Barry Choi is a Toronto-based personal finance and travel expert who frequently makes media appearances. His blog Money We Have is one of Canada’s most trusted sources when it comes to money and travel. As a completely self-taught, do-it-yourself investor with no formal training, he makes money easy to understand for all Canadians. His specialties include personal finance, budget travel, millennial money, credit cards, and trending destinations.
RRSP or TFSA: Which should you contribute to first?
Investing in your future is straightforward because there are several registered accounts available that offer tax incentives. However, with so many option for savings, it can also leave many people feeling confused about where to put their money.
Which account you prioritize depends on various factors such as your income, financial goals, timeframe and more. To help you make an informed decision, this guide will explain when to choose your Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA).
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What’s the difference between an RRSP and TFSA?
While both your RRSP and TFSA are registered accounts, they have subtle differences that can significantly impact your decision-making and investment returns. Here’s a quick overview:
| Feature | RRSP | TFSA |
| Contributions | Tax deductible, so your income is reduced | No tax reduction |
| Taxes on growth | Tax-deferred until withdrawal | Tax-free |
| Taxes on withdrawals | Taxed as regular income | None |
| Contribution limit | 18% of the previous year’s earned income, up to a limit | Annual flat rate ($7,000 in 2025) |
| Withdrawal rules | You lose the space permanently, except when used for the Home Buyers’ Plan or Lifelong Learning plan | Funds withdrawn can be added back the following year |
| Ideal use | Long-term retirement savings | Short and long-term financial goals |
Generally, an RRSP is ideal when you’re in a higher tax bracket, since contributions lower your taxable income for the year. However, since your contributions will eventually be taxed when you withdraw the funds, it doesn’t benefit those who will still be in a high tax bracket upon retirement.
The appeal of TFSAs lies in the tax-free growth. This account is suitable for both short- and long-term growth, allowing you to reallocate funds based on your life goals.
Which account to contribute to first?
When deciding whether to focus on your RRSP or TFSA, you should base your decision on two key factors: current tax rate, and when you may need the funds.
Tax rates
Your current tax bracket compared to your expected retirement income significantly influences whether you choose an RRSP or a TFSA. If your income today places you in a higher bracket, such as $100,000 or more, the immediate tax deduction from RRSP contributions helps lower your tax bill. You’ll probably receive an immediate tax refund, and your investments grow tax-deferred.
On the other hand, if you’re only working part-time or in a lower income bracket, the benefit of that upfront RRSP deduction is less significant. Instead, a TFSA’s combination of flexible access and completely tax-free growth often outweighs any small tax advantage you might get from RRSP contributions. In other words, you’re better off waiting until you’re in a higher tax bracket before contributing to your RRSP.
Time horizon
If you have short-term savings goals like a home or car down payment, a TFSA is hard to beat because you can withdraw your funds anytime without worrying about taxes. Plus, you can recontribute those funds later, making it a great place to park some money.
On the other hand, if you’re saving for retirement and don’t plan to touch your investments for decades, then RRSPs are a better fit for your needs.
What account to use in specific scenarios
Using your tax rate and time horizon is a helpful way to determine whether to focus on your RRSP and TFSA quickly. But there are also specific scenarios that may influence your decision:
- Employer benefits: If your employer offers an RRSP matching plan through group plans, you should contribute the maximum amount. That’s because the amount your work adds is a guaranteed return.
- Freelancers and gig workers: Because of the unpredictable income freelancers often have, using a TFSA is usually more beneficial since your contribution limits are not linked to your earnings.
- Dual-income household with a high earner: Max out the high-earner’s RRSP contributions for deductions, then direct any remaining savings into a TFSA owned by the lower-income spouse to even out the household tax load.
- Pre-retirees nearing 60: At this stage, it's essential to consider your retirement income. If you’ll be in a higher tax bracket, prioritizing your TFSA since it will give you more withdrawal flexibility and may help you pay less taxes.
What about an FHSA?
To further complicate things, the Tax-Free First Home Savings Account (FHSA) is now available and combines the best features of RRSPs and TFSAs, such as:
- Contributions are tax-deductible, similar to an RRSP
- Capital gains and interest earned are tax-free, just like a TFSA
- You can contribute up to $8,000 annually, with a lifetime limit of $40,000
- Unused contribution room carries forward indefinitely
As the name suggests, the FHSA is designed for your first home purchase. Once you open an account, you have 15 years to buy a home. If you don’t buy a home within that period, it will be considered taxable income. However, you can choose to transfer your FHSA to your RRSP without penalty or affecting your available RRSP space.
Some would argue that the FHSA is the best account to start with, even if you don’t plan on buying a home soon, since it offers the benefits of an RRSP and TFSA. However, it’s also less liquid, so if you need to access the funds, you might end up paying taxes.
Whether it’s an RRSP, TFSA, or FHSA, your choice depends on your individual goals.
Barry Choi is a paid spokesperson of Sonnet Insurance.
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