Like RRSPs, TFSAs offer tax incentives to save and invest for long-term goals. They’re very different, however, in how those taxes apply and when you can access the money.

TFSA contributions are not tax-deductible, but withdrawals are completely tax-free. This can make a TFSA a good choice for short-term savings needs like vacations, emergency funds and down payments on new homes. You can hold cash or invested investments within a TFSA.

An RRSP is more typically used for retirement savings. RRSP contributions generate a tax deduction now, and withdrawals in retirement are taxed at a much lower rate than income in peak earning years. Read more ex-ponent.com

There are other reasons to use an RRSP, such as for education (the Lifelong Learning Plan) or for a down payment on your first home under the Home Buyers’ Plan. You can also borrow against your RRSP.

The best approach depends on your financial situation, including your tax bracket now and in retirement. In general, it’s usually recommended that you prioritize RRSP contributions during your peak earning years. This lets you take advantage of a higher tax deduction rate, and you can switch to a TFSA once your taxable income drops to a lower level again.

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Depending on your personal circumstances, it may be more appropriate to save in a TFSA than an RRSP. In this scenario, you can withdraw the funds whenever you want, and you’ll never pay tax on them again. It can be a great option for people with variable income, and who aren’t sure what their tax rate will be in the future.