RRSP vs TFSA: Which Should You Max Out First?

You've got $10,000 to invest. Should it go into your RRSP or your TFSA? The conventional wisdom says "it depends on your tax bracket"—but what does that actually mean for your specific situation?

The Fundamental Difference

Both accounts let your investments grow tax-free. The difference is when you pay tax:

The Tax Bracket Rule of Thumb

The classic advice: If your tax rate is higher now than it will be in retirement, prioritize RRSP. If it's lower now (or the same), prioritize TFSA.

Here's the logic:

• High earner now, modest retirement income? You get a deduction at 45% today, withdraw at 25% later. RRSP wins.
• Early career, income will grow? Deduction at 20% today, but you might withdraw at 30%+ later. TFSA might be better.
• Same bracket now and later? It's roughly a wash mathematically, but TFSA has more flexibility.

Beyond Tax Brackets: Other Factors

1. Do You Need Flexibility?

TFSA withdrawals are completely tax-free and you get the contribution room back the next year. RRSP withdrawals are taxed and you lose that room forever. If you might need the money for a house down payment or emergency, TFSA is safer.

2. What About Government Benefits?

RRSP withdrawals count as income and can affect:

• OAS clawback (starts around $87,000 income)
• GIS eligibility (for low-income seniors)
• Age credit and other income-tested benefits

TFSA withdrawals don't count as income for any of these purposes. For some retirees, this makes TFSA dramatically more valuable.

3. Got an Employer Match?

If your employer matches RRSP contributions, that's free money. Max out the match first, every time, regardless of tax brackets.

4. What If You Max Both?

Lucky you! Generally fill TFSA first (for flexibility), then RRSP (for the deduction), then non-registered accounts. But if you're in a very high bracket, the RRSP deduction might be more valuable right now.

A Real Example

Sarah earns $85,000 in Ontario. Her marginal rate is about 31.5%. She has $10,000 to invest.

If she uses RRSP: She gets a ~$3,150 refund. If she's smart, she invests that refund too, giving her effectively $13,150 working for her (though it'll all be taxed later).

If she uses TFSA: No refund, but $10,000 grows tax-free forever and she can withdraw whenever without affecting her future CPP, OAS, or GIS.

If Sarah expects to have a modest retirement (say, $45,000/year income), her future marginal rate might be around 20%. The RRSP likely wins on pure math. But if she might need the money before retirement, or if she expects higher retirement income, TFSA might be the better call.

What Talk Through Wealth Does

Instead of guessing, you can model your specific situation:

• Project your actual retirement income from all sources
• See your expected tax rate in retirement, year by year
• Compare scenarios: prioritizing RRSP vs prioritizing TFSA
• See the impact on OAS clawback and other benefits
• Get actual dollar amounts, not rules of thumb