TFSA vs RRSP: Which Should You Choose?

The TFSA-versus-RRSP decision depends primarily on your marginal tax rate now versus your expected marginal rate in retirement. If your current rate is higher than your expected retirement rate, the RRSP wins because the tax deduction now is worth more than the tax you will pay on withdrawals later. If your current rate is lower (or you expect significant income growth), the TFSA wins because you pay tax at the lower rate now and never pay tax on growth or withdrawals.

A common rule of thumb: if your marginal rate is above 30%, prioritize RRSP. If below 30%, prioritize TFSA. At 30%, the two are roughly equivalent. However, the TFSA has unique advantages: withdrawals do not count as income for government benefit calculations (OAS clawback, GIS, CCB), funds can be withdrawn anytime for any purpose without penalty, and contribution room is restored the following year after withdrawal.

There are situations where the answer is clear. New graduates with entry-level incomes should almost always start with a TFSA — their marginal rate will only go up. High-income earners above $100,000 should maximize RRSP for the immediate tax savings. Self-employed individuals may prefer RRSP contributions to reduce instalment payments. If you are saving for a home, the FHSA gives you the best of both worlds. For most Canadians in the middle, the ideal strategy is to contribute to both: use RRSP to bring your income down to a lower bracket, then direct remaining savings to TFSA.