TFSA vs RRSP: which one should you fill first?

The short answer

A TFSA is funded with money you have already paid tax on, and everything after that point, all the growth and every withdrawal, is tax-free forever. An RRSP works in reverse: contributions are deducted from your taxable income today, the money grows tax-deferred, and you pay income tax when you withdraw it, usually in retirement.

That means the decision comes down to one comparison: your marginal tax rate now versus your expected marginal tax rate when you take the money out. If your rate will be lower in retirement, the RRSP wins because you deduct at a high rate and repay at a low one. If your rate is low now, perhaps early in your career, the TFSA wins because an RRSP deduction is not worth much to you yet, and you preserve your RRSP room for higher-earning years.

How the TFSA works

Every Canadian resident aged 18 or older accumulates TFSA contribution room each year, whether or not they open an account. The annual limit for 2026 is $7,000, and someone who has been eligible since the program started in 2009 has $109,000 of cumulative room. Unused room carries forward indefinitely.

Withdrawals are completely flexible. You can take money out at any time, for any reason, with no tax and no impact on income-tested benefits. The amount you withdraw is added back to your contribution room, but only on January 1 of the following year. Re-contributing in the same calendar year without available room is the most common TFSA mistake, and the CRA charges 1% per month on the excess until it is removed.

The name is misleading: a TFSA is not a savings account. It is a registered wrapper that can hold stocks, ETFs, GICs, and cash. Leaving it in cash forfeits the entire point of the account, which is decades of tax-free compounding. To see what that compounding looks like, try our free compound interest calculator.

How the RRSP works

RRSP room is earned, not granted. Each year you gain room equal to 18% of your previous year's earned income, up to an annual ceiling, which is $33,810 for 2026. A workplace pension reduces that room through a pension adjustment. Unused room carries forward indefinitely.

Contributions are deducted from taxable income, which is why an RRSP contribution often produces a tax refund. Inside the account, growth is tax-deferred. Withdrawals are taxed as regular income at your marginal rate in the year you take them, and withdrawals before retirement also face withholding tax at source. By the end of the year you turn 71, the account must be converted to a RRIF or annuity.

Two programs let you borrow from your own RRSP without immediate tax: the Home Buyers' Plan for a first home and the Lifelong Learning Plan for education, both with mandatory repayment schedules.

The tax math, with numbers

Suppose you earn $95,000 in Ontario and contribute $10,000 to an RRSP. At a roughly 38% marginal rate, that contribution reduces your tax bill by about $3,800 today. If you withdraw that money in retirement at a 25% marginal rate, you pay $2,500 in tax per $10,000 withdrawn, plus tax on the growth. The spread between 38% in and 25% out is pure gain.

Now flip it. Suppose you earn $42,000. Your marginal rate is around 20%, so the same $10,000 deduction saves only about $2,000, and there is a real chance your retirement rate will be just as high or higher once government benefits are counted. At that income, the TFSA is usually the better first home for your savings, and your RRSP room waits for you, fully preserved, until a higher-earning year when the deduction is worth more.

A simple priority order

Common mistakes with both accounts

Withdrawing and re-contributing to a TFSA in the same year without room triggers the 1% monthly penalty. Over-contributing to an RRSP beyond a $2,000 buffer triggers the same 1% monthly charge. Treating the TFSA as a chequing account erases years of compounding. And forgetting that RRSP withdrawals count as income can push retirees into OAS clawback territory.

Where the FHSA fits in

If a first home is anywhere in your plans, there is a third account in this conversation. The First Home Savings Account combines the defining feature of each of the other two: contributions are tax-deductible like an RRSP, and qualifying withdrawals for a first home are tax-free like a TFSA. For its narrow purpose, it beats both.

The catch is eligibility and scope: you must qualify as a first-time buyer, the lifetime limit is $40,000, and the account runs on a 15-year clock from the day you open it. For eligible buyers, though, the standard priority order flips: fill the FHSA before either of the other two, because no other dollar you save gets both a deduction on the way in and a tax-free exit on the way out. The full rules, including the surprisingly forgiving answer to what happens if you never buy, are in our guide to the FHSA, explained.

See the difference in dollars

Reading about tax treatment is abstract. Watching two scenarios diverge over 25 years is not. Our scenario comparison tool lets you run the same monthly contribution at two different assumptions side by side, and the goal calculator works backwards from a target balance to the monthly amount that gets you there.

Frequently asked questions

Can I contribute to both in the same year?

Yes. The accounts have separate, independent contribution limits. Most long-term savers eventually use both.

Does TFSA contribution room come back after a withdrawal?

Yes, but not immediately. The withdrawn amount is added back to your room on January 1 of the following year.

Does the FHSA replace the TFSA or RRSP?

No. It supplements them for one specific goal. Once your FHSA is maxed at $40,000, or if you do not qualify as a first-time buyer, the TFSA vs RRSP decision above takes over for the rest of your savings.

Where do I find my exact limits?

Your CRA My Account shows both your TFSA room and your RRSP deduction limit. The RRSP figure also appears on your most recent Notice of Assessment.