TFSA vs. RRSP: Which One Should You Fill First?

If you're a Canadian starting to invest, you've probably run into this question almost immediately: should I put my money in a TFSA or an RRSP? Both are tax-advantaged accounts. Both help you build wealth. But they work in fundamentally different ways, and which one you should prioritize depends entirely on your income and life stage. Here's the honest, simple answer.

How the TFSA Works

The Tax-Free Savings Account lets you contribute money you've already paid tax on (after-tax dollars). Once inside the TFSA, your investments grow completely tax-free. When you withdraw, you pay zero tax — no matter how much your investments have grown. Contribute $7,000, grow it to $70,000 over the years, and withdraw the full $70,000 without owing a penny. The current annual contribution limit is around $7,000, and unused room carries forward. If you've never contributed and have been eligible since 2009, you could have over $102,000 in available room. Withdrawals also re-open your contribution room the following year, making the TFSA incredibly flexible.

How the RRSP Works

The Registered Retirement Savings Plan lets you contribute pre-tax dollars. Your contribution reduces your taxable income for the year, which means you get a tax refund. If you earn $80,000 and contribute $10,000 to your RRSP, you're only taxed on $70,000. That could save you $3,000 or more in taxes this year. Your investments grow tax-free inside the RRSP, just like the TFSA. But here's the catch: when you withdraw in retirement, every dollar is taxed as income. The RRSP isn't tax-free — it's tax-deferred. You're betting that your tax rate in retirement will be lower than your tax rate today. The annual contribution limit is 18% of your previous year's income, up to roughly $32,490, and unused room carries forward.

When to Prioritize the TFSA

If your income is under roughly $55,000-$60,000, the TFSA is almost always the better first choice. At lower income levels, your marginal tax rate is relatively low, which means the RRSP tax deduction isn't worth very much. You're getting a small tax break now, but you'll pay tax on every dollar when you withdraw later. If your income grows over your career (which it likely will), you might end up withdrawing from your RRSP at a higher tax rate than when you contributed. That's the opposite of what the RRSP is designed to do. The TFSA avoids this problem entirely. There's no tax on withdrawal, ever. No matter how much your income changes, no matter what tax bracket you're in when you retire, your TFSA withdrawals are completely tax-free. For young people, early-career workers, and anyone earning a modest income, the TFSA should be maxed out first.

When to Prioritize the RRSP

If your income is above roughly $60,000-$70,000, the RRSP starts to become very attractive. At higher income levels, your marginal tax rate is high, which means the RRSP deduction saves you a significant amount in taxes right now. If you're in a 40% tax bracket and contribute $10,000, you save $4,000 in taxes. That's an instant 40% return on your contribution. If you're earning a high income now and expect to earn less in retirement (as most people do), the RRSP math works beautifully: deduct at a high rate now, withdraw at a lower rate later. The RRSP is also useful if your employer offers matching contributions — that's free money and should always be taken advantage of, regardless of your income level.

The Simple Decision Framework

Here's the straightforward rule of thumb most financial planners suggest: if you're earning under $50,000-$60,000, fill the TFSA first. If you're earning over $70,000+, the RRSP becomes very compelling — especially in the higher tax brackets. If you're in between, either is fine, but the TFSA's flexibility gives it a slight edge. And if you can afford to max out both? Do both. The order matters less when you're filling both accounts. The worst thing you can do is obsess over the "perfect" choice and delay investing altogether. A dollar invested in the "wrong" account today still beats a dollar sitting in a chequing account earning nothing.