TFSA or RRSP First?

Money tip 01

The order you fund them in changes how much of this year's paycheque the government keeps.

The two accounts

TFSA

Tax-Free Savings Account. No deduction going in — but zero tax on growth or withdrawals, ever.

RRSP

Registered Retirement Savings Plan. Deduction going in, lowers this year's bill — but withdrawals, including all the growth, are taxed as income later.

Rule one

Expect a higher tax bracket in retirement than you're in now?

Fund your TFSA first. You're taxed on that income at today's low rate either way — let it grow completely tax-free instead of deferring the bill to a year you'll owe more.

Rule two

Earning more now than you expect to in retirement?

Take the RRSP deduction first — it's worth more against today's higher rate. Route the refund straight into your TFSA instead of spending it.

The expensive mistake

A TFSA withdrawal doesn't free up room right away.

That contribution room isn't added back until January 1 of the next calendar year. Re-contribute the same amount sooner, while you're already at your limit, and you're taxed 1% a month on the excess.

If you overfund

Which one punishes the mistake?

TFSA

No buffer. Go $2,000 over your room and CRA taxes it 1% a month — $20/month, up to $240/year — until you withdraw it or new room opens next Jan 1.

RRSP

$2,000 lifetime grace amount. The same $2,000 slip-up costs nothing — you just don't get the deduction until a future year's room catches up to it.

Before any of this

Check for an employer RRSP match first.

If your employer matches contributions, put in enough to get the full match before choosing between TFSA and RRSP for the rest. It's an immediate, guaranteed return neither account beats on its own.

Tickle & Compass

Save this, then go deeper.

The full TFSA vs. RRSP Cheat Sheet works through both rules with real income examples.

Get the cheat sheet →

General information, not financial advice for your specific situation.