If you find yourself with some extra cash—whether from a tax refund, a bonus, or simply good budgeting—you’re likely wondering where it should go. Should you invest in your RRSP, grow your TFSA, or focus on paying down debt? Each option has its own advantages, and the right choice depends on your financial goals, tax situation, and comfort with risk. Here’s how to decide which path makes the most sense for you.
Understanding Your Options
Before comparing strategies, it’s helpful to understand what each option offers.
RRSP (Registered Retirement Savings Plan)
An RRSP is a tax-deferred retirement account. Contributions are tax-deductible, meaning you can lower your taxable income in the year you contribute. Your investments grow tax-free until you withdraw them—usually in retirement, when your income and tax rate are lower.
RRSPs are ideal for long-term retirement savings and can help reduce your annual tax bill. However, withdrawals are fully taxable as income, so the money is best left untouched until retirement.
TFSA (Tax-Free Savings Account)
A TFSA allows your investments to grow tax-free, and withdrawals are not taxed at all—even on the gains. Unlike the RRSP, contributions are not tax-deductible, but the flexibility of tax-free withdrawals makes the TFSA excellent for both short-term goals (like a home purchase or emergency fund) and long-term investing.
In 2025, the annual TFSA contribution limit is $7,000, and if you’ve been eligible since 2009 and never contributed, you could have over $95,000 in available room.
Paying Down Debt
Paying off debt doesn’t earn “interest” the same way an investment does—but it can provide a guaranteed return. For example, if your credit card charges 19% interest, paying it off is equivalent to earning a risk-free 19% return. Even lower-interest debts, like a mortgage or student loan, can provide peace of mind and financial flexibility when reduced.
Step 1: Evaluate Your Debt Situation
The first step in deciding where to put extra cash is to analyze your debts.
- High-interest debt (over 10%) should almost always come first. Paying off credit cards or payday loans provides an immediate, guaranteed return.
- Moderate-interest debt (5–10%), such as car loans or personal loans, may be balanced with investing if you have a strong emergency fund and RRSP/TFSA room.
- Low-interest debt (under 5%), such as many mortgages or student loans, may not be as urgent to pay off—especially if your investments can potentially earn higher returns.
The peace of mind that comes from being debt-free is invaluable, but the math often favours investing once high-interest debt is under control.
Step 2: Consider Your Tax Bracket
Your tax rate plays a major role in the RRSP vs. TFSA decision.
- If you’re in a higher tax bracket, RRSP contributions are particularly beneficial because you’ll receive a significant tax refund now and likely pay lower taxes in retirement.
- If you’re in a lower tax bracket, a TFSA often makes more sense. You won’t gain much from the RRSP deduction today, and the TFSA’s tax-free withdrawals provide more flexibility later.
A popular strategy is to contribute to your RRSP, receive the tax refund, and then reinvest that refund into your TFSA—maximizing both accounts.
Step 3: Align With Your Goals
Your financial goals should ultimately guide where your extra money goes.
- Short-term goals (under 5 years): The TFSA is ideal since it allows for tax-free growth and penalty-free withdrawals.
- Medium-term goals (5–15 years): A mix of TFSA and RRSP can work well, especially if you’re planning for major life milestones like buying a home or funding education.
- Long-term goals (retirement): Prioritize your RRSP, especially if your employer offers a matching contribution—that’s free money you don’t want to leave on the table.
If you’re close to retirement and have little debt, focus on building tax-efficient retirement income through both your RRSP and TFSA.
Step 4: Don’t Forget Emergency Savings
Before investing or aggressively paying off debt, make sure you have an emergency fund—ideally covering three to six months of expenses. A TFSA is perfect for this because you can withdraw funds at any time without penalties or tax consequences.
Having this cushion protects you from needing to rely on high-interest credit if unexpected expenses arise.
Step 5: Combine Strategies for the Best Results
You don’t have to pick just one option. In fact, many Canadians benefit from a balanced approach:
- Eliminate high-interest debt first.
- Build or top up your emergency fund in a TFSA.
- Invest for retirement through RRSP and TFSA contributions.
- Pay extra on low-interest debt if it aligns with your comfort level and financial goals.
For example, you might direct 50% of your extra cash toward debt repayment and 50% into your RRSP or TFSA—adjusting the balance based on interest rates, tax savings, and your personal priorities.
Final Thoughts
Deciding whether to put extra cash into your RRSP, TFSA, or debt repayment isn’t a one-size-fits-all choice. It depends on your tax situation, interest rates, time horizon, and risk tolerance.
If you’re carrying high-interest debt, tackle that first. If your debt is manageable, focus on maximizing the tax advantages of your RRSP and TFSA.
When in doubt, consulting a financial advisor or accountant can help you create a personalized strategy that aligns with both your short-term needs and long-term goals.
Smart money management isn’t about choosing one perfect option—it’s about balancing priorities so your money works hardest for you.