RRSP and TFSA have different benefits depending the career and life stage that you are. But in general, you should always invest in TFSA first and use the profit to buy RRSP. The main reason is, you are using tax-free income to get tax refund. In another word, you are getting refund on money that you have earned through investment appreciation. Who doesn't like free money?
Lets see what the difference is. Assuming both TFSA and RRSP gained 30% annually and a 30% tax rate. In example A, we buy RRSP first and in example 2, we buy TFSA first.
Example A (RRSP first)
($10,000 initial deposit) x 0.3 (assume 30% tax rate) = 3000 tax refund
($10,000 initial deposit) x 1.3(gain) + 3000 (tax refund) = 16,000
Example B (TFSA first)
($10,000 initial deposit) x 1.3 = 13,000 TFSA Balance
Purchase RRSP with 10,000 from TFSA
($10,000 initial deposit) x 0.3 (assume 30% tax rate) = 3000 tax refund
($10,000 initial deposit) x 1.3(gain) + 3000 (tax refund) + 3000(remaining TFSA balance) = 19,000
The difference is +19% by investing in TFSA first. Over the next few years, these differences will compound and contribute to your overall net-worth.
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