RRSP vs TFSA: which should you use first?

The core difference

An RRSP gives you a tax deduction now and taxes withdrawals as income later. A TFSA gives no deduction, but growth and withdrawals are never taxed. If your tax rate is the same at both ends, the two give about the same after-tax result.

• RRSP room: 18% of the previous year's earned income up to an annual CRA maximum, minus any pension adjustment.
• TFSA room: a yearly dollar limit for every adult resident, whatever their income.
• RRSP withdrawals are taxable and the room is lost; TFSA withdrawals come back as room the next year.
• An RRSP must be converted to a RRIF or annuity by the end of the year you turn 71.

When the RRSP usually wins

Higher earners in their peak years often save the most with an RRSP, especially if they invest the refund. Employer matching in a group RRSP is effectively free money and is usually worth taking first. RRSPs can also fund a first home through the Home Buyers' Plan.

When the TFSA usually wins

If you earn a lower income, the RRSP deduction is worth less. TFSA withdrawals do not count as income, so they do not reduce Old Age Security or the Guaranteed Income Supplement. A TFSA is also more flexible for emergency savings or medium-term goals.

Doing both

Many Canadians split contributions. One common approach is to contribute to an RRSP, then put the tax refund into a TFSA. Check your RRSP deduction limit on your notice of assessment and your TFSA room in CRA My Account before contributing.

Compare options

• Compare TFSA providers
• Registered accounts