RRSP or TFSA?

Which should you use?

Life is full of choices. Having choices is good – we are happier when we have control over our lives. But for most of us, there are probably too many choices. Too many decisions to make every day. Sometimes we just want someone to tell us what to do.

Making decisions is a lot easier when we have rules and guidelines. In fact, we use heuristics – mental shortcuts that help us make quick decisions – all the time. For example, I always buy the same kind of yogurt because I know I like it, and it prevents me from over-thinking it. I go to the gym on Mondays and Wednesdays, which means I don’t have to hum and haw about whether I shoud go. These shortcuts don’t always give us the best results – maybe the other yogurt is better! -  but they certainly help.

In the financial planning world, there are many decisions that need to be made. And rules and guidelines are a starting point for making decisions, and sometimes they actually result in pretty good decisions (certainly better than making no decision at all).

One question that comes up a lot is whether to prioritize contributing to an RRSP or a TFSA, and how much one should allocate to each. This choice is like deciding between taking Tylenol or Advil. Both are very helpful, but they each have their strengths. You could take either and you’d feel better, but picking the right ones for the situation – or perhaps even taking both together – is even better.

For most people, having an RRSP and a TFSA is a good idea. But not always. And sometimes you should be putting more in one account than the other. With some analysis, you can come up with an optimal plan. But even if you don’t have help figuring this out and you get it a bit wrong, it’s still better than doing nothing.

Here are a few things to consider when making your own TFSA versus RRSP decision.

One is not better than the other

RRSPs and TFSAs have different strengths and are good for different reasons.

An RRSP gets a gold star for your retirement savings. It’s meant to give you an incentive to save for retirement by giving you a tax break now while allowing you to pay less tax on withdrawals later. An RRSP also provides some discipline because taking money out of the account hurts. Withdrawals are taxable like regular income (unless you are using to for a first home or to go back to school).

TFSAs are good for pretty much anything. The TFSA’s super power is letting your investments grow tax-free. Any income you earn on GICs, stocks, ETFs or other kinds of investments will never be taxed. And when you take money out of a TFSA, it’s not taxable income. Not only that, the account is wonderfully flexible. You can take money out anytime with no negative consequences, and unlike an RRSP, you never lose your contribution room. If you take money out this year, you can replace it next year. TFSAs are good for all kinds of savings, whether it’s for the short term like a new car, or long term like retirement.

Which you choose depends on your situation.

Mind your tax bracket

An RRSP is very beneficial if you are in a high tax bracket. “High” means you pay a higher tax rate now than you will when you take the money out down the road. Think about how much taxable income you might have in retirement – for “average” folks, that’s probably somewhere between $60,000 and $100,000 a year. This depends on whether you are part of a couple, how big your RRSP is, whether you have a pension, and what kind of lifestyle you plan on having. In order for an RRSP contribution to make sense now, you need to be earning more this year than you will in retirement. As a general guideline, if you are earning $60,000 or more, and you aren’t part of a pension plan, making an RRSP contribution probably makes sense.

TFSAs don’t give a hoot about tax brackets. Anyone who earns an income and pays taxes will benefit from a TFSA.  If you have less than $60,000 of income, you should (probably) focus on piling money into your TFSA before you think about making an RRSP contribution.

Tax shelter as much as you can

If you have money sitting around in bank account or in a non-registered investment account, and you have room to contribute to your TFSA, move your money ASAP. Even if this money is earmarked as an emergency fund, why pay tax on the interest you are earning when you can avoid it?

If you have to make a choice between putting your emergency fund or your retirement money in your TFSA, go for the retirement money. It’s best to hold your high-growth investments in the TFSA. As your investments grow, so does your effective TFSA room, which allows you to tax shelter more money than if you just held a low-to-no-growth investment like GICs and bonds. Generally speaking, your emergency fund, which should be in a boring savings account, cashable GIC, or high-interest savings ETF, should be held outside your TFSA, while long-term savings that can be invested in the stock market should be in your TFSA. But remember – if all you have in non-registered savings is an emergency fund and you have TFSA room, put that money in your TFSA.

Quick hits

There are many nuances to RRSPs and TFSAs. Here are a few “quick hits” that are important.

1.     When you put money into an RRSP or TFSA, invest it. Don’t let it sit there in cash or a savings account (unless it’s very short-term money). You can invest in all kinds of things inside these accounts – stocks, GICs, mutual funds, and ETFs are all options.

2.     Be very careful about your TFSA room. When you look on My CRA to find out how much you can contribute to your TFSA, the balance you see is as of January 1sts of the current year. This balance is only updated in February or March each year. So if you look in January of 2026, be aware that this balance does not account for any additions or withdrawals you made in 2025. It’s best to keep track of how much you add and take out of your TFSA throughout the year to make sure you know how much you can put in. If you over-contribute, you’ll be hit with a nasty 1% monthly tax on the amount that is over the limit.

3.     You might benefit from using a spousal RRSP. If you are married or common law, you can open a spousal RRSP and make contributions to your partner’s account. You get the deduction, but they will pay the tax on the withdrawals down the road. A spousal RRSP probably doesn’t make sense if your spouse is part of a pension plan or already has a big RRSP, but it’s great for couples who have an imbalance in their retirement savings and need to even it out. It’s also most beneficial for couples who plan on retiring and taking money from their RRSPs before age 65.