Deciding whether to prioritize a TFSA or an RRSP is one of the most common money questions Canadians face. The right choice depends on your income today, your expected income in retirement, and how you plan to use the money. This guide lays out the 2025 contribution limits, the tax trade-offs, and a simple decision flow so you can pick the right account — and start investing without overthinking it.

2025 at a glance

• TFSA annual limit (2025): $7,000.
• RRSP max (2025): 18% of last year’s earned income to a maximum of $32,490. Fidelity Investments Canada
• TFSA withdrawals are tax-free; any withdrawn amount is only added back to contribution room on January 1 of the following year. Do not re-contribute withdrawals in the same calendar year unless you have spare room.

What is a TFSA?

A Tax-Free Savings Account (TFSA) lets investments grow tax-free and withdrawals are tax-free. You get no immediate tax deduction for contributions, but you also do not pay tax on growth or withdrawals. TFSA room accumulates from the year you turn 18 and unused room carries forward indefinitely. The TFSA is ideal for goals where you need flexible, tax-free access — emergency funds, a home down payment, or long-term investing. Canada

What is an RRSP?

A Registered Retirement Savings Plan (RRSP) gives you a tax deduction on contributions. That reduces your taxable income this year. Investments then grow tax-deferred, but withdrawals are taxed as income. RRSPs are mainly for retirement saving where you expect to be in a lower tax bracket when you withdraw. RRSP contribution room is 18% of your prior year’s earned income, subject to an annual maximum (2025 max $32,490). If you have a workplace pension, your RRSP room may be lower because of a pension adjustment.

How to decide: three core questions

Answer these quickly to choose which to prioritize.

1. What is your current marginal tax rate vs expected rate in retirement?

• If you’re in a high tax bracket now and expect to be lower later → RRSP often gives greater net benefit because you get a larger immediate tax refund.
• If you’re in a low tax bracket now (student, part-time, early career) and expect higher earnings later → TFSA usually makes more sense.

1. Will you need the money before retirement?

• For short-term or flexible goals (house down payment, emergency fund): TFSA. Its tax-free withdrawals and recontribution rules (added next year) make it flexible.

1. Do you receive income-tested benefits (GIS, OAS claw back) or expect them?

• RRSP withdrawals increase taxable income and can reduce income-tested benefits in retirement. TFSA withdrawals do not affect those benefits.

Example scenarios (practical)

A. Student / early career (low taxable income)

• Prioritize TFSA. You likely benefit more from tax-free growth and flexible access. Start with regular monthly TFSA contributions.

B. Mid-career high earner (high marginal tax rate)

• Prioritize RRSP to get a meaningful tax refund now. Use the refund to pay down high-interest debt or top up TFSA if you have room.

C. Near retirement or saving for a home

• If you expect a lower tax rate in retirement, RRSP is attractive. For a house down payment, TFSA is better because withdrawals are tax free (or use Home Buyers’ Plan with RRSP but note repayment rules).

Practical steps — what to do this week

1. Check your TFSA and RRSP contribution room on CRA My Account.
2. Open the appropriate account (TFSA or RRSP) with a low-fee broker or bank.
3. Set an automated monthly contribution (even $50 helps).
4. Use low-cost broad ETFs or index funds inside the account to minimize fees.

Common mistakes to avoid

• Re-contributing TFSA withdrawals in the same year without available room — can trigger a 1%/month penalty on excess contributions.
• Overcontributing RRSP beyond your limit — excess contributions beyond $2,000 are penalized.
• Using RRSP for short-term needs without understanding tax and repayment consequences (Home Buyers’ Plan exceptions exist, but they have repayment schedules).

FAQs

1. Can I have both TFSA and RRSP? — Yes. Many people use both. Use TFSA for flexibility and RRSP for tax shelter if you’re in a higher tax bracket.
2. Can I transfer money from TFSA to RRSP? — Yes, but transferring is considered a withdrawal from TFSA and recontribution room rules apply; plan to avoid penalties.
3. Which account reduces my taxable income? — RRSP contributions reduce taxable income; TFSA contributions do not.
4. How do I find my exact contribution room? — Check CRA MyAccount or the Notice of Assessment.
5. Should I invest in stocks inside a TFSA or RRSP? — Both can hold similar investments. Choose the account based on tax and withdrawal plans.
6. What if I have a pension at work? — Pension adjustments reduce your RRSP room. Check your PA on your T4 or through CRA.

Closing

There is no one-size-fits-all answer. Use your current tax rate, goals, and timeline to guide the choice. If you are unsure, start with the TFSA for flexibility and build from there. For personalized advice and to avoid costly mistakes, book a free 20-minute consultation with Terces Finance.

[Book a 20-minute Consultation]