TFSA vs. RRSP: Which One Should You Use First?

If you're just starting to save in Canada, you’ve probably heard of the TFSA and RRSP. Both accounts offer tax perks, but they serve different purposes. Choosing the right one first can help you save more efficiently and avoid headaches later.

What’s the Difference Between a TFSA and an RRSP?

Here’s a breakdown:

Feature	TFSA (Tax-Free Savings Account)	RRSP (Registered Retirement Savings Plan)
Tax on Contributions	No tax deduction	Contributions reduce taxable income
Tax on Withdrawals	Withdrawals are tax-free	Withdrawals are taxed as income
Contribution Room	Not tied to income; fixed annual limit	Based on 18% of previous year's income (up to a max)
Best Use Case	Short to medium-term goals, emergency funds, investing with flexibility	Long-term retirement savings, especially for high earners
Impact on Benefits (GIS, etc.)	Withdrawals don’t affect income-tested benefits	Withdrawals count as income and could reduce benefits

When a TFSA Makes More Sense First

Start with a TFSA if:

• You’re in a low tax bracket now (under ~$50,000/year)

• You want flexibility—no penalties for withdrawals

• You’re building an emergency fund or saving for a car, house, or business

• You’re worried about losing income-tested benefits down the road (like GIS or OAS)

  
  

A TFSA gives you room to grow your money without tax, and you can pull it out anytime. That flexibility matters if your income or plans change.

When an RRSP Is the Smarter First Choice

Start with an RRSP if:

• You’re in a higher tax bracket now and expect a lower income in retirement

• You want to lower your taxes today

• You have a stable job and are planning long-term

• You’re using the Home Buyers' Plan or Lifelong Learning Plan

  
  

RRSPs are designed for retirement. The tax break today is most valuable when your income is higher now than it will be when you withdraw later.

Can You Use Both?

Yes. In fact, it’s smart to eventually use both accounts.

Here’s a simple plan:

• Start with a TFSA while your income is low.

• Shift toward RRSP contributions as your income (and tax rate) increases.

• Maximize RRSPs when you hit your peak earning years.

  
  

If your job has an RRSP match through work—take it. That’s free money.

A Quick Example

Let’s say you’re earning $40,000 a year.

• A $5,000 RRSP contribution might save you around $750 in taxes, but that money will be taxed when you withdraw it later.

• A $5,000 TFSA contribution doesn’t save tax today—but all future growth and withdrawals are completely tax-free.

  
  

In this case, unless you need the refund or have a long-term plan for the RRSP, the TFSA is more flexible and often better value.

Bottom Line

Start with a TFSA if you want access to your money and you're not earning big yet. Use an RRSP when you're earning more and want a tax break now. If you’re still unsure, think about your goals: flexibility = TFSA, tax savings = RRSP.