TFSA vs RRSP: Which should I use first?

For most Canadians, the best choice depends on your current tax rate, expected tax rate in retirement, and whether you may need the money soon.

Simple rule of thumb

1. Get an employer RRSP match first if your employer offers one. That’s usually the best immediate return.
2. Use an FHSA first if you’re eligible and plan to buy your first home.
3. Choose an RRSP first if you’re in a higher tax bracket now and expect to be in a lower tax bracket in retirement.
4. Choose a TFSA first if you want flexibility, since TFSA withdrawals are tax-free and the room is restored the following calendar year, or if you expect to need the money sooner.

Why this usually works

• RRSP: contributions are tax-deductible now, but withdrawals are taxed later.
• TFSA: contributions are made with after-tax dollars, but growth and withdrawals are generally tax-free.
• FHSA: if you’re eligible, it’s a strong first-home-saving account with tax-deductible contributions and generally tax-free qualifying withdrawals for a first home. It is not the same as combining the full benefits of an RRSP and a TFSA.

Practical takeaway

• If you’re early in your career, expect your income to rise, or want easy access to the money: TFSA first.
• If you’re in a strong earning year and expect lower income in retirement: RRSP first.
• If you’re saving for a first home and qualify: FHSA first, then often TFSA or RRSP depending on your situation.

One important caveat

If you expect a large pension, substantial CPP/OAS, rental income, or other retirement income, your retirement tax bracket may stay higher than expected. In that case, the RRSP may be less advantageous than it looks.