Skip to main content
Book a free consultation

Personal tax

RRSP vs TFSA: which should you contribute to first?

The RRSP and the TFSA both shelter investment growth, but they treat tax at opposite ends. An RRSP gives you a deduction now and generally taxes the money when it comes out; a TFSA gives no deduction and generally lets withdrawals come out tax-free. Neither is better in every case. This article sets out what each account does, the questions that decide the order, and the checks to make before you deposit anything.

Sora Accounting & Tax · General information · Editorial policy
Updated · 6 min read

RRSP and TFSA compared by when the tax is paid

A side-by-side comparison of the RRSP, which gives a deduction now and taxes withdrawals, and the TFSA, which gives no deduction and generally tax-free withdrawals.

Visual labels: RRSP: deduct, taxed later; TFSA: no deduction, no tax; Compare rate now and later.

See the sourced 2026 Ontario tax guide: rates, limits and deadlines →

What to take away

  • An RRSP contribution is deductible and withdrawals are generally taxable; a TFSA contribution is not deductible and withdrawals are generally tax-free.
  • The order usually turns on whether your tax rate is higher now or is likely to be higher when you withdraw.
  • Check your own RRSP limit and your own TFSA records first, because excess contributions can be taxed at 1% per month.

What each account actually does

With a registered retirement savings plan, deductible contributions reduce your tax for the year you claim them. Income earned inside the plan is usually exempt from tax while the money stays there, and you generally pay tax when you receive payments from the plan.

A tax-free savings account works the other way round. Contributions are not tax deductible, but the CRA describes contributions and any interest, dividends or capital gains earned in the account as generally tax-free, including when you withdraw. In both accounts the tax benefit comes from the sheltering, so the real question is when you prefer to be taxed: now, later or not at all on the growth.

Know the room you really have

Your RRSP deduction limit is generally built from unused room carried forward plus the lesser of 18% of last year’s earned income and the annual dollar limit, which is $33,810 for 2026, reduced by any pension adjustment. The CRA reports your limit on your latest notice of assessment or reassessment, on Form T1028 when one is sent, and in your CRA account. If you belong to a workplace pension plan, that pension adjustment can reduce your room noticeably.

The TFSA dollar limit for 2026 is $7,000, added to your room on January 1. Your available room is the total you can contribute across all your TFSAs, not per account. The CRA warns that the room shown in your CRA account is updated only once a year, so it recommends calculating room from your own records. See our article on the 2026 limits for how the three registered accounts differ, and our notice of assessment entry for where the RRSP statement sits.

The main question: your tax rate now and later

Because an RRSP contribution is deducted and the withdrawal is taxed, the comparison is largely between the rate that applies to the deduction and the rate that will apply to the withdrawal. If you expect to be taxed at a lower rate when you draw the money, the RRSP often comes out ahead. If you expect the same or a higher rate, the TFSA tends to match or beat it.

Here is an illustration with round numbers, not a forecast. Suppose you set aside $1,000 of income before tax and the same rate applies at both ends. At a 30% rate, an RRSP puts the full $1,000 to work and later taxes the withdrawal at 30%, leaving $700 plus growth after tax. A TFSA puts $700 to work, and the withdrawal is tax-free, leaving $700 plus growth. They match. If the withdrawal rate turned out to be 20%, the RRSP would leave more; at 40%, the TFSA would. The match depends on the refund from the RRSP also being invested rather than spent.

Situations that often point to the TFSA first

A lower current income is the usual signal. A student, someone early in a career or someone on a temporary income dip gets little value from a deduction against a low rate, and may expect higher rates later. A TFSA also suits money you may need before retirement, because you can withdraw at any time and the amount is added back to your room on January 1 of the following year.

The CRA also notes that income earned in a TFSA and withdrawals from it do not affect federal benefits such as Old Age Security, the Guaranteed Income Supplement, Employment Insurance, the Canada child benefit, the Canada workers benefit or the GST credit. That matters if you expect to rely on income-tested benefits at some point.

Situations that often point to the RRSP first

A high current income is the other usual signal. A deduction against a higher rate is worth more, and many people expect a lower rate in retirement when employment income stops. Having substantial unused room also helps, as does an employer match where your employer offers one, which is a separate arrangement to confirm with the plan administrator.

Remember what the RRSP does to cash flow. When you withdraw, your financial institution withholds tax at 10% on amounts up to $5,000, 20% from $5,000 to $15,000 and 30% over $15,000 for residents outside Quebec. The CRA notes that this may not cover the tax you owe, so a withdrawal can leave a balance at filing time. Our article on how RRSP withdrawals are taxed walks through that, and the first-time home buyer alternatives are covered in our FHSA comparison.

Why many people do both over time

The choice is rarely permanent. Room in both accounts carries forward, so you can lean towards one this year and the other next year as income changes. A common approach is to use the RRSP in higher-income years and the TFSA in lower-income years, then keep each account’s room records up to date.

Another thing to weigh is liquidity. An RRSP withdrawal is generally taxed when you receive it, while a TFSA withdrawal comes back as room on January 1 of the following year. Treat the RRSP as retirement money unless you have a specific plan, and treat the TFSA as flexible money you can reuse once the next January arrives.

Owner-managed business income and registered accounts

If you own a corporation, how you pay yourself affects RRSP room. The CRA describes earned income as employment earnings, self-employment earnings and certain other types of income, less specific expenses and losses. An owner who takes mostly dividends should confirm what room that pays for before planning around an RRSP, while TFSA room follows the dollar limit and your own records. Our salary and dividends guide covers the wider trade-off.

Money still belonging to the corporation is not yours personally. Before it can fund an RRSP or TFSA it has to be paid to you in a way your accountant has planned, and the tax on that payment is part of the decision. Keep a note of the source of every deposit alongside your room records.

Mistakes to avoid and what to bring

The two most common mistakes are over-contributing and re-contributing a TFSA withdrawal in the same year. An RRSP excess over your limit by more than $2,000 generally attracts a 1% monthly tax, and any excess in a TFSA is taxed at 1% per month while it stays in the account. Also remember that interest on money borrowed to contribute to an RRSP or TFSA is not deductible, and that someone trading with the frequency of a professional can have a TFSA deregistered and the income taxed as business income.

For a conversation with an accountant, bring your latest notice of assessment, your own TFSA contribution and withdrawal history, recent RRSP receipts, your pension adjustment if any and a rough picture of expected income. Ask which year’s deduction you would be claiming, and what the refund will be used for. Our personal tax service can help organize that review.

Sources & editorial notes

Sources checked October 24, 2026. The examples are illustrative and provide general information. Discuss how the guidance applies to your circumstances with your accountant.

Rules and guidance can change. Use the current official source and confirm the treatment for your facts. To flag an error, contact Sora.