Investing - RRSP vs. TFSA vs. FHSA

You’ve recently completed your work term and are looking to invest in stocks or bonds. Should you put your money in a Tax Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP)? Or perhaps you’re interested in Canada’s new First Home Savings Account (FHSA) that will start April 1, 2023?

In contrast to regular investment accounts, the TFSA, RRSP, and FHSA are all “tax-sheltered” accounts meaning you are not taxed on the growth of your investments in the accounts. However, there are several differences between them that may affect your decision.

Account TFSA RRSP FHSA
Who can open one? Must be over 18 years old and a resident of Canada

Anyone who is a Canadian resident

 Must be over 18 years old and a resident of Canada that has not purchased a home in which you have lived in as a principal place of residence.
Contributions Limited to the TFSA contribution limits beginning when you become 18 and any unused contribution room.

For example, if you turn 18 in 2023, you would have $13,000 of available contribution room in 2023. If you turned 18 in 2022 and did not make a contribution last year, you will have an additional $12,000 of contribution room available i.e. $25,000.

Limited to 18% of your previous year’s earned income or $29,210 (whichever is lower) for 2022, plus any unused contribution room from previous years.

RRSP contributions made in the year and up to March 1 of the following year are deductible against your income and will reduce your tax liability.

Limited to $40,000 over your lifetime and up to $8,000 per year plus any unused contribution room.

Note that the contribution room doesn’t start accumulating until you’ve opened an account. However, the account can only be open for 15 years.

FSHA contributions made will be deductible against income resulting in a reduction in your tax liability.
Withdrawals Withdrawals are tax free.

Withdrawals can be re-contributed. The contribution room is re-established in the next calendar year.

Withdrawals are generally taxed as income unless it is under the:

(1) Home Buyer’s Plan: the withdrawal is to purchase your first home (up to $35,000)

(2) Lifelong Learning Plan: the withdrawal is to finance full-time training or education

These amounts must be repaid over time.

Withdrawals are tax free if the following conditions are met:

(1) You are a first-time home buyer and resident of Canada

(2) You have a written agreement to buy/build a home in Canada before October 1 of the year following the year of withdrawal

(3) You intend to occupy the home as your principal residence within one year of buying/building it

Any savings not used to purchase a home can be transferred to an RRSP or will be included in income and taxed.
Key difference

The amount you contribute does not depend on your income level.

Flexibility to take out money whenever you want.

Growth is not taxed (tax savings).

The tax deduction for contributions made is a dollar-for-dollar deduction against your income.

This could bring your income level down to a tax bracket with a lower tax rate.

Growth is taxed when withdrawn (tax deferral).

The account allows for both the income deduction on contributions and tax-free withdrawals.

The funds must be used to purchase a principal residence.

For students, it may be more favourable to invest in the TFSA. Since as a student you may not yet have worked many jobs, you will likely have a lower contribution room for your RRSP compared to the TFSA. Since RRSP and FHSA contributions are tax deductible, saving those contributions for years when you are earning more income can increase your tax deduction. Finally, the flexibility to take out money from your TFSA whenever you want can help toward making any student loan payments once you graduate. However, keep track of how much contribution room you have. Overcontributing to your TFSA could result in a penalty tax of 1% per month.

- Rebecca, Young Tax Professional