RRSP or TFSA: which should I contribute to first?

• RRSP: deduction now, fully taxable later, withdrawal room is generally lost permanently.
• TFSA: no deduction, tax-free growth, and withdrawn amounts are added back to contribution room the following calendar year.
• TFSA withdrawals do not count as income for OAS, GIS or the Canada Child Benefit.
• Both accounts hold the same kinds of investments — the difference is tax treatment, not investment type.
• Many Canadians use both, weighted by their current marginal tax rate.

RRSP contributions are deducted from taxable income in the year claimed. Investments grow tax-deferred, and every dollar withdrawn is included in income at your marginal rate. TFSA contributions are made with after-tax dollars; investment growth and withdrawals are not taxed, and withdrawals restore contribution room in the following year.

If your marginal tax rate today is meaningfully higher than the rate you expect on withdrawal, the RRSP deduction is generally worth more. If your rate today is low — early career, a low-income year, parental leave — the TFSA usually preserves flexibility and avoids using RRSP room at a low deduction value. If the rates are similar, other factors decide: access to funds, benefit clawbacks, estate treatment and discipline.

Unused RRSP room carries forward, and so does unused TFSA room from the year you turned 18 and became a Canadian resident. Because both carry forward, choosing one this year does not permanently forfeit the other. Over-contributions to either account can attract penalty tax, so check your notice of assessment or CRA My Account before large deposits.

Treating a TFSA as a chequing account and re-contributing within the same calendar year; contributing to an RRSP in a very low-income year; forgetting that RRSP room is consumed even when the deduction is deferred; and holding only cash in either account when the goal is long-term growth.

Two Canadians each save $6,000. One earns $55,000 and expects similar income in retirement; the TFSA may serve them well because the deduction has limited value and withdrawals will not affect income-tested benefits. Another earns $140,000 and expects lower retirement income; the RRSP deduction is claimed at a higher rate than the expected withdrawal rate. Actual outcomes depend on future tax rates and returns, which are not guaranteed.

• Contribution limits and thresholds are set annually by the CRA — verify current figures before contributing.
• Withholding tax applies to most RRSP withdrawals made before conversion to a RRIF.
• The Home Buyers' Plan and Lifelong Learning Plan allow specific RRSP withdrawals with repayment rules.
• This is general information, not a recommendation about your own accounts.

• Registered Retirement Savings Plan (RRSP) guidance — Canada Revenue Agency
• Tax-Free Savings Account (TFSA) guidance — Canada Revenue Agency
• Savings and pension plans — RRSP, TFSA, RRIF, RESP — Government of Canada