Why TFSA before RRSP?

The idea is that the tax free growth from the TFSA is a greater advantage than the tax differential gained from the RRSP. So if over 20 years your $1000 portfolio grows 100% (4% over 20 years will beat this), your current tax bracket is 35%, and your eventual top retirement tax bracket is 25%.

TFSA tax = 1000 x 35% = $350 tax
RRSP tax = 1000 x 200% x 25% = $500 tax

So you can see where the argument comes from. Depending on what province you are in and what tax bracket you are in now vs when you expect to retire, and how long you have until retirement, there's the potential to make more in the TFSA if invested in early on.

If you have a heafty pension plan incoming (or expect to) that may boost you to a higher bracket when you're withdrawing the RRSP (makes RRSP worse). If you're closer to retirement you also have less growth potential in your TFSA to offset the tax benefit of the RRSP (makes RRSP better).

Other factors are the flexibility of a TFSA and the unknown element of what future income tax rates may actually work out to be.

/r/CanadianInvestor Thread Parent