdrawals do not trigger income tax.

Our Retirement Savings Calculator can help you get a feel for how different contribution levels might add up over time, no matter which account type you choose.

Common real-world scenarios

In practice, many Canadians split contributions between TFSAs and RRSPs, adjusting the mix as their income and goals change.

• Early career: prioritise TFSAs while your income is lower, then gradually add RRSP contributions as your tax bracket rises.
• Mid-career: use both accounts – for example, RRSP for retirement, TFSA for flexibility and medium-term goals.
• Approaching retirement: pay attention to future withdrawal plans and how RRSP/RRIF income will interact with government benefits.

Whichever account you prioritize, the fundamentals still matter most: regular contributions, a sensible asset allocation and keeping costs reasonable with low-cost ETFs or similar investments.