TFSA vs RRSP: Which First?

Both the TFSA and RRSP are excellent. The “right” first dollar depends on your tax bracket today, the tax bracket you expect in retirement, and whether your employer is offering an RRSP match. Use the following decision guide to choose confidently—and revisit the decision whenever your income or benefits change.

Start here: do you get an RRSP match?

If your employer matches contributions to a group RRSP, capture the match first. It’s a guaranteed immediate return. After meeting the match, evaluate whether additional savings go to TFSA or RRSP based on your marginal tax rate and goals. If there is no match, proceed to the tax bracket test.

Tax bracket test: now vs later

• Higher now than later: RRSP usually wins. The deduction saves you more at today’s high rate than you’ll pay on withdrawals in retirement. The RRSP is a tax-rate arbitrage tool.
• Lower now than later: TFSA usually wins. If your income and rate are currently low (students, early career, variable gig income), the TFSA’s tax-free growth is hard to beat, and you preserve RRSP room for when your rate climbs.
• Unsure or volatile: Split contributions. Use TFSA for flexibility and RRSP for long-term compounding as your income stabilizes.

Liquidity and flexibility

TFSA withdrawals are tax-free and room is restored the following calendar year. RRSP withdrawals are fully taxable and permanently use up room; they also face withholding tax. If you might need funds for emergencies, training, or a down payment without using the Home Buyers’ Plan, prioritize TFSA for its flexibility and keep RRSP contributions “sticky.”

Spousal and household considerations

Couples should think jointly. If one partner is in a much higher bracket, a spousal RRSP can reduce family tax in retirement. Meanwhile, both partners should maximize TFSA room when possible; tax-free income later can help manage OAS clawback and keep effective tax rates lower throughout retirement.

Costs and investment menus

Not all accounts have equal fees. If your group RRSP charges high investment fees, consider contributing only to get the match, then direct the rest to a low-fee TFSA or personal RRSP. Whether TFSA or RRSP, minimizing MERs and trading costs preserves more of your return.

Decision tree in five steps

1. Emergency fund first: Build 3–6 months of expenses, preferably outside registered accounts.
2. Employer match: Contribute enough to capture 100% of the RRSP match.
3. Marginal rate check: If your tax rate is high today, prioritize RRSP; if low, prioritize TFSA.
4. Debt check: High-interest debt often beats any investment return. Consider paying it down before maxing either account.
5. Automate and rebalance: Set monthly contributions and review annually. Shift the mix as your circumstances change.

Cross-border footnote: TFSA vs IRA awareness

TFSA has no exact U.S. equivalent. Americans in Canada—or Canadians who later become U.S. tax residents—may face unfavourable U.S. treatment of TFSAs. RRSPs are usually treaty-recognized for deferral, but TFSAs might be treated as taxable by the IRS. If you have U.S. status, get cross-border advice before building a large TFSA. Canadians staying in Canada full-time need not overthink this, but it explains why U.S. content you read online may downplay TFSA-like accounts.

Examples

• High-income professional, stable job: Max RRSP (especially if a match exists), then TFSA. Use the RRSP deduction to fund the TFSA and create a virtuous cycle.
• New grad, starter salary: Build emergency fund and TFSA first. As income rises, add RRSP contributions and carry forward the room until you’re in a higher bracket.
• Self-employed with variable income: Split. Automate TFSA monthly, and add RRSP lump sums in high-profit years to reduce taxes.

The bottom line

When in doubt, do both—capture free employer money in the RRSP and keep TFSA contributions humming. The order matters less than your consistency, low fees, and an asset mix you’ll actually stick with. Review your marginal tax rate annually, and don’t be afraid to rebalance the TFSA/RRSP split as your career evolves.

This guide is educational. Confirm tax details for your province and personal situation before making contribution decisions.