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TFSA vs RRSP: Which Should Canadians Use First?

Choosing between TFSA vs RRSP? Learn which account to prioritize first based on your income, tax rate, and career stage. Includes free calculator + examples.

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NextGenFinance Team

1/31/20269 min read

Overview

Most Canadians get this decision wrong.

They contribute to an RRSP in their 20s when they should be maxing their TFSA.

Or they avoid RRSPs entirely and miss out on $10,000+ in tax savings.

The reason? They don't understand the one factor that makes this decision simple:

Your current tax rate vs. your future tax rate

That's it.

In this guide, we'll show you exactly which account to prioritize based on your income, and when to switch strategies as your career progresses.

Introduction

The decision of whether to invest in a TFSA or RRSP confuses many young Canadians. Not knowing which account is right for them often leads to inaction. As a result, they don’t open up either account, or they just outsource the problem to a professional. Who may or may not have their best interest in mind. For young Canadians today, this uncertainty exists alongside a level of optionality that previous generations simply didn’t have.

Choosing between a TFSA and an RRSP is difficulty because both accounts offer their own unique benefits. Because of these differences, there is no universal “right” answer. I can’t say that everyone should prioritize their TFSA first. While that may be the best choice for some, it won’t be for others. That said, both are excellent tools, and anyone using either one is already doing something right. If you’ve already started with one account and later learn another option may have been better, there’s no reason to panic. Starting at all puts you ahead of most Canadians.

The purpose of this article is to help you decide which account to prioritize first based on your personal situation. That includes not only your finances, but also lifestyle, behaviour, and psychological factors that meaningfully influence the decision.

The One Rule That Decides TFSA vs RRSP

At its core, the TFSA vs RRSP decision comes down to one thing: your current tax rate compared to your expected future tax rate.

Why Tax Rates Over Time Matter More Than the Account Itself

Canada uses a progressive tax system, which means that as your income increases, each additional dollar you earn is taxed at a higher rate once you cross certain thresholds. Because RRSP contributions reduce your taxable income, the value of that deduction depends entirely on the tax rate you are paying in the year you contribute.

This is the key idea behind the RRSP. You contribute during years when your income, and therefore your tax rate, is relatively high. You then withdraw later, typically in retirement, when your income and tax rate are lower. The benefit of an RRSP comes from the difference between those two tax rates.

For example, in Ontario the first $53,891 of income is taxed at 19.05%. Income earned between $53,891 and $58,523 is taxed at 23.15%. The tax rates progressively increase further from here. This is why RRSP contributions are most powerful during your highest earning years. That’s when you will get the best bang for your buck in terms of tax deduction.

For example, imagine someone works as a Registered Practical Nurse (RPN) in Ontario earning $70,000 per year. Later, she returns to school, become a Registered Nurse (RN), and reach a peak income of $105,000 per year. If she contributes $10,000 to an RRSP, the tax savings differ meaningfully:

  • RPN: approximately $2,965 in tax savings

  • RN: approximately $3,118 in tax savings

In this case, the contribution amount does not change, but the value of the deduction does.

The second part of this rule is just as important. When you withdraw money from an RRSP, those withdrawals are taxed as income. For the strategy to work, your tax rate in retirement needs to be lower than it was while you were working.

Continuing the example, if the RN retires with a pension equal to 70% of her top five earning years, or $73,500, she could withdraw up to $19,632 from her RRSP each year at a marginal tax rate of 29.65%. That is lower than the 31.48% marginal tax rate they faced during her working years.

This leads to a simple conclusion. If you expect your tax rate to be higher in the future than it is today, prioritizing a TFSA generally makes more sense. If you expect your tax rate to be lower in the future than it is today, prioritizing an RRSP becomes more attractive.

What Actually Matters When Choosing Between a TFSA and RRSP

TFSA (What Matters for This Decision)

The TFSA is the most flexible registered account in Canada. It can be used for both short-term goals, such as a car purchase or vacation, and long-term goals like retirement or buying a home.

Contributions to a TFSA are made with after-tax dollars, meaning there is no tax deduction when you contribute. The benefit comes later:

  • Any income earned inside the account, such as interest, dividends, or capital gains, is not taxed

  • Any money you withdraw from the account is also tax-free

Because of this flexibility and tax-free access, the TFSA is often well suited for people who value optionality or expect their income to rise in the future.

RRSP (What Matters for This Decision)

The RRSP has less flexibility relative to the TFSA. It’s primary purpose is long term savings, most commonly for retirement. While there are limited situations where RRSP funds can be accessed earlier, such as for a house or post-secondary education, those withdrawals generally need to be repaid. You can learn more on that here.

What makes the RRSP appealing to many Canadians is that contributions are tax deductible. Any amount you contribute can reduce your taxable income, either in the current year or be carried forward to a future year.

Like a TFSA, any income earned inside an RRSP is not taxed while it remains in the account. The key difference is what happens when you withdraw. Any money taken out of an RRSP is added to your income and taxed in the year of withdrawal.

This structure is designed to take advantage of tax rates over time. The idea is that you contribute while your income, and tax rate, are relatively high. Then you withdraw later in life when your income, and tax rate, are lower.

So… Which Should You Use First?

If I didn’t know anything about your income, my default recommendation would be to start with a TFSA. For most Canadians early in their careers, the flexibility and tax-free access make it the better first choice. That said, this decision changes as your income rises.

You should generally prioritize a TFSA first if:

  • You plan to use the money for short-term goals, such as buying a car or going on vacation

  • You are early in your career

  • You expect your income to increase over time

You should generally prioritize an RRSP first if:

  • You are in, or approaching, your peak earning years

  • You have already maximized your TFSA.

  • You are saving exclusively for long term savings goals, such as retirement

To understand why, we need to look at how tax rates actually work.

Why Most Young Canadians Should Start With The TFSA

In most cases, the TFSA is the best choice for Canadians just starting to invest. The reason is that many young Canadians will earn near or below the median income level. This means you will have a low marginal tax rate, and RRSP deductions will be less valuable.

Consider the following: the median individual employment income in Canada was $44,500 after tax in 2023. This is approximately $56,500 in gross income. Assuming you lived in Ontario, your marginal tax rate would be 23.65%. The lowest tax bracket is 19.55%. This means that you would be saving ~4.1% in taxes on your contributions relative to retirement. Compare this to someone making $120,000 per year. They would experience a ~24% difference in taxes (43.41% vs 19.55%).

The additional benefit of starting with the TFSA is it allows you to preserve RRSP contribution room for high-income earning years. The RRSP contribution room is calculated based on 18% of your prior years earned income up to a maximum of $32,490 for 2025. However, it accumulates every year, even if you don’t contribute to your RRSP. By not contributing when you are younger, and earning a lower income you will have more to contribute when your income rises. Exactly when you get more bang for your buck.

The final reason why the TFSA is a better starting option is the flexibility. The money can be used for anything, not just retirement. It can be withdrawn at anytime without tax penalty. Thus, it is much easier to make the wrong decision by contributing to your TFSA, and afterwards switch to the RRSP than vice versa. As the later option comes with tax implications.

Unsure? Utilize A Mixed Strategy

At this point the answer seems obvious in theory:

  • Contribute to your TFSA during your lower earning years

  • Contribute to your RRSP during your peak earning years

The dilemma is we never really know if we are in our peak earning years… We should be able to make a good estimate, but life circumstances change. So another technique that could be used is a mixed strategy whereby you contribute to the RRSP and TFSA simultaneously. How much you contribute to the RRSP is determined by what I will call the “pull down technique”. This involves only contributing enough to the RRSP to pull your income down to the next lowest bracket.

For example. In Ontario we have the following income thresholds:

  • $53,891 - $58,523 will be taxed at 23.15%

  • $58,523 - $94,907 will be taxed at 29.65%

So imagine you earned $65,000 in 2026. You contribute $7,477 to your RRSP in order to avoid that money being taxed at the higher 29.65%. Any other saved funds will go into your TFSA.

Unfortunately, this isn’t a fool proof technique because you could get a promotion driving your income above the $94,907 threshold where additional income is now taxed at 31.48%. In this case you would have liked to reserve the contribution room.

6% Increase In Taxes

There are two specific income thresholds that are meaningful to consider in Ontario. Similar thresholds exist for other provinces. They are the following:

  1. $58,523- $94,907

  2. $117,045-$150,000

The reason why these thresholds are important is because any income earned below these amounts are taxed at 6% less. This differs from other income thresholds whereby you will only experience an increase ranging from 1.5%-4.5%.

What can we extract from this?

If you expect your income will fall within either of these two brackets you should use the RRSP to pull it down to the bracket below them. This is where you will get the most bang for your buck.

Common Questions About TFSA vs RRSP

Q: Can I contribute to both in the same year?

Yes. Many Canadians use both accounts simultaneously. The key is understanding which one to prioritize based on your current income and tax situation. Think of it as a spectrum rather than an either/or choice.

Q: What if I've already maxed my TFSA?

Then RRSP becomes your priority, regardless of income. Once your TFSA is maxed, the RRSP is the next best tax-advantaged account available to you. Just make sure that you're comfortable with the long-term commitment as it is meant for retirement savings. If you aren’t prepared to wait in order to withdraw your money then consider a non-registered account.

Q: Can I switch strategies mid-career?

Absolutely. Most Canadians should switch from a TFSA-first strategy to a RRSP-first strategy as their income grows. This isn't a permanent decision. Your strategy should evolve with your income and life circumstances.

Q: What about the First Home Savings Account (FHSA)?

If you plan on buying your first home in the next 15 years, and you haven’t maxed out the FHSA than this should be your 1st priority. The FHSA offers the best of both worlds: tax-deductible contributions like an RRSP and tax-free withdrawals like a TFSA. Failing to take advantage of this account would be a significant missed opportunity.

Even if you are unsure of whether or not you will purchase a home it may be worth maximizing the FHSA first regardless. The reason is that the funds can be added to your RRSP without impacting your current RRSP contribution limit.

Q: Do I lose my RRSP contribution room if I don't use it?

No. RRSP room carries forward indefinitely. This is exactly why many young Canadians should wait to use their RRSP room until they're earning more and can benefit from the higher tax deduction.

Your Next Step

Here's what to do today:

1. Check your income

Are you above or below $60K?

2. Open the right account

TFSA for most under-60K earners, RRSP for peak earners

3. Set up automatic contributions

Even $100/month compounds over time

Remember: Starting with either account beats perfect optimization. The best account is the one you actually use.

Still Unsure (Calculator)

At this point we have went through how to evaluate the dilemma of which account to contribute to. However, we recognize for some they will still have some hesitation when making this decision. If you need more clarity for your personal situation we provide a coaching service. For more information you can contact us at info@nextgenfinance.ca.

In the meantime, this calculator will help provide you with more direction for your specific situation.

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