Which Account Should You Fund First?

Last week we went through the three registered accounts: the TFSA, the RRSP, and the FHSA. Knowing what each one does is the easy part. The harder question is which one to prioritize first, since most people can't max all three at once.

There's no single right answer, because it depends on your income and your goals. But there's a sensible order that works for most situations, and a few questions that tell you how to adjust it.

First, the stuff that comes before any account

Two things outrank all three accounts, and we covered them earlier in this series. Pay off high-interest debt first, because clearing a 20% credit card beats any return you can count on from investing. And keep a small emergency fund in cash, so the first surprise doesn't undo your progress. With those handled, the account question is worth asking.

Take the employer match before anything else

If your employer matches RRSP contributions, that comes first, ahead of every other account. A match is an instant return you can't get anywhere else. If they add 50 cents for every dollar you put in, that's a 50% return before your money has even been invested. Contribute at least enough to get the full match, then move on to the rest.

Then it comes down to two questions

Once the match is handled, there are two questions you need to ask yourself to help you decide where your money should be going.

Are you saving for a first home? Start with the FHSA

The FHSA gives you the deduction going in, tax-free growth, and a tax-free withdrawal for the home, and if you end up not buying, the money rolls into your RRSP instead. There's very little downside, which is why it usually comes first for anyone who might buy. This is the account my wife Katelyn and I are filling first, because a first home is our main goal right now.

After that, your income decides whether to choose the TFSA or RRSP

The TFSA and the RRSP both shelter your investments from tax, but they do it at opposite ends. The RRSP gives you the deduction now and taxes you later. The TFSA gives you no deduction now but never taxes you again.

That difference is really about your tax rate. The RRSP is most valuable when your income is high, because the deduction saves you tax at a high rate today, and you'll likely withdraw at a lower rate in retirement. If your income is lower, that deduction isn't worth much, and the tax-free TFSA usually makes more sense. Two questions point you the right way: what's your tax rate today, and how much do you expect to be spending in retirement, which sets the rate you'll pay when you take the money out? If your rate is higher now than it will be then, the RRSP has the edge. If it's about the same or lower now, the TFSA usually wins.

There's more nuance to it than this, but when you're starting out, what matters most is getting going, not getting every dollar in the perfect account.

Flexibility cuts both ways. The TFSA lets you withdraw any time, tax-free, for any reason, which an RRSP doesn't. If you value being able to reach your money, that can be reason enough to put the TFSA ahead, even when the RRSP looks a little better on paper. But that same flexibility can be a trap. Because the money is so easy to get at, some people end up pulling from their TFSA for things they didn't really need. An RRSP locks your money up a little more, and for some people that friction is a feature, because it helps the money stay put for retirement.

If you're not sure where you land, the TFSA vs RRSP calculator on the site compares the two at your own tax rate.

A simple default order

Putting it together, a reasonable order for many people looks like this:

Pay off high-interest debt and build a small emergency fund.
Contribute enough to get any employer RRSP match.
If a first home is a goal, fund the FHSA.
Fill your TFSA, or your RRSP first if you're in a higher tax bracket.
Once those are full, keep going in a regular taxable account.

Treat that as a starting point, not a rule. Someone earning a high income with no plans to buy a home might put the RRSP ahead of the TFSA. Someone at a lower income saving for a house might pour everything into the FHSA and TFSA and leave the RRSP for later. The order bends around your situation, which is the whole point.

What's next

Knowing which account to fund still leaves the biggest question of all: what do you put inside it? Next week we'll get into what can go inside these accounts, things like stocks, bonds, GICs, and the rest. You can run your own numbers anytime with the calculators at smallbirdfinancial.ca.

This is general financial education, not individual advice. The right order depends on your own income, goals, and tax situation, so check with a qualified professional about yours.