RRSP or TFSA — which should I use?
Compare your marginal tax rate today against the rate you expect when you withdraw. Higher now favours an RRSP; higher later, or unknown, favours a TFSA. If the rates are the same, so is the outcome.
Both accounts shelter investment growth from tax. The difference is only when the tax is paid: an RRSP deduction is worth your marginal rate today and the withdrawal is taxed as income later, while a TFSA contribution gets no deduction and the withdrawal is never taxed. If your marginal rate is identical in both years, the two produce exactly the same after-tax result — the mathematics is symmetric.
So the question is not which account is better, it is which of your two tax rates is higher. Earning $130,000 now and expecting to draw $55,000 in retirement means deducting at a high rate and withdrawing at a low one, which is the RRSP case. Earning $45,000 in an early career year means deducting at a low rate against a plausibly higher one later, which is the TFSA case — and it is why the reflex to "always max the RRSP first" is backwards for many people early on.
Two Canadian details break the symmetry, both in the TFSA's favour at lower incomes. TFSA withdrawals are not income, so they do not reduce income-tested benefits — the OAS clawback, the Guaranteed Income Supplement, the age amount. RRSP and RRIF withdrawals are income and do. For someone who will rely on GIS, an RRSP can be actively counterproductive, because the clawback rate on that benefit exceeds most marginal tax rates.
Contribution room behaves differently too. TFSA room returns the January after a withdrawal, so the account works for medium-term goals as well as retirement. RRSP room is gone permanently once used, apart from the Home Buyers' Plan and Lifelong Learning Plan, so a withdrawal for a non-retirement reason is expensive twice — taxed as income, and the room does not come back.
In practice most people should use both, in a specific order: contribute enough to any employer RRSP match to collect all of it, then fill the TFSA, then return to the RRSP as income rises. A deduction is also worth deferring — RRSP room carries forward, so contributing in a low-income year while claiming the deduction in a later high-income year is straightforwardly better than claiming it immediately.
One more mechanical point that catches people out: an RRSP refund is not a bonus. It is the tax you did not owe on money you set aside, and the strategy only works as advertised if the refund is invested rather than spent.
Common follow-ups
Should I use my RRSP refund to pay down debt?
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If the debt carries a rate above your expected investment return, yes. The refund is a lump of after-tax money like any other; the reason to earmark it is that spending it is what quietly turns the RRSP strategy into a smaller version of itself.
Can I hold the same investments in both?
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Yes — both are containers, not investments. What changes is which assets are best placed where: US dividend payers generally belong in an RRSP, where a tax treaty removes the withholding tax that a TFSA cannot reclaim.
What happens if I over-contribute?
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Both carry a 1% per-month penalty on the excess. The RRSP allows a $2,000 lifetime buffer before the penalty applies; the TFSA allows none, and re-contributing a withdrawal in the same calendar year is the most common way people trip it.
Which one should I withdraw from first in retirement?
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Usually neither in isolation. The order that minimizes lifetime tax normally draws taxable and RRSP/RRIF income up to the top of a low bracket each year and uses the TFSA to top up beyond it, which keeps you out of higher brackets and away from benefit clawbacks.