Should You Contribute to the TFSA or RRSP First?

Are you wondering whether you should contribute to the TFSA or RRSP first? Here are some thoughts on why to pick one versus the other.

| More on:

The Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP) are some of the most beloved tax-advantaged accounts in Canada. Both can help you save on taxes, but they each have unique characteristics. This may leave many investors wondering which one they should invest in first.

Unfortunately, there is no straight answer. It really depends on your situation and preference. Let’s discuss how these two Canada Revenue Agency (CRA) registered plans might work for you.

The TFSA: No tax now or when you withdraw

The TFSA is the most straightforward to understand. You put cash into the TFSA and invest. All income (which includes interest, dividends, and capital gains) earned in the TFSA is safe from tax. You don’t need to report your income and you don’t need to pay any tax on that income.

You can really simplify tax season if you just place all your investments into a TFSA. Likewise, when you withdraw your cash (say for retirement or a big-ticket purchase like a car or house), there is no reporting or tax requirement. When you withdraw, you lose the same contribution limit value in that year. However, you recover it the following year again.

The TFSA is the most flexible of the two. The tax-free benefits make it a great place to hold investments that compound wealth for the long term. However, you have the freedom to withdraw from the account with very little consequence if you need/want to.

The RRSP: Defer tax while preparing for retirement

The RRSP is a little bit more complicated. It is more of a tax-deferral account with tax-saving benefits. When you contribute to the RRSP, you get a tax receipt that you can use to lower your taxable income in the year.

This can be particularly beneficial if the contribution can help lower your income tax bracket. Many people use this to get a tax refund, which they often then invest into their TFSA.

Any income earned inside the RRSP is deferred from tax. Like the TFSA, you can compound your capital for years (even decades) without a tax consequence. However, when you withdraw, that amount will be taxed as income at your then-current tax bracket.

That is why the RRSP is largely considered the account to use for retirement savings. You contribute when you are making peak income (and get a tax refund). You withdraw when your taxable income is lower in retirement.

A solid stock for a TFSA or RRSP

Both the TFSA and RRSP can help you save tax and build wealth. If I were first starting out investing, I would use the TFSA first almost every time. However, as your wealth grows, the RRSP can be a great tax deferral tool to enhance your overall investing and tax-saving strategy.

If you want to invest tax efficiently for the long term, one stock you might consider holding is WSP Global (TSX:WSP). With 66,500 employees, WSP is one of the largest consulting and professional services firms in the globe. With expertise in environment, engineering, design, and project management, it is helping build the world of tomorrow.

WSP has grown earnings before interest, tax, depreciation, and amortization by a 24% compounded annual growth rate (CAGR) over the past 10 years. The stock has delivered a similar return with a CAGR of 23% (or a 716% total return) over that time period.

As this business scales, it also gets more profitable. As it gets larger, it can offer more services and cross-sell across its business segments. Despite its strong return record, this business and stock could still be a great bet for a long-term TFSA or RRSP.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Robin Brown has positions in WSP Global. The Motley Fool recommends WSP Global. The Motley Fool has a disclosure policy.

More on Stocks for Beginners

A glass jar resting on its side with Canadian banknotes and change inside.
Stocks for Beginners

How to Grow Your TFSA Well Past the Average

Need to catch up quick with your TFSA? Consider some regular contributions to this top bank stock, as well as…

Read more »

An investor uses a tablet
Stocks for Beginners

Prediction: Here Are the Most Promising Canadian Stocks for 2025

Here are three top Canadian stocks that could deliver solid returns on your investments in 2025.

Read more »

Top TSX Stocks

A 6 Percent Dividend Yield Today! But Here’s Why I’m Buying This TSX Stock for the Long Term

Want a great stock to buy? You will regret not buying this TSX stock and its decades of growth and…

Read more »

grow money, wealth build
Dividend Stocks

TELUS Stock Has a Nice Yield, But This Dividend Stock Looks Safer

TELUS stock certainly has a shiny dividend, but the dividend stock simply doesn't look as stable as this other high-yielding…

Read more »

sale discount best price
Stocks for Beginners

Have $2,000? These 2 Stocks Could Be Bargain Buys for 2025 and Beyond

Fairfax Financial Holdings (TSX:FFH) and another bargain buy are fit for new Canadian investors.

Read more »

Rocket lift off through the clouds
Stocks for Beginners

2 Canadian Growth Stocks Set to Skyrocket in the Next 12 Months

Despite delivering disappointing performance in 2024, these two cheap Canadian growth stocks could offer massive upside in 2025.

Read more »

A train passes Morant's curve in Banff National Park in the Canadian Rockies.
Dividend Stocks

1 Magnificent Canadian Stock Down 12% to Buy and Hold Forever

This top stock may be down 12% right now, but don't see that as a problem. See it as a…

Read more »

woman looks at iPhone
Dividend Stocks

Retirees: Is TELUS Stock a Risky Buy?

TELUS stock has long been a strong dividend provider, but what should investors consider now after recent earnings?

Read more »