Understanding Your Options

Canada offers two powerful tax-advantaged accounts for building wealth: the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP). For Gen Z starting their investment journey, knowing which to use first can mean thousands of dollars in difference over a lifetime.

The TFSA: Flexibility First

The TFSA is the most versatile account. Contributions are after-tax, but all growth โ€” dividends, capital gains, interest โ€” is completely tax-free. You can withdraw anytime without penalties, and contribution room resets the following year. For 2026, the contribution limit is $7,000.

The TFSA is ideal for medium-term goals (5-10 years) and for young people who expect to be in a higher tax bracket in the future. Since you contribute after-tax money now, you benefit most when your marginal tax rate is lower today than it will be at retirement.

The RRSP: Tax Deferral

RRSP contributions reduce your taxable income now, but withdrawals are taxed as income in retirement. This makes sense if you are in a high tax bracket today and expect to be in a lower one at retirement.

For most Gen Z Canadians early in their careers with lower incomes, the TFSA is usually the better first choice. You can always move money to an RRSP later when your income increases.

The Strategy

Max out your TFSA first. Use low-cost index ETFs like VEQT or XEQT for diversification. Once you are earning a higher income (over $70,000 annually), start contributing to your RRSP to get the tax deduction. This approach optimizes your tax situation both now and in the future.