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TFSA, RRSP or FHSA: which is right for you?

When you’re just starting out, some of the most common ways to save are TFSAs, RRSPs and FHSAs. And that leads to two of the most common investment questions: “What’s the difference between FHSA, RRSP and TFSA accounts?” and “Should I choose a TFSA, RRSP or FHSA?” The fact is, these plans offer tax advantages and opportunities for growth. Understanding the differences is what will help you decide – and make the most of your savings.

Whether you start with an FHSA, RRSP or TFSA depends on factors like your reason for saving, your time horizon, and your current and future tax rates. Below we offer an in-depth comparison to help you make the right call.

The basics

In general terms, Registered Retirement Savings Plans (RRSPs) are well suited to those who want to save for their retirement, their first home or to further their education. Tax-Free Savings Accounts (TFSAs), meanwhile, are geared towards all kinds of investors, especially long-term investors looking to minimize their tax liability by sheltering assets within the TFSA for as long as possible. The longer you save using this account , the more the account’s benefits kick-in. First Home Savings Accounts (FHSAs) are a relatively new type of registered account, introduced by the Federal Government specifically to help Canadians save for the purchase of their first home.

The comparison

The major difference between these account-types centres around tax implications. RRSPs offer a tax deduction when you contribute, but you have to pay tax when you withdraw the money. TFSAs offer no up-front tax break, but you don’t pay tax on any withdrawals, including growth. FHSAs allow potential first-time home buyers to make tax deductible contributions on savings for their first home, similar to an RRSP. And, like a TFSA, any income, and capital gains inside the FHSA, as well as withdrawals toward the down payment of a first home, are tax-free.

Therefore, earnings within these accounts grow tax-sheltered, which helps you reach your savings goals faster than a simple savings account. These accounts also allow you to carry forward unused contribution room (up to $8000). But beware: all three have penalties for over-contributing.

Here are important factors to consider when choosing a TFSA, RRSP or FHSA
When did the federal government establish the account? 2009 1957 2023
What are the age restrictions? Anyone 18+ can open an account. Anyone up to age 71,1 with earned income and a filed tax return can open an account. At least 18 years of age, and not turning 72 or older in the year.
Are contributions tax deductible? No Yes Yes
Are withdrawals for home purchases non-taxable? Yes Yes, under the RRSP Home Buyers Plan
What are the annual contribution limits? $8,000
Can you carry unused contribution room forward? Yes Yes Yes, up to $8,000
What are the penalties for over contributing? Penalty tax of 1% per month on the excess funds. Penalty tax of 1% per month on the excess funds. Penalty tax of 1% per month on the excess funds.
What are the tax advantages? Your money grows tax-free; you pay no tax on withdrawals. Your money grows tax-sheltered, with taxes deferred. Contributions are tax deductible and can be deferred for a future tax break. Your money grows tax-free; contributions are tax deductible; you pay no tax on withdrawals toward the down payment of a first home.
What are the tax disadvantages? Contributions are not tax deductible. You must pay tax on withdrawals.  
What are the withdrawal rules? At any time and for any purpose. Withdrawals are taxed as income unless used for your first home or continued education. You must convert the funds to a RRIF or annuity by age 711 and pay tax on income you withdraw. The qualifying home must be in Canada. You must be a resident in Canada from the time of the withdrawal to the acquisition of the qualifying home, and a first-time home buyer when they make the withdrawal. There must be a written agreement to buy or build a qualifying house before October 1 of the year following the withdrawal. You must intend to occupy the house as a principal residence within one year after buying or building.
Can withdrawals be redeposited? Yes; after a withdrawal, contribution room is adjusted and readded in the next year. No, unless related to the Lifelong Learning Plan or Home Buyers’ Plan. If there are funds left over after making a withdrawal, this can be transferred to another FHSA, RRSP, or RRIF on a tax-free basis, before the end of the year following the calendar year when the first qualifying withdrawal was made. Transfers do not reduce or limit the available RRSP contribution space. Once transferred, the funds are subject to the applicable rules of the receiver’s account(s).
Can you name a beneficiary or successor? Yes Yes You can designate your spouse or common-law partner as the successor, in which the account may maintain its tax-exempt status.
Can you benefit by contributing to your spouse’s account? No. TFSA accounts belong to individuals. Yes. You can contribute in your spouse’s name and enjoy a tax benefit. No. You are not permitted to contribute to your spouse’s FHSA and claim a deduction.
  1. You can contribute to your own RRSP until Dec. 31 of the year that you turn 71. You can contribute to a spousal RRSP until Dec. 31 of the year that your spouse turns 71. RRSPs must be converted to a Registered Retirement Income Fund (RRIF) by Dec. 31 of the year that you turn 71.
  2. The RRSP Home Buyers Plan (HBP) is a program that allows you to withdraw up to $60,000 (lifetime limit) from your registered retirement savings plan (RRSPs) to buy or build a qualifying home for yourself, or for a related person with a disability. To withdraw $60,000 using the HBP, the RRSP must have sufficient assets in the account. RRSPs are dependent on the cumulative permitted annual employee and employer contributions calculated as a function of the employee’s earnings.
  3. Anyone who was 18 or older in 2009, and has not yet contributed, will have $95,000 of contribution room available in 2024.
  4. Since unused contribution room carries forward, you may be eligible to contribute more than the annual maximum. To find out your individual RRSP limit for the current year, check your most recent Notice of Assessment from Canada Revenue Agency (CRA). Annual contribution limits are also reduced by any existing pension adjustments from an employer-sponsored pension plan. Your limit may be less than 18% if you contribute to a company pension plan.

Wait! Why not invest in all of these accounts?

Good question. Since these plans provide tax-sheltered growth, maximizing your allowable contributions – if you’re able – can help you reach your savings goals that much faster. But, if you’re not a first-time home buyer, and investing in multiple accounts isn’t realistic, it comes down to RRSPs and TFSAs. Here’s how to know which account you should you open first.

TFSA vs RRSP: the choice

Ultimately, the best way to choose an RRSP or TFSA is to compare your current marginal tax rate (the percentage of income tax you pay each year) to the rate you expect to pay in retirement. This involves a little thinking and calculating, but it can help you save a lot of money.

First, get a sense of how you want to live in retirement. Do you want to travel, learn new skills, indulge in hobbies? Or are you content to maintain or lessen your current standard of living? Second, estimate how much your retirement plans, along with your regular living expenses, will cost each year. Third, when you have an idea of your annual retirement income needs, check to see how much tax you’ll pay. Remember to include both federal and provincial taxes. For example, compared with your current tax rate, do you predict that you’ll have:

  • a lower tax rate in retirement? You may want to start with an RRSP.
  • a higher tax rate in retirement? You may want to start with a TFSA.
  • the same tax rate in retirement? You may want to start with a combination of the two, even if you’re not maximizing your annual contribution limits.

Try our retirement savings calculator to get a better idea of how much you’ll need to  save to live the life you want in retirement.

With a better idea of how RRSP and TFSA accounts compare, what’s your next move?

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