Should I use a TFSA or RRSP first?

When deciding between a TFSA and an RRSP, the best choice usually depends on your current tax rate, your expected tax rate in retirement, and whether your employer offers RRSP matching.

A good general rule is:

• Use your RRSP first if you’re in a high tax bracket now and expect to be in a lower bracket in retirement. The tax deduction is most valuable when your current marginal tax rate is high.
• Use your TFSA first if your current income is lower or your tax rate is not especially high. A TFSA gives you tax-free growth and tax-free withdrawals, and your contribution room is restored the following calendar year.
• Always take employer RRSP matching first, if available. That’s usually the best immediate return.

A few key points:

1. TFSA: Contributions are not tax-deductible, but withdrawals are tax-free, and the withdrawn amount is added back to your contribution room the next calendar year.
2. RRSP: Contributions are generally tax-deductible, but withdrawals are taxed as income, and you generally do not get that contribution room back.
3. The best choice depends on your situation: current income, expected retirement income, other benefits tied to net income, and whether you have RRSP matching.