The same RRSP wisdom has been handed down for decades: maximize your contributions, take the tax deductions, let it compound. And for a long time that was genuinely useful advice, to the point that many stopped questioning if it was actually right for them. But that line of thinking was meant for a financial reality that no longer applies to most Canadians in their 20s and 30s.
TFSAs don’t carry the same cultural heritage as RRSPs, partly because they’ve only been around since 2009 and partly because they don’t come with an upfront tax deduction. More than 17 million Canadians do hold a TFSA, but less than 10% of them maximize their annual contribution room. In other words, nine in 10 Canadians are underutilizing their TFSAs. For anyone whose financial life is still taking shape, it's worth asking why.
Under the hood
The mechanics are straightforward enough. Since you fund a TFSA with money you've already paid tax on, withdrawals are completely tax-free, and taking money out for a big purchase won't cost you anything extra. Withdraw from an RRSP and you get hit twice on the way out: the financial institution withholds a percentage of it immediately, and the full amount gets added to your taxable income for the year, meaning you could owe even more come tax time. That tradeoff rarely gets mentioned when someone tells you to max out your RRSP.
“When you have high earners, they are automatically assuming that the RRSP should always come first,” says Bianca Tomenson, a Certified Financial Planner at Castlemark Wealth Management Inc. in Toronto. “But once we model income trajectory and near-term goals, flexibility often becomes a higher priority – especially for younger, high-earning Canadians.”
While high earners stand to benefit more from RRSP tax deductions, for many young Canadians, the decision of where to put their savings isn’t just about the tax bracket. There’s also the income-trajectory factor to consider: as Tomenson puts it, “Even if you’re considered a high-income earner today, a 30-year-old earning $150,000 could be earning a lot more at 45.” If your income is still climbing, preserving your RRSP contribution room now means you can get a bigger refund when you reach a higher bracket, which is part of why prioritizing the TFSA makes more sense in the meantime.
The life script of getting married in your early twenties, buying a house a few years later, and staying in the same job for the next four decades gets less common every year. Today's young Canadians are navigating unpredictable careers, higher costs of living, and major milestones that keep getting pushed further out. That means juggling a lot of competing financial priorities at once, often for longer than previous generations had to, which makes the TFSA's flexibility extremely valuable.
“Conventional wisdom was assuming linear income growth, stable employment, probably pension availability, and early home purchases,” says Tomenson. “But the reality is that today, younger high earners often have frequent turnover of employers; they see income swings; there’s parental leave to consider; and, of course, high housing costs. The conventional RRSP-first advice made sense when the careers were predictable.”
But there's a catch (there's always a catch)
The versatility of a TFSA means your money can meet you where you’re at. But that exact quality comes with its own risks.
“I always say TFSAs are great, but before we even talk about accounts, we need to really outline: what’s the investment plan?” says Jessica Moorhouse, a Toronto-based financial counsellor and author of Everything But Money. “What are we investing for? Is it for a short-term goal? Is it for a long-term goal?”
Being able to withdraw without penalty is also what makes it easier to raid when something shiny comes along. “If something happens and you think, ‘Maybe I’ll just make a little withdrawal,’ maybe it’s better for it to be locked away, so to speak,” says Moorhouse.
The TFSA is really only an advantage if you treat it like a long-term investment account. It’s well suited for bigger goals that come up before retirement – a wedding, a car, a bucket-list trip – but ones that still require actually investing the money and leaving it alone. Simply having a TFSA won’t do that work for you.
The new financial order of operations
The order Tomenson recommends looks like this: if your employer provides any sort of RRSP matching, start there, because that’s basically free money. After that, maximize your First Home Savings Account (FHSA) if you’re eligible (meaning you don’t already own a home but are planning to at some point), since it grows tax-free and comes with a tax deduction if you use it toward a home purchase. Then focus on your TFSA. And believe it or not, your RRSP can come last.
The RRSP’s position at the bottom of the list tends to surprise people. But the real power of the RRSP, Tomenson says, is the tax rate arbitrage: “putting money in and getting the tax refund in your high-income years, and drawing it out in retirement.”
Sometimes the most responsible thing you can do with your RRSP contribution room is leave it alone – it'll still be there when you're ready. Your TFSA, however, has been waiting long enough.
