RRSP vs TFSA: which should you use first?
Use an RRSP first if your tax rate today is higher than you expect it to be in retirement, because the deduction saves more now than the withdrawals cost later. Use a TFSA first if your income is modest, you may need the money before retirement, or you expect income-tested benefits like the Guaranteed Income Supplement later.
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.
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Frequently asked questions
- Can I carry forward unused RRSP room?
- Yes. Unused RRSP deduction room carries forward indefinitely, as does unused TFSA room.
- Do I have to claim the RRSP deduction in the year I contribute?
- No. You can carry the deduction forward to a year when your income and tax rate are higher.
- Is there an over-contribution penalty?
- Yes for both. RRSPs allow a CAD 2,000 lifetime buffer before the 1% monthly tax applies; TFSAs have no buffer.
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Official sources
General information only, not personalized financial, tax or legal advice. Rules change; confirm current details with the source.
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