RRSP or TFSA? The age old question. There is no simple answer to which is better between the two accounts and how you should use them is very situational. If you aren’t concerned with absolutely maximizing efficiency, choosing either one will probably be fine. If you are concerned with maximizing efficiency, then there are a couple different determinants to think about when choosing which account to use. Things such as: projected future earnings/age, projected retirement earnings, possibility to require invested money early, individual self-discipline and views on future tax rates should all be taken into account.

If you think you will make much more money in the future that will eventually push you into higher tax brackets, you should prioritize the TFSA over the RRSP. This will save room for your higher earning years where you can defer a higher amount of taxes. The opposite is true if you think your income will go down in the future. Typically young people will be looking towards increasing their earnings while older people will be looking at a decrease as they choose to work less or retire. Under these normal circumstances, younger people should be prioritizing their TFSA and older people in their prime income earning years should be looking to maximize their RRSP. Another advantage to focusing on the TFSA when you are young is the potential growth of the account. The TFSA has a much smaller contribution room limit and growing it early is very beneficial.

Is there a chance you will need this money in the event of an emergency? If the answer is yes, invest it in your TFSA. Contribution room from TFSA withdrawals come back at the start of the next year, in the RRSP it is lost forever. The money you withdraw from a TFSA is also already taxed, so you don’t end up with a big bill during tax time that you would if you withdrew from the RRSP.

If you think you are going to be in a similar tax bracket when you retire, the TFSA should be prioritized. If you think you are going to be in a lower tax bracket, then the RRSP should be prioritized. Projected retirement earnings has less weight than projected future earnings and age, but if you are young and expecting to be in a high tax bracket after retirement, it makes even more sense to get a head start on growing your TFSA as soon as possible.

This highlights the risk of the RRSP. Tax rates can change a lot over 30 years, this makes using an RRSP when you are 20 much higher risk than when you are 60. I personally do not see tax rates going down by much while I do find it possible they could continue to increase. For this reason, I find it more beneficial to use the TFSA early, while saving the RRSP for years closer to retirement. If you have the opposite beliefs, then you should plan for the opposite.

metaphor, tug, rope

A generic answer to TFSA vs RRSP based on these topics would be: if you are young, start with the TFSA. Put your emergency fund in there if you have room. Start the growth early. As you get older and your income increases (or your TFSA is full), start adding to the RRSP. A few years before you plan on retiring, put as much into the RRSP as possible.