TFSA or RRSP: which should you fill up first?

How TFSA and RRSP actually differ

Both accounts shelter your investments from tax while they grow — that part is identical. Where they diverge is when the tax is paid.

An RRSP contribution reduces your taxable income in the year you make it (or you can carry the deduction forward to a higher-income year). Growth inside the account is tax-deferred, not tax-free — every dollar withdrawn, including the original contribution, is taxed as regular income in the year you take it out. By the end of the year you turn 71, an RRSP must convert to a RRIF (or annuity), after which minimum annual withdrawals become mandatory. Withdrawals never restore your contribution room.

A TFSA contribution is made with after-tax money — no deduction. But growth and withdrawals are completely tax-free, permanently, with no forced withdrawals at any age. Withdraw $10,000 this year, and that $10,000 of room is added back on January 1 of next year — not immediately, but it does come back.

The simple rule for deciding

The RRSP's entire advantage depends on one comparison: your tax rate today vs. your tax rate when you eventually withdraw (usually retirement). If today's rate is meaningfully higher, the RRSP deduction is worth more than the tax you'll eventually pay — a net win. If the two rates are similar, or your current rate is actually lower, the TFSA's tax-free-forever structure tends to come out ahead, since you're not deferring tax into a future you can't accurately predict anyway.

• Higher earner today, expect a lower retirement income → lean RRSP.
• Early career, lower income, or want penalty-free access before retirement → lean TFSA.
• Not sure, or income fluctuates → split contributions between both and adjust as your income becomes clearer.

A worked example

Someone earning $95,000/year is likely sitting at a meaningfully higher marginal tax rate than they'll have in retirement. A $10,000 RRSP contribution reduces their taxable income by that amount in the year it's made.

Using either one for a first home

The RRSP's Home Buyers' Plan (HBP) lets a first-time buyer withdraw up to $60,000 tax-free from an RRSP toward a home, repayable to the RRSP over 15 years (unpaid amounts get added back to taxable income). It's a useful lever, but it's not the most efficient tool purpose-built for this goal anymore — that's now the FHSA, which has no repayment requirement at all and can even be combined with the HBP for the same purchase.

How TFSA withdrawal room actually comes back

Money withdrawn from a TFSA is added back to your contribution room — but not until January 1 of the following year, not immediately. Withdraw $10,000 in June to cover an expense, and that room doesn't reappear until the next calendar year, so re-depositing the same amount before then can trigger an over-contribution and a penalty tax if you've otherwise maxed out your room. This timing gap catches people who treat a TFSA like a simple chequing account.

Which to prioritize when you can't max both

Most people can't fully fund both every year, so the practical rule is usually: contribute enough to your RRSP to capture any employer matching (if offered), then prioritize whichever account fits your current tax bracket and goals — RRSP when your income (and tax rate) is relatively high, TFSA when it's lower or when you value flexibility. Neither choice is permanent; both accounts can be built up over years as your income changes.