TFSA vs RRSP: Which Should You Use First?
It’s the most-asked question in Canadian personal finance: should I put my money in a TFSA or an RRSP? The good news is there’s a simple way to think about it.
The 30-second version
- An RRSP gives you a tax refund now, grows tax-deferred, and is taxed when you withdraw in retirement.
- A TFSA gives you no deduction now, but grows and comes out completely tax-free.
| TFSA | RRSP | |
|---|---|---|
| Tax deduction now? | No | Yes — a refund |
| Growth | Tax-free | Tax-deferred |
| Taxed on withdrawal? | No | Yes (as income) |
| Withdraw any time? | Yes — room returns next year | Generally no (taxed; room lost) |
| Best when | Your tax rate now ≤ in retirement | Your tax rate now > in retirement |
The deciding question is one thing: will your tax rate be higher now, or in retirement?
- Higher tax rate now than in retirement → lean RRSP. You deduct at a high rate today and withdraw at a low rate later.
- Lower or similar tax rate now → lean TFSA. There’s little benefit to deferring tax you’d pay at the same or a higher rate anyway.
A practical rule of thumb
- Lower income (say, under ~$50k): TFSA usually wins. Your tax rate is already low, so the RRSP deduction isn’t worth much — and you keep the flexibility.
- Higher income (say, six figures): the RRSP deduction is valuable. Use it, ideally alongside a TFSA.
- Middle income: it’s close. Using both is a perfectly good answer.
You can see your current marginal rate with the take-home pay calculator, then compare the growth in the TFSA and RRSP calculators.
Don’t skip free money
One rule beats all of the above: if your employer matches RRSP contributions, contribute at least enough to get the full match first. A 50% or 100% match is an instant, guaranteed return no account can beat.
The RRSP’s hidden catch (and trick)
An RRSP only delivers its full benefit if you invest the refund, not spend it. Contribute to your RRSP, then put the resulting tax refund into your TFSA (or back into the RRSP). People who spend the refund get far less out of an RRSP than the math promises.
Flexibility matters too
The TFSA is wonderfully flexible: you can withdraw any time, tax-free, and get the room back the following year. The RRSP is meant to stay put until retirement — early withdrawals are taxed and the room is gone for good (with two exceptions: the Home Buyers’ Plan and Lifelong Learning Plan).
So, which one?
- Saving for a first home? Look at the FHSA first — see the FHSA calculator.
- Lower income or want flexibility? Start with the TFSA.
- Higher income? Use the RRSP for the deduction — and put the refund to work.
- Not sure? Splitting between both is a smart, low-regret choice.
This is general education, not financial advice. Your own situation — income, goals, and timeline — should drive the decision.