FHSA vs TFSA vs RRSP: A guide to getting the most from your money
Choosing between an FHSA, a TFSA, and an RRSP
One of the most common questions investors have is: Should I invest with a First Home Savings Account (FHSA), a Tax-Free Savings Account (TFSA), or a Registered Retirement Savings Plan (RRSP)? Good news – you can absolutely invest in all three. Each of these options offer great ways to save for different goals at the same time.
But if you want to start with just one, or if you already have accounts set up and you’re wondering where to contribute first, understanding the differences between an FHSA, a TFSA, and an RRSP is key.
What’s the difference between an FHSA, a TFSA, and an RRSP?
| FHSA | TFSA | RRSP | |
|---|---|---|---|
Primary goal | Save for a down payment, to purchase a home | General savings | Save for retirement |
Eligibility to open | Canadian residents with a SIN who are at least age 18 (and the age of majority in their province) and under age 71. Applicants, spouses and/or common-law partners haven’t owned a home where they live in the current calendar year or at any time in the preceding four calendar years. | Canadian residents with a SIN who are at least age 18 and older. | Canadian residents with a SIN who are under age 71, have earned income, and file a tax return in Canada. |
Biggest benefit | Contributions are tax-deductible, and your savings grow tax-free1. Withdrawals to purchase a qualifying home are tax-free2 and do not need to be repaid. These benefits help you get closer to home ownership, faster. | Savings grow tax-free. Interest, dividends, or capital gains from any investments and savings in the account are tax-free. That means the government doesn’t tax you on your earnings - it’s all yours. | Contributions are tax-deductible. In other words, if you make $65,000 this year but add $10,000 to your RRSP throughout the year, you'll be taxed as if your income was $55,000 this year. Funds may be withdrawn under the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP). |
Contribution limit | The contribution limit is set at $8,000 each year, to a lifetime maximum of $40,000. Unused contribution room at the end of the year, up to a maximum of $8,000, may be carried forward to use in the following year. | For the 2024 taxation year, the contribution limit has been set to $7,000. Unused contribution room is carried forward from previous years. | For the 2024 taxation year, the annual limit is 18% of the earned income you reported on your tax return in the previous year, up to a maximum of $31,560. Unused contribution room is carried forward from previous years. |
Tax implications | Eligible contributions are tax-deductible1 (except on transfers into your FHSA from your RRSP/RRIF, although these transfers do use up FHSA contribution room). Any non-qualifying withdrawals will be taxed. | You don’t pay tax on money you withdraw from your account, or on interest, dividends, or capital gains your investments earn inside the account. Unlike an RRSP, you won’t get a tax deduction for contributions. | Contributions to your RRSP are tax deductible. You don’t pay tax on interest, dividends, or capital gains your investments earn, as long as they stay in the plan. You will pay tax on withdrawals. |
Withdrawal rules | When you’re ready to withdraw money from your FHSA for a qualified home purchase, you can do so without being taxed. Non-qualifying withdrawals can be made any time, but will be subject to income tax. | You can withdraw as much as you want, any time, and it’s exempt from tax. There may be some exceptions to this. Withdrawals made from your TFSA throughout the year can only be added back as contribution room at the beginning of the following year. | You can withdraw as much as you want, any time, but it’s subject to income tax. There are some exceptions to this. Also, withdrawals don’t give you contribution room back unless you’re using the RRSP for the government’s Home Buyers' Plan or Lifelong Learning Plan. |
Investment options | High Interest Savings Account, GICs, mutual funds, ETFs, bonds, stocks | High Interest Savings Account, GICs, mutual funds, ETFs, bonds, stocks | High Interest Savings Account, GICs, mutual funds, ETFs, bonds, stocks |
Plan expiry | Your FHSA can remain open for up to 15 years, until the end of the year you turn 71, or until the year following your first qualifying withdrawal, whichever comes first. | Never expires. You can keep a TFSA open regardless of your age. | In the year you turn 71, you’ll need to either cash out your RRSPs or convert them to a RRIF or LIF. |
When should you start investing in a tax-free savings account?
The answer to “when should I start investing” is always: as early as possible! When you put off investing, you lose out on earning more interest and add the stress of scrambling to reach your savings goals.
While there is no minimum age required to open an RRSP, you must be at least 18 years of age to open a FHSA or TFSA. Get started with these tips for choosing the right account for you.
Save for your first home, faster, with an FHSA
An FHSA is a new registered account that makes it easier to save for a down payment on your first home. The FHSA has similar tax benefits to RRSPs and TFSAs. Like an RRSP, your FHSA contributions are tax-deductible and will grow tax-free1. Like a TFSA, you can make tax-free withdrawals2 from your FHSA for qualified purchases. These benefits mean more of your savings will go directly towards your home savings.
Good reasons to invest in an FHSA
- You’re just starting out and want to build a nest egg to help towards the purchase your first home, when the time comes.
- You’re working towards home ownership and know that tax-free contributions and withdrawals will maximize the savings you can put towards your home.
- You have an RRSP in place for retirement savings, but also want tax-friendly savings to help you with your first home purchase.
- You want to remain flexible, knowing that you may not need all of your FHSA savings by the time you become a homeowner. For example, if you marry or move in with someone who already owns a home, you can transfer any unused portion of your FHSA to your RRSP or RRIF, tax-free.
- You want to take advantage of both the FHSA and the government’s Home Buyer’s Plan (HBP). While the FHSA allows you to make tax-free contributions, to a lifetime maximum of $40,000, the HBP allows you to borrow up to $35,000 tax-free, from your RRSP. To explore the differences between these programs, see FHSA vs Home Buyers' Plan.
Save for anything with a TFSA
A TFSA is a great choice if you’re saving for a goal earlier than retirement. In some cases, you can use it for retirement savings too. A TFSA doesn’t have the same tax benefits as an RRSP, but it’s more flexible because you can withdraw money any time without paying tax on it and the money you invest is growing tax-free. With a regular non-registered savings or investment account, you’d be taxed on whatever interest or gains you earn.
Good reasons to invest in a TFSA
- You’re just starting out when it comes to savings and not making much money right now (less than $50,000 a year), so you won’t really benefit from the tax perks of an RRSP.
- You’re investing to save for a goal that’s earlier than retirement – like a wedding, down payment on a new home, emergency fund, new car, etc.
- You expect to use some of your savings soon and you don’t want to pay tax on the money you withdraw.
- You’re investing for retirement, you expect your salary to go up significantly soon, and you want to use your TFSA contribution room now so you have more room to contribute to an RRSP later, when you want to take advantage of greater tax benefits.
- You usually max out your RRSP contribution room and you want another option for tax-sheltered savings.
Save taxes while saving for retirement
The money you add to your RRSP is tax-deductible. This means that for every dollar you place into an RRSP, you can take a deduction against that year’s income. This means you could get a higher tax refund that you can invest right back into your RRSP or TFSA. So to get the most out of your RRSP, contribute to it when your income is higher and withdraw from it when your income is lower (like when you’re retired).
Good reasons to invest in an RRSP
- You’re investing to build savings for retirement and you’re currently in a higher tax bracket (if you’re making more than $50,000 a year, for example).
- If you make more than $50,000 a year, you’re investing to build savings for your first home and you plan to use your RRSP as part of the Canadian government’s Home Buyers’ Plan (HBP). If you meet certain conditions, the HBP allows you to withdraw up to $35,000 tax-free to put towards the purchase of a qualifying home and pay back the withdrawn funds within a 15-year period.
- If you make more than $50,000 a year, you’re investing to build savings for your own education, and you want to use your RRSP as part of the Canadian government’s Lifelong Learning Plan (LLP).
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