TFSA vs RRSP: Which Should You Max Out First?

# TFSA vs RRSP: Which Should You Max Out First? Both TFSAs and RRSPs are powerful tax-advantaged savings vehicles, but they serve different purposes. Understanding when to prioritize each one is crucial to optimizing your tax situation and long-term wealth. ## Key Differences ### TFSA (Tax-Free Savings Account) - Tax-free growth on all earnings - Tax-free withdrawals anytime - 2024 annual limit: $7,000 - No tax deduction on contributions - Great for emergency funds and short-term goals ### RRSP (Registered Retirement Savings Plan) - Tax deduction on contributions - Tax-deferred growth (pay tax on withdrawal) - 2024 limit: 18% of prior year income (max $31,560) - Locked in until retirement (generally) - Designed for long-term retirement savings ## When to Prioritize RRSP First 1. **High Income Earners**: Large tax refund makes RRSP contributions attractive 2. **Employer Matching**: If your employer matches RRSP, always take the match 3. **Long Investment Horizon**: 30+ years until retirement 4. **Higher Tax Bracket**: You'll be in a lower bracket in retirement ## When to Prioritize TFSA First 1. **Lower Income**: Less tax benefit from RRSP 2. **Need Flexibility**: Want access to funds without penalties 3. **Irregular Income**: Self-employed or commission-based work 4. **Emergency Fund**: Build tax-free emergency savings ## The Optimal Strategy For most Canadians, consider this order: 1. Contribute enough to RRSP to get full employer match (if available) 2. Max out TFSA ($7,000) 3. Return to RRSP with remaining contribution room 4. Consider taxable investments only after maximizing both ## Real-World Scenario Let's say you earn $75,000 annually with $10,000 to invest: **Strategy A (RRSP First):** - RRSP contribution: $10,000 - Tax refund at 30% marginal rate: $3,000 - Total tax savings: $3,000 **Strategy B (TFSA First):** - TFSA contribution: $7,000 - RRSP contribution: $3,000 - Tax refund at 30%: $900 - Total tax savings: $900 - But: TFSA funds are accessible anytime ## Key Takeaway The best account to max out first depends on your personal situation. When in doubt, prioritize employer matching, then balance between both accounts based on your income level and financial needs.