Most Canadians Pick the Wrong First Investing Account in Canada: Don't Be One of Them

The Account Order That Actually Matters

Most Canadians open an RRSP as their first investing account, drawn by the immediate tax deduction and the idea that retirement savings should come first. For the majority of Canadian investors, especially those early in their careers or earning under $50,000 annually, this is backwards. The TFSA (Tax-Free Savings Account) is almost always the better first choice, offering flexibility, tax-free growth, and room to build both emergency savings and investments without locking your money away until retirement.

Why the First Account You Choose Matters

The sequence in which you open investing accounts shapes your financial flexibility and your lifetime tax bill. Once you contribute to an RRSP, that money is effectively locked until retirement (withdrawals trigger income tax and permanent loss of contribution room). Once you max out a TFSA, you need to wait until the next calendar year to regain that room. Your first account sets the foundation for how accessible your money is, how much tax you pay, and how quickly you can pivot if life changes.

According to the Canada Revenue Agency, TFSA contribution room is $7,000 for 2024, with unused room carrying forward indefinitely. RRSP contribution room is 18% of your prior year’s earned income, up to an annual maximum set by the CRA each year, also carrying forward. Many Canadians reflexively choose the RRSP first because the tax deduction feels like an immediate win, but that deduction is worth far less when your income (and marginal tax rate) is low.

TFSA as Your First Account: Flexibility and Tax-Free Growth

The TFSA is a registered account where contributions are made with after-tax dollars, but all growth (interest, dividends, capital gains) and all withdrawals are completely tax-free. You can hold the same investments in a TFSA as in an RRSP: GICs, bonds, stocks, ETFs, mutual funds.

Advantages of starting with a TFSA:

Tax-free forever: You never pay tax on investment gains or withdrawals, no matter how large the account grows.
Withdrawal flexibility: You can pull money out anytime for any reason, and the full withdrawn amount returns to your contribution room the following calendar year. This makes the TFSA ideal as a hybrid emergency fund and investing account.
No impact on government benefits: TFSA withdrawals do not count as income, so they do not trigger OAS clawback or affect income-tested benefits.
Low-income advantage: When your income (and tax rate) is low, the RRSP deduction saves you little. The TFSA’s tax-free compounding becomes far more valuable over decades.

Who should open a TFSA first:

Canadians earning under $50,000 annually (your marginal tax rate is relatively low, so the RRSP deduction is worth less now than it will be when your income rises).
Anyone without a fully-funded emergency fund (the TFSA lets you invest while keeping money accessible).
Investors who expect their income to rise significantly in the future (you can save RRSP room for later, when the deduction is worth more).
Anyone who values flexibility and may need access to funds before retirement.

Drawbacks:

No immediate tax deduction (you contribute with after-tax money).
Annual contribution limit is fixed ($7,000 in 2024), so high earners may want the larger RRSP contribution room available to them.

RRSP as Your First Account: When the Tax Deduction Wins

The RRSP is a tax-deferred account: contributions reduce your taxable income now, and you pay tax on withdrawals in retirement (when, ideally, your income and tax rate are lower).

Advantages of starting with an RRSP:

Immediate tax deduction: If you earn $80,000 and contribute $10,000 to an RRSP, you reduce your taxable income to $70,000, potentially saving $3,000 to $4,000 in tax (depending on your province and marginal rate).
Larger contribution room for high earners: 18% of a $100,000 income is $18,000, far more than the $7,000 TFSA limit.
Forced retirement discipline: Once money is in an RRSP, the tax cost of early withdrawal discourages spending, which can be helpful if you struggle with saving discipline.

Who should open an RRSP first:

Canadians earning above $90,000 annually (your marginal tax rate is high enough that the deduction provides substantial immediate savings).
Those with a separate, fully-funded emergency fund held outside the RRSP (so you do not need to access retirement money early).
Older investors with fewer years to retirement and high current income (the tax arbitrage works better when you contribute at a high rate and withdraw at a lower rate soon after).

Drawbacks:

Locked until retirement: Early withdrawals trigger income tax and permanent loss of contribution room (except under the Home Buyers’ Plan or Lifelong Learning Plan, which have repayment requirements).
Taxed on withdrawal: Every dollar you pull from an RRSP in retirement is added to your income and taxed at your marginal rate.
OAS clawback risk: Large RRIF withdrawals in retirement can push your income over the OAS clawback threshold (roughly $90,000 in 2024), reducing your Old Age Security benefit.

The Third Option: Taxable (Non-Registered) Accounts

A taxable account is any investment account held outside the TFSA or RRSP. You pay tax on interest, dividends, and capital gains annually (or when realized). This is almost never the right first account, but it becomes necessary once you have maxed both your TFSA and RRSP contribution room.

When to use a taxable account:

You have maxed your TFSA and RRSP and still have money to invest.
You are saving for a goal with a timeline between emergency (use TFSA) and retirement (use RRSP), and you have already filled both registered accounts.

Comparison Summary

Feature	TFSA First	RRSP First	Taxable Account
Tax on growth	Tax-free forever	Tax-deferred until withdrawal	Taxed annually
Tax on withdrawal	None	Full amount taxed as income	Only gains taxed
Contribution room (2024)	$7,000 annual, cumulative	18% of prior income, cumulative	Unlimited
Withdrawal flexibility	Anytime, room returns next year	Early withdrawal taxed + permanent room loss	Anytime
Best for	Low to moderate income, need flexibility	High income, locked retirement savings	After maxing TFSA + RRSP

The Right Sequence for Most Canadians

Step 1: Open a TFSA and build a combined emergency fund and starter investing account. Hold 3 to 6 months of expenses in a high-interest savings account (HISA) within the TFSA, and invest the rest in low-cost index ETFs on the TSX (such as VEQT, XEQT, or a balanced ETF).

Step 2: Once your TFSA is maxed and your income rises (typically above $70,000 to $90,000), begin contributing to an RRSP to capture the larger tax deduction.

Step 3: When both registered accounts are maxed, move additional savings into a taxable account.

The foundational principle, as covered in Principles of Finance, is that tax-advantaged compounding over decades creates wealth far more effectively than taxable growth. The choice between TFSA-first and RRSP-first hinges on your current income, your timeline, and your need for flexibility.

Common Mistakes to Avoid

Opening an RRSP first because “retirement is important”: Retirement is important, but the TFSA is also a retirement account. The label “savings account” is misleading. Both are investing vehicles.
Assuming the RRSP deduction is always better: A $5,000 RRSP contribution saves you roughly $1,500 if your marginal rate is 30%, but only $1,000 if your rate is 20%. The tax-free TFSA often wins when rates are low.
Ignoring contribution room strategy: If you expect your income to double in five years, saving your RRSP room for later (when the deduction is worth more) and maxing your TFSA now is often smarter.

Conclusion

Most Canadians pick the RRSP first because it sounds like the responsible, adult choice. For the majority, especially those earning under $50,000 or without a fully-funded emergency fund, the TFSA is the better foundation. It offers tax-free growth, complete flexibility, and the ability to serve as both emergency savings and long-term investing in one account. Once your income rises and your TFSA is maxed, the RRSP becomes the logical next step. The right sequence is not the one that sounds most impressive, it is the one that matches your income, your flexibility needs, and your tax situation today.

This information is educational and does not constitute financial, tax, or investment advice. TFSA and RRSP contribution limits change annually; confirm current limits on the CRA website before contributing. Consult a Certified Financial Planner (CFP) or Chartered Professional Accountant (CPA) for advice tailored to your personal situation.