I had this conversation on a couch this past weekend, with my daughter.
She works. She owns her condo. She had some money to direct and asked me the same question almost everyone asks eventually: does this go into the RRSP, the TFSA, or against the mortgage?
I've been answering that question since 2009, the year the TFSA arrived and turned a two-way decision into a three-way one. It was harder sitting on her couch, because she didn't want a framework. She wanted an answer. So here is what I told her, and, more usefully, how I got there.
Before the three-way choice: the match
If your workplace plan has an employer match and you aren't contributing enough to collect all of it, stop reading and fix that first.
Nothing in the rest of this note competes. A fifty-cent match on your dollar is an immediate fifty percent return, before the money is invested in anything. No mortgage rate and no tax deduction comes close. Collect the match in full, then the real question starts.
The three inputs that decide it
Everything else turns on three things.
Your marginal tax rate today, versus the rate you expect in retirement. This is the entire RRSP argument, and the gap between those two rates (not the rate itself) is what you're actually deciding about. An RRSP contribution is deducted at the rate you pay today and taxed at the rate you pay when you withdraw. Deduct at 40% and withdraw at 25% and you've kept a fifteen-point spread. Deduct at 25% and withdraw at 25% and you've deferred tax without gaining much. Combined federal and provincial rates run from roughly 20% on modest income to the high forties and low fifties at the top, and the thresholds differ in every province, so the only rate that matters here is yours.
Your mortgage rate. Paying down a mortgage is a guaranteed, risk-free, after-tax return equal to your rate. That's a real hurdle and it deserves respect. Today a five-year fixed sits around 4.3–4.4%, variable nearer 3.3–3.4%. A guaranteed 4.4% is good. A guaranteed 3.3% is a lower bar than it was two years ago.
Whether you'll actually leave it alone. The least discussed input and often the decisive one. A TFSA is easy to withdraw from; that's its strength and its weakness. An RRSP is harder to raid. A mortgage payment is gone for good. If you know you'd spend it, choose the option you can't easily reverse.
Why her order came out RRSP, TFSA, mortgage
For her, in her circumstances, the order was RRSP first, TFSA second, mortgage last.
The reasoning is mostly input one. Her marginal rate today sits well above anything she can reasonably expect to pay in retirement, so each RRSP dollar buys a real spread rather than a simple deferral. That spread is wide enough that a guaranteed mortgage return in the low fours doesn't come close to it. And she has decades ahead of her, which is the one input you can never buy back later.
When the order flips
TFSA first, if you're early in your career and expect to earn considerably more later. Taking a deduction at 20% today to pay 40% on withdrawal is a bad trade. Fill the TFSA, and keep the RRSP room; it doesn't expire.
Mortgage first, if you're renewing into a materially higher rate, if you're close to retirement and want the certainty of a smaller fixed cost, or if the debt is genuinely keeping you up at night. A guaranteed return and a good night's sleep are both worth something.
Whichever you won't touch, if the honest answer is that the refund would be spent. That settles it.
The part that actually matters
Her case is a clear one, and most aren't. A wide tax spread, a low mortgage rate and thirty years of runway is the easy end of this question. Move any one of those toward the middle and the three options get much closer together.
So there is a right order. It just isn't the same order for everyone, and anyone who gives you a universal answer hasn't asked you enough questions.
But I'd rather you did any of the three than spent another year deciding. The gap between the best of these choices and the second-best is usually a fraction of a percent a year. The gap between doing one of them and doing nothing is the whole thing.
My daughter picked an order and optimized her contributions before I left. That was the part that mattered.
Brian Prokop, P.Eng., CFA, is CEO, Ultimate Designated Person, Chief Compliance Officer and an Advising Representative of LINK Plan Management Inc., a registered portfolio manager and a wholly owned subsidiary of LINK Investment Management Inc., which provides workplace savings solutions to companies and distribution partners.
This is general information and education only: not investment, tax or legal advice, and not tailored to any individual's circumstances. Plan features, contribution limits and tax treatment vary by plan and province; confirm your own details with your plan administrator. Figures are current as at the date of publication and may change. Examples are illustrative and are not forecasts or guarantees.