Difference Between TFSA, RRSP, & FHSA (Complete Guide)

Welcome to our guide to all that you need to know about the most attractive savings accounts in Canada

36 Minute read

Originally published: December 21, 2022

Difference Between TFSA, RRSP, & FHSA

Difference Between TFSA, RRSP, & FHSA (Complete Guide)

Welcome to our guide to all that you need to know about the most attractive savings accounts in Canada

36 Minute read

Originally published: December 21, 2022

Difference Between TFSA, RRSP, & FHSA

Welcome to our guide on the Difference Between TFSA, RRSP, & FHSA! When shopping around for the best savings account available to you in Canada, you need to know the difference between the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), First Home Savings Account (FHSA) so that is why we created our complete guide! We will cover everything that you need to know about the TFSA, RRSP, FHSA. Right now these are the best and most attractive savings accounts that are available to Canadians and they each come with their own benefits and their own setbacks. That’s why this full guide will cover the pros and cons, tax benefits,contribution amounts, and much more essential things to know about the TFSA, RRSP, and FHSA. 

What to Consider Before Opening a Savings Account

When you decide to open a savings account, there are many things that you need to consider, such as your current financial situation, future expenses and goals, and the potential risks and investment opportunities, and tax guidelines or rules associated with different types of savings account. Here are a few key factors to consider:

  • Your current financial situation: Before setting savings goals, it’s important to take a realistic look at your current income, expenses, and debts. This will help you determine how much you can realistically save each month, and what types of savings and investment options are appropriate for your situation. 
  • Your future expenses and goals: Consider your future expenses and goals, such as buying a home, starting a family, paying for education, or retiring, and determine how much you will need to save in order to achieve these goals. This will help you set specific and measurable savings targets.
  • The potential risks and opportunities associated with different types of savings accounts and their investment options such as stocks, bonds, and mutual funds, all of which come with different levels of risk and potential return. It’s important to consider these risks and potential returns when choosing where to save and invest your money.
  • Finally, taxes and how those will impact your savings account and any income made through investments, but also how will those taxes affect you once you withdraw your savings and are ready to retire, purchase your first home, or just go on that dream vacation you have been saving for. 

Setting savings goals requires careful planning and consideration of your current financial situation, future expenses and goals, the potential risks and opportunities associated with different savings and investment options, and knowledge of tax impact. 

What is the Difference Between TFSA, RRSP, FHSA 

There are plenty of differences between the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) and the First Home Savings Account (FHSA). The main differences that you need to understand before you open an account are the contribution amount and limits, the tax benefits, and eligibility. We will get more in-depth with each of these accounts soon but for now let’s cover the basics.

What is the difference between TFSA, RRSP, FHSA

Contribution amounts and limits

Tax Free Savings Account (TFSA)

The annual contribution limit for TFSAs is set by the Canadian government, and is subject to change. The 2022 annual contribution limit is $6,000, but the 2023 annual contribution limit is $6,500. The total lifetime contribution amount for 2022 was $81,500 and the total lifetime contribution amount for 2023 is $88,000. Now keep these amounts and limits in mind because surpassing these limits can lead to tax implications. You will need to pay a 1% tax each month on the highest amount of TFSA contributions which exceed the limit, so long as that extra money remains in your TFSA account. To avoid this, simply withdraw the overage amount in your TFSA. 

First Home Savings Account (FHSA)

The FHSA allows individuals to contribute a sum of up to $8,000 annually to their FHSA, with a total maximum account value of $40,000. Contributions made in a specific tax year are eligible for an income tax deduction. Contributions made within the first 60 days of a calendar year are not counted as part of the prior tax year as it is with RRSPs. After creating an FHSA for the first time, any remaining portion of the annual contribution can be carried forward. A tax rate of 1% will be imposed on any contributions to a FHSA that exceed the legal limit for each calendar month (or fraction thereof) on the highest amount of the surplus during that period. 

Registered Retirement Savings Plan (RRSP)

Contributions to RRSPs are tax-deductible, this means that you can actually claim the amount that you have contributed to your RRSP when you file your tax return. Thus this account is tax deductible and is tax-sheltered because you won’t get taxed on income made, but you will be taxed when you withdraw money from your RRSP when you retire. Contribution limits include either 18% of your yearly income or a yearly maximum which for 2023 is: $30,780 and the 2022 yearly maximum is: $29,210. 

Tax Benefits

Tax Free Savings Account (TFSA)

Contributions to TFSAs are not tax-deductible, but income made in your TFSA and any management fees are not subjected to tax, thus your growth is tax-sheltered. Withdrawals from TFSAs are tax-free, meaning that individuals do not have to pay taxes on the amount they withdraw from their TFSA

Registered Retirement Savings Plan (RRSP)

Withdrawals from RRSPs are subject to tax, although the taxes paid will be lower than the tax deduction claimed for the original contribution. The RRSP tax deduction is available to Canadians that allows them to deduct contributions made to their RRSP from their taxable income. Contributions to an RRSP are tax-deductible in the year they are made and can be used to reduce the amount of income tax payable, you can claim for the previous up to 60 days into the next tax year.

First Home Savings Account (FHSA)

Contributions made in a specific tax year are eligible for an income tax deduction, withdrawals are tax free and the income made is tax sheltered. Basically the FHSA takes the best tax features from the RRSP and the TFSA, as you can claim up to $8,000 annually and when you withdraw the money for your first home, it is tax free. 

Continuing on with our guide on the Guide to Difference Between TFSA, RRSP, & FHSA, let’s look at some tax benefits of these accounts!

Eligibility 

Tax Free Savings Account (TFSA)

To be eligible to open a Tax-Free Savings Account (TFSA) in Canada, you must be a Canadian resident who is over 18 years of age, and you must have a valid Social Insurance Number (SIN).

Registered Retirement Savings Plan (RRSP)

An individual must be a Canadian resident and you can open the RRSP from ages 0 to 71. Some banks may require you to have an income in order to open a RRSP.

First Home Savings Account (FHSA)

An individual must be a Canadian resident and at least 18 years old in order to open an FHSA, and has never purchased a home before.

Now let’s a look at the Difference between the TFSA, RRSP, & FHSA, these sections will do a deep dive and answer all that you need to know about these accounts!

Registered Retirement Savings Plan Guide

What is a Registered Retirement Savings Plan (RRSP)

A Registered Retirement Savings Plan (RRSP) can provide you with a number of tax benefits, as it is recognized and registered by the government. Throughout your life, you can contribute to your RRSP, and when you retire, convert it to a Registered Retirement Income Fund to receive your retirement income. RRSPs are essential for ensuring financial security for your retirement, and are especially beneficial for young adults just starting to save, as well as those who are close to retirement age. The key characteristic is that all of your contributions are tax deductible and can be claimed on your income tax. Let’s focus and learn more about the RRSP and see what makes this account beneficial to you. We will be looking at all the features of the RRSP, this includes: Pros and Cons, How to Use the RRSP, Tax Benefits, Tax Implications, Withdrawal Rules and more! 

In this section:

Pros and Cons of Registered Retirement Savings Plan (RRSP)

There are plenty of pros with the RRSP, but with every account, there are also some cons. If you are in the market for a new savings account it is a good idea for you to look into the various pros and cons of the RRSP. 

Pros: 

  • Tax savings: Contributions to an RRSP are tax-deductible, which means you can claim them as a tax credit on your income tax return. This can reduce the amount of tax you owe, or increase your tax refund.
  • Investment growth: The money in your RRSP grows tax-free, which means you don’t have to pay tax on any investment income or capital gains you earn. This can help your savings grow faster over time.
  • Flexibility: You can choose from a variety of investment options, including mutual funds, exchange-traded funds, and individual stocks, to help you reach your retirement goals. You can also make contributions at any time, as long as you have contribution room.
  • Availability: Make use of your RRSP savings with the Home Buyers Plan and the Lifelong Learning Plan.

Cons:

  • Contribution limits: There are limits to how much you can contribute to an RRSP each year. If you exceed these limits, you may have to pay a tax penalty.
  • Withdrawal restrictions: You cannot withdraw money from your RRSP without incurring a tax penalty, unless you qualify for one of the exceptions provided by the government, such as the Home Buyer’s Plan or the Lifelong Learning Plan.
  • Potential for loss: Like any investment, there is a risk of loss with an RRSP. The value of your investments may go down, which could reduce the amount of money you have saved for retirement.
  • Complexity: Understanding the rules and regulations surrounding RRSPs can be complex, and it can be challenging to determine the best investment options for your specific situation. It may be helpful to seek our professional financial advisors to ensure that you are making the most of your RRSP. There are also difficult rules when it comes to death and marital breakdown.

How to Use Your Registered Retirement Savings Plan (RRSP)

In order to maximize your RRSP there are some essential things to know about using your RRSP. When you open a brand new savings account, you might be wondering what this account can mean for you and how this account can be utilized properly, well luckily, here is a list of our recommendations: 

  • Make contributions: You can contribute to your RRSP on a regular basis, such as monthly or annually. You can also make one-time contributions as needed. You can contribute to your RRSP until December 31 of the year you turn 71. Better yet, you can contribute for 60 days into the new year, and these contributions will count for the previous tax year! 
  • Choose your investments: You can choose from a variety of investment options, such as mutual funds, exchange-traded funds, and individual stocks, to help you reach your retirement goals. It’s important to diversify your investments to spread out the risk and potentially increase your returns.
  • Take advantage of tax benefits: Contributions to an RRSP are tax-deductible, which means you can claim them as a tax credit on your income tax return. This can reduce the amount of tax you owe, or increase your tax refund. This is the most attractive feature of the RRSP, so we highly recommend that you make use of this. You are usually subject to contribution limits though, the maximum RRSP contribution for 2023 is $30,780 while the maximum RRSP contribution for 2022 is $29,210, OR 18% of your income, whichever is lesser.
  • Use your RRSP for a down payment on a home: If you are a first-time home buyer, you may be able to use the Home Buyer’s Plan (HBP) to withdraw up to $35,000 from your RRSP to use as a down payment on a home. You will need to repay/restore the withdrawn amount to your RRSP over a period of 15 years.
  • Use your RRSP for education expenses: If you or your spouse are returning to school, you may be able to use the Lifelong Learning Plan (LLP) to withdraw up to $10,000 per year (up to a lifetime maximum of $20,000) from your RRSP to pay for education expenses. You will need to repay the withdrawn amount to your RRSP over a period of 10 years.
How to use your RRSP before and after retiring

Tax Benefits of a Registered Retirement Savings Plan (RRSP)

One of the main tax benefits of a Registered Retirement Savings Plan (RRSP) is that contributions to an RRSP are tax-deductible. This means that you can claim the amount you contribute to your RRSP as a tax credit on your income tax return. This can reduce the amount of tax you owe, or increase your tax refund.

For example, if you contribute $1,000 to your RRSP and your marginal tax rate is 30%, you can claim a tax credit of $300 ($1,000 x 30%) on your tax return. This means that you would pay $300 less in tax, or receive a $300 tax refund if you have already paid your taxes.

It’s important to note that there are limits to how much you can contribute to an RRSP each year. The contribution limit is approximately 18% of your earned income from the previous year, minus any pension adjustments or the maximum RRSP contribution for 2023 is $30,780 while the maximum RRSP contribution for 2022 is $29,210. If you exceed your contribution limit, you may have to pay a tax penalty.

In addition to the tax savings on your contributions, the money in your RRSP grows tax-free. This means that you don’t have to pay tax on any investment income or capital gains you earn while your money is in your RRSP. This can help your savings grow faster over time.

Tax Implications of a Registered Retirement Savings Plan (RRSP)

  • It’s important to consider the tax implications of an RRSP before making a contribution. There are a couple of things that you need to consider in order to avoid any unnecessary and unexpected taxation. 
  • Withdrawals are taxable: When you withdraw money from your RRSP, the amount you withdraw is considered taxable income. This means you will have to pay tax on the withdrawn amount at your marginal tax rate.
  • Over contributions: There are limits to how much you can contribute to an RRSP each year. If you exceed your contribution limit, you may have to pay a tax penalty.
  • RRSP Home Buyer’s Plan (HBP) and Lifelong Learning Plan (LLP): If you use the HBP or LLP to withdraw money from your RRSP, you will have to pay tax on the withdrawn amount if you do not set up a payment plan for your withdrawal and if you did not use it for education or for purchasing a house. This can lead to withholding taxes and you will need to claim the amount on your income tax. 
  • It’s important to carefully consider the tax implications of an RRSP before making a contribution or withdrawal.

Continuing on with our guide on the Guide to Difference Between TFSA, RRSP, & FHSA, let’s look at why you should have a RRSP. 

Why You Should Have a Registered Retirement Savings Plan (RRSP)

A Registered Retirement Savings Plan (RRSP) is a type of investment account designed to help you save for retirement. There are several reasons why you should consider having an RRSP:

  • First, an RRSP can help you save on taxes. Contributions to an RRSP are tax-deductible, which means you can claim them as a tax credit on your income tax return. This can reduce the amount of tax you owe, or increase your tax refund. This can be especially beneficial if you are in a high tax bracket, as the tax savings from an RRSP contribution can be significant.
  • Second, an RRSP can help your savings grow faster. The money in your RRSP grows tax-free, which means you don’t have to pay tax on any investment income or capital gains you earn. This can help your savings grow faster over time, as you are not losing a portion of your returns to taxes.
  • Third, an RRSP offers flexibility. You can choose from a variety of investment options, including mutual funds, exchange-traded funds, and individual stocks, to help you reach your retirement goals. You can also make contributions at any time, as long as you have contribution room.
  • Finally, an RRSP can provide access to additional programs such as the Home Buyer’s Plan (HBP) and the Lifelong Learning Plan (LLP). The HBP allows first-time home buyers to withdraw up to $35,000 from their RRSP to use as a down payment on a home, while the LLP allows individuals to withdraw up to $10,000 per year (up to a lifetime maximum of $20,000) from their RRSP to pay for education expenses.
  • Overall, an RRSP can be a valuable tool to help you save for retirement, reduce your taxes, and access additional programs such as the HBP and LLP. It’s important to carefully consider the tax implications and any potential risks before making a contribution to an RRSP, and to seek professional financial advice if needed.

Who Can Open a Registered Retirement Savings Plan (RRSP)

In Canada, any individual who is a resident of Canada can open a Registered Retirement Savings Plan (RRSP). This includes individuals who are self-employed, as well as employees who earn income from an employer. There is no age restriction on when you can open a RRSP but a lot of banks require you to be 18 years of age or older to open an RRSP, and you can contribute to an RRSP until December 31 of the year you turn 71. After this age, you must close your RRSP and either convert it to a Registered Retirement Income Fund (RRIF) or purchase an annuity.

You will also need a Social Insurance Number (SIN) to open an RRSP, and you may need to provide proof of your earned income, such as a T4 slip or a Notice of Assessment.

Withdrawal Rules of a Registered Retirement Savings Plan (RRSP)

The withdrawal rules for a Registered Retirement Savings Plan (RRSP) vary depending on the circumstances of the withdrawal. Here are some of the key rules to consider:

  • Taxable withdrawals: Generally, withdrawals from an RRSP are considered taxable income. This means you will have to pay tax on the withdrawn amount at your marginal tax rate when you file your income tax return.
  • Withdrawals after age 71: Once you reach the age of 71, you must close your RRSP and either convert it to a Registered Retirement Income Fund (RRIF) or purchase an annuity. You may be able to make withdrawals from your RRIF or annuity as needed, but these withdrawals will be subject to tax.
  • Over contributions: If you exceed your contribution limit for an RRSP, you may have to pay a tax penalty.

Types of Registered Retirement Savings Plan (RRSP)

There are a few different types of Registered Retirement Savings Plans (RRSPs) that you can choose from:

Individual RRSP: An individual RRSP is a personal retirement savings plan that is registered in your name. You can contribute to an individual RRSP using your own earned income, and you have control over how the money is invested.

Spousal RRSP: A spousal RRSP is a retirement savings plan that is registered in the name of your spouse or common-law partner. You can contribute to a spousal RRSP using your own earned income, and your spouse or common-law partner is the owner of the plan. This can be a good option if one spouse has a higher income and is in a higher tax bracket than the other spouse.

Group RRSP: A group RRSP is a retirement savings plan that is offered through an employer. Contributions are made through payroll deductions, and the employer may also make contributions on behalf of the employee. Group RRSPs are typically administered by a financial institution or mutual fund company, and employees can choose from a variety of investment options.

Self-directed RRSP: A self-directed RRSP is an RRSP that gives you the flexibility to invest in a wide range of assets, including stocks, bonds, mutual funds, exchange-traded funds, and more. You have complete control over your investments and can choose which assets to buy and sell.

Benefits of Spousal RRSP

Investing with a Registered Retirement Savings Plan (RRSP)

Investing with a Registered Retirement Savings Plan (RRSP) can be a good way to save for retirement and potentially grow your savings over time. When you invest in an RRSP, your money grows tax-free, which means you don’t have to pay tax on any investment income or capital gains you earn. This can help your savings grow faster over time.

There are a variety of investment options available through an RRSP, including mutual funds, exchange-traded funds, and individual stocks. It’s important to diversify your investments to spread out the risk and potentially increase your returns.

Before investing in an RRSP, it’s important to consider your financial situation and retirement goals, as well as any potential risks. It’s also important to be aware of the tax implications of investing in an RRSP. Contributions to an RRSP are tax-deductible, which means you can claim them as a tax credit on your income tax return. However, withdrawals from an RRSP are generally subject to tax. Contact our investment planners to find out what investments make sense for you! 

Is a Registered Retirement Savings Plan (RRSP) Right for Me? 

A Registered Retirement Savings Plan (RRSP) can be a good option for individuals who are looking to save for retirement and potentially reduce their taxes. One of the main benefits of an RRSP is the tax savings. Contributions to an RRSP are tax-deductible, which means you can claim them as a tax credit on your income tax return. This can reduce the amount of tax you owe, or increase your tax refund. This can be especially beneficial if you are in a high tax bracket, as the tax savings from an RRSP contribution can be significant. In addition to the tax benefits, a RRSP can also help your savings grow faster over time. The money in your RRSP grows tax-free, which means you don’t have to pay tax on any investment income or capital gains you earn. This can help your savings grow faster than they would in a taxable account.

However, there are a few things to consider before deciding if an RRSP is right for you. First, there are limits to how much you can contribute to an RRSP each year. If you exceed your contribution limit, you may have to pay a tax penalty. Second, withdrawals from an RRSP are generally subject to tax. Finally, like any investment, there is a risk of loss with an RRSP. The value of your investments may go down, which could reduce the amount of money you have saved for retirement. Now let’s take a look at the Tax Free Savings Account (TFSA) and continue on with our blog on the Difference Between TFSA, RRSP, & FHSA. Remember to contact our team of financial planners to find out what savings account are right for you! 

Talk to a retirement planner today.

Contact Protect Your Wealth
Tax-Free Savings Account (TFSA) guide

What is a Tax Free Savings Account (TFSA)

A Tax Free Savings Account (TFSA) is a type of savings account offered by financial institutions in Canada. It is a government-approved account that allows Canadians to save money for any purpose without paying any income tax on the investment income earned. Contributions to the account are not tax deductible; however, any interest, dividends, or capital gains earned on investments held within the TFSA are not subject to income tax. The TFSA can be used to save for retirement, purchase a home, finance post-secondary education, or simply to save for a rainy day. The TFSA is a flexible and convenient way to save money and build wealth.

Contributions to a TFSA are limited by the Canadian government. There is an annual contribution limit each year, and unused contribution room can be carried forward to future years. Withdrawals from the TFSA are tax-free and do not need to be reported as income; however, any withdrawals must be replaced in a future year. The TFSA is a great way to save for short-term or long-term goals, as the money can be accessed whenever needed. It is important to note that the TFSA does not offer the same level of protection as a registered retirement savings plan.

The TFSA is a great way to save for any purpose without paying income tax on the investment income earned. It is important to be aware of the annual contribution limits and to replace any withdrawals in future years. With careful planning and proper management, the TFSA can be a great way to save for the future.

Pros and Cons of Tax-Free Savings Account (TFSA)

It’s important to carefully consider the pros and cons of a TFSA before making a decision. Similarly as the RRSP and FHSA, you must be careful of any taxes and other limits. 

Pros of a Tax-Free Savings Account (TFSA):

  • Tax-free growth: Any investment income or capital gains you earn in a TFSA are tax-free. This means you don’t have to pay tax on these earnings, which can help your savings grow faster over time.
  • Flexibility: You can contribute to a TFSA at any time, as long as you have contribution room. You can also withdraw money from a TFSA at any time, without incurring any tax penalties.
  • No income restrictions: There are no income restrictions for contributing to a TFSA. This means that anyone, regardless of their income level, can contribute to a TFSA.
  • Investment possibilities: The TFSA allows for multiple investment options and better yet, the income earned is tax free, same as any investment fees. 

Cons of a Tax-Free Savings Account (TFSA):

  • Limited contribution room: There is a limit to how much you can contribute to a TFSA each year. If you exceed your contribution limit, you may have to pay a tax penalty.
  • No tax deductions: Contributions to a TFSA are not tax-deductible, unlike contributions to a Registered Retirement Savings Plan (RRSP). This means you cannot claim a tax credit for your contributions on your income tax return.

How to Use Your Tax-Free Savings Account (TFSA)

Here are some steps to help you use your Tax-Free Savings Account (TFSA) effectively:

  • Determine your contribution room: Your contribution room is the maximum amount you can contribute to your TFSA each year. Your contribution room is determined by the Canada Revenue Agency (CRA) and is based on a yearly amount which is set by the government as well as your personal contribution room. You can check your contribution room by logging into your CRA account or contacting the CRA.
  • Choose your investments: There are a variety of investment options available for a TFSA, including high-interest savings accounts, guaranteed investment certificates (GICs), mutual funds, exchange-traded funds (ETFs), and individual stocks. It’s important to carefully consider your financial goals and risk tolerance before choosing your investments. You may also want to seek professional financial advice to help you choose the right investments for your specific situation.
  • Contribute regularly: You can contribute to your TFSA at any time, as long as you have contribution room. Consider setting up automatic contributions to make it easier to save consistently.
  • Monitor your investments: It’s important to regularly review your investments and ensure that they are still aligned with your financial goals. You may need to make adjustments to your portfolio if your financial goals or risk tolerance changes.
  • Use your TFSA for long-term savings: A TFSA is a good option for long-term savings, such as saving for retirement or a major purchase. You can withdraw money from a TFSA at any time without incurring any tax penalties, but it’s important to consider the impact of withdrawals on your long-term financial goals.

Tax Benefits of a Tax-Free Savings Account (TFSA)

Tax benefits of TFSA

Tax Implications of a Tax-Free Savings Account (TFSA)

One of the main tax implications of a Tax-Free Savings Account (TFSA) is that contributions to a TFSA are not tax-deductible. This means that you cannot claim a tax credit for your contributions on your income tax return. However, any investment income or capital gains you earn in a TFSA are tax-free. This means you don’t have to pay tax on these earnings, which can help your savings grow faster over time.

In addition, withdrawals from a TFSA are also tax-free. You can withdraw money from a TFSA at any time without incurring any tax penalties. You also need to consider the limitation of the TFSA: Tax-Free Savings Account contribution limit for 2023: $6,500, Tax-Free Savings Account contribution limit for 2022: $6,000, this brings the lifetime limit to $88,000.

Why You Should Have a Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account (TFSA) can be a valuable tool to help you save for long-term financial goals, such as retirement or a major purchase. Here are a few reasons why you should consider having a TFSA:

  • Tax-free growth: Any investment income or capital gains you earn in a TFSA are tax-free, which means you don’t have to pay tax on these earnings. This can help your savings grow faster over time, as you are not losing a portion of your returns to taxes.
  • Flexibility: You can contribute to a TFSA at any time, as long as you have contribution room. You can also withdraw money from a TFSA at any time without incurring any tax penalties. This can be helpful if you need access to your savings for emergencies or unexpected expenses.
  • No income restrictions: There are no income restrictions for contributing to a TFSA. This means that anyone, regardless of their income level, can contribute to a TFSA.
  • Diversification: A TFSA can be a good option for diversifying your savings, as it offers a variety of investment options such as high-interest savings accounts, guaranteed investment certificates (GICs), mutual funds, exchange-traded funds (ETFs), and individual stocks.

Overall, a TFSA can be a valuable tool to help you save for long-term financial goals, while also providing tax benefits and flexibility.

What to do with a TFSA, how to use a TFSA

Who Can Open a Tax-Free Savings Account (TFSA)

In order to open a Tax-Free Savings Account (TFSA) in Canada, you must be 18 years old and a Canadian resident, with a valid Social Insurance Number (SIN). Even non-residents with a valid SIN may open a TFSA, but they will be charged 1% per month for any funds left in the account. Continuing on with our guide on the Guide to Difference Between TFSA, RRSP, & FHSA, let’s look at some TFSA withdrawal rules.

Withdrawal Rules of a Tax-Free Savings Account (TFSA)

The rules for withdrawing from a Tax-Free Savings Account (TFSA) in Canada are as follows:

  • You can withdraw any amount from your TFSA at any time, without paying any taxes on the withdrawal.
  • Any amount withdrawn from your TFSA can be replaced (contributed) in a future year, as long as you have available contribution room.
  • If you exceed your TFSA contribution room, you will be subject to a tax of 1% per month on the excess amount.
  • You do not need to report TFSA withdrawals on your tax return, unless you have received a taxable benefit from the withdrawal.

Investing with a Tax-Free Savings Account (TFSA)

A Tax-Free Savings Account (TFSA) is a Canadian government-approved savings account that allows you to earn investment income tax-free. Contributions to a TFSA are not tax-deductible, but any income or capital gains earned within the account are not subject to tax. TFSAs are a great option for investors looking to grow their savings without having to worry about paying taxes on their investment income. 

One of the key benefits of a TFSA is that it allows you to save for both short-term and long-term goals, as the funds in the account can be withdrawn at any time without incurring any tax penalties. TFSAs also have higher contribution limits compared to other types of tax-advantaged accounts, making them a popular choice for investors looking to maximize their tax-free savings. 

Investing in a TFSA, differences between the TFSA and a non-registered savings account is mainly the taxes. TFSA is tax-sheltered

Is a Tax-Free Savings Account (TFSA) Right for Me?

A Tax-Free Savings Account (TFSA) may be a good option for you if you are looking for a way to save and invest for the long term without having to pay taxes on your investment income. TFSAs can be a useful tool for saving for a variety of goals, including retirement, a down payment on a home, or education expenses. They can also be a good choice for individuals who are in a lower tax bracket and looking for a way to save more money tax-free.

However, it’s important to consider whether a TFSA is the right fit for your financial situation and goals. Some factors to consider include:

  • Your financial goals: TFSAs are designed to help you save and invest for the long term, so they may not be the best choice if you need access to your funds in the short term.
  • Your tax bracket: If you are in a higher tax bracket, you may be better off using other tax-advantaged accounts, such as a Registered Retirement Savings Plan (RRSP) to save for retirement.
  • Your investment strategy: TFSAs offer flexibility in terms of the types of investments you can hold, but you may need to consider whether they align with your investment strategy and risk tolerance.

Now that we have taken a closer look at the Tax-Free Savings Account, let’s touch on the newest registered savings account in Canada: the Tax Free First Home Savings Account (FHSA). Remember, if you want to open a RRSP, TFSA, or a FHSA please contact our team of financial planners and they can help get you started! 

Talk to a financial planner today.

Contact Protect Your Wealth
First Home Savings Account (FHSA) guide

What is a First Home Savings Account (FHSA)

Continuing on with our guide on the Difference Between TFSA, RRSP, & FHSA, let’s look at the newest savings account: the FHSA. In 2022, the government unveiled the Tax-Free First Home Savings Account (FHSA), which will become available to the public in 2023. This account will permit potential first-time home buyers to save up to $40,000 without being taxed, similar to a Tax-Free Savings Account (TFSA). People can open this type of account at their banks starting in 2023 and contribute a maximum of $8,000 per year. Contributions, like with a Registered Retirement Savings Plan (RRSP), will be tax-deductible, while withdrawals for a first home will be exempt from taxation. Furthermore, the FHSA will offer various investment options.

Pros and Cons of First Home Savings Account (FHSA)

There are plenty of pros that come with the FHSA but with that being said there are some cons to this account and it is definitely not worth it for everyone, but is helpful for those who are saving for a house. 

Pros: 

  • Tax deductable like RRSP, reducing your income tax amount
  • 15 year to use the account makes it attractive for young adults
  • Carry over amount can heavily reduce your taxes if you expect to earn more in the future
  • Like the TFSA, you can hold the investments in the FHSA to drive some more income, and it is completely tax-free growth!
  • Qualifying withdrawals are tax-free!

Cons: 

  • The FHSA will not be available to those who have already purchased their first home unfortunately 
  • The FHSA has a total contribution amount of $40,000 which is a good starting point for a down payment but not realistically not a large enough down payment for most houses on the market currently
  • There is strict withdrawal rules surrounding the FHSA which might make it an unsafe way to save due to the fact that you won’t have immediate access to your savings like you would in a TFSA 
  • Cannot be combined with the Home Buyers Plan 
  • The FHSA can only be open for 15 years, due to life circumstances this might not be enough time for some

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How to Use Your First Home Savings Account (FHSA)

The FHSA is a combination of the Home Buyer’s Plan (HBP), a Tax-Free Savings Account (TFSA), and a Registered Retirement Savings Plan (RRSP). Contributions to an FHSA are tax-deductible, similar to an RRSP, but withdrawals from the FHSA to purchase a home are not taxed, unlike withdrawals from an RRSP. Investment income from an FHSA is also not taxable, like a TFSA, so long as the money is used to purchase a home. This can help lower your taxable income when filing taxes. When you open an FHSA, you must use the funds within 15 years in order to purchase a home; otherwise, the funds will be moved into an RRSP or RRIF. Additionally, if you don’t use the funds from the FHSA to purchase a home, you will not be required to pay tax on them so long as you transfer them to your.

Tax Benefits of a First Home Savings Account (FHSA)

The First Home Savings Account (FHSA) is a tax-deductible account like an RRSP. Contributions to the FHSA are deducted from your income tax amount. For example, if you make the median income in Ontario of $52,000 and contribute $8,000 to the FHSA throughout the year, then your income tax amount will be reduced to $44,000. This will lower your marginal tax rate to 20.05%, meaning that after taxes you will be left with $42,000. The FHSA also includes a frequently asked questions (FAQs) section to help you understand the account’s details.

Tax Implications of a First Home Savings Account (FHSA)

There are the same tax implications as the TFSA, so you will get a 1% tax rate on any over-contribution. There is also a tax implication if you do not use the account for a house or if you chose to transfer the amount into anything other than a RRIF or RRSP. 

Why You Should Have a First Home Savings Account (FHSA)

If you are considering buying a home in the next 15 years and are comfortable with having money set aside that you cannot access unless you are buying a home, the FHSA might be the right option for you. This account has the benefit of contributing $8,000 per year, up to a total of $40,000. Additionally, this account is tax-deductible, and you and your partner can both have separate accounts for maximum tax deductions and combined savings for your future home purchase.

Who Can Open a First Home Savings Account (FHSA)

In order to open a FHSA, an individual must be a Canadian resident, at least 18 years old, a first-time home buyer, and not over 71 years old.

Withdrawal Rules of a First Home Savings Account (FHSA)

  • Maximum withdrawal available is $40,000
  • You are qualified to make a withdrawal if you’ve already signed a contract to purchase a house
  • You must be residing in the house you made a withdrawal for within a year of purchasing or constructing the house
  • A residence located in Canada is considered to be a qualifying home. It would also be acceptable if the taxpayer owned a share of a co-operative housing corporation that gave them the right to own and have an equity stake in a home situated in Canada. A share that only grants the right to tenancy in the housing unit, however, would not be qualifying.
  • The entire amount of available FHSA funds may be withdrawn on a tax-free basis in one withdrawal or a series of withdrawals so long as the account owner meets the qualifying withdrawal requirements
  • Both parties may contribute from their own FHSA funds if they are buying a house jointly (you and your spouse). The account must be closed within a year of making a tax-free withdrawal used to pay for a home, and an FHSA cannot be opened again after that. 
  • Must make qualifying withdrawals of the money in the FHSA within 30 days of moving into their home
Advantages of a First Home Savings Account (FHSA)

Investing with a First Home Savings Account (FHSA)

The Tax-Free First Home Savings Account (FHSA) is an excellent way to invest. It allows you to benefit from the same investments as a TFSA, such as GICs, mutual funds, stocks, ETFs, bonds, and more. You can generate tax-free income from this account over the years. It is best to start this account as soon as possible in order to take advantage of the 15-year limit for growth. In this guide, we will explore the contribution rules for the FHSA.

Is a First Home Savings Account (FHSA) Right for Me? 

The FHSA is right for those who have the goal of buying their first home within the next 15 years, this isn’t the account for your retirement savings and is not an account for short term savings either. This is strictly an account for those who want to save up for a down payment for their first home. We suggest you talk to our financial advisors to find out if the FHSA is right for you. 

Conclusion: What Savings Account is Right For Me? 

Well, now that we have taken a look at the 3 most attractive savings accounts that are available in Canada, you are probably wondering which account is right for you. And well this is a tough question, but luckily now you know more about each account, so it is now up to you to choose the right account for yourself by considering what your goals are, what your expectations are, and what your strategy is both short-term and long-term. The TFSA is a great emergency fund, or short and long term savings account, the RRSP is the best retirement savings account that is out there, and the FHSA is wonderful for those who are saving up for their first home purchase. To get an evaluation done and to find out what the best option for you is, talk to our team of financial advisors who can help you build a strong and cohesive financial plan and retirement plan. Thank you for reading our guide on the Difference Between TFSA, RRSP, FHSA (Complete Guide)!

main differences between a TFSA, RRSP, & FHSA

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Frequently Asked Questions (FAQs) about the TFSA, RRSP, & FHSA

A TFSA is a Canadian government-approved savings account that allows you to earn investment income tax-free. Contributions to a TFSA are not tax-deductible, but any income or capital gains earned within the account are not subject to tax.

Canadian residents who are 18 years of age or older and have a valid Social Insurance Number (SIN) are eligible to open a TFSA.

The maximum contribution limit for a TFSA is set by the Canadian government and is subject to change. In 2021, the maximum contribution limit is $75,500. Any unused contribution room can be carried forward to future years.

Yes, you can withdraw money from your TFSA at any time without incurring any tax penalties. However, it’s important to note that any withdrawals will reduce your contribution room for future years.

Yes, you can hold a variety of investments in a TFSA, including cash, stocks, mutual funds, and exchange-traded funds (ETFs).

There is no deadline to contribute to a TFSA. You can contribute to your account at any time, subject to your contribution room and any applicable contribution limits.

In general, there are no tax implications for transferring assets to a TFSA. However, it’s important to note that transferring certain types of assets, such as publicly traded securities, may trigger a capital gain or loss for tax purposes. It’s always a good idea to consult with a financial professional or tax advisor before making any transfers to a TFSA.

An RRSP is a Canadian government-approved savings plan that is designed to help you save for retirement. Contributions to an RRSP are tax-deductible and the investment income earned within the account is tax-sheltered until it is withdrawn.

Canadian residents who have earned income and have a valid Social Insurance Number (SIN) are eligible to open an RRSP.

The maximum contribution limit for an RRSP is based on your earned income and is set by the Canadian government. In 2021, the maximum contribution limit is 18% of your earned income for the previous year, up to a maximum of $27,830. Any unused contribution room can be carried forward to future years.

You can withdraw money from your RRSP at any time, but you will be required to pay taxes on any withdrawals you make. You can also use your RRSP to purchase a first-time home through the Home Buyer’s Plan or to finance your education through the Lifelong Learning Plan.

Yes, you can hold a variety of investments in an RRSP, including cash, stocks, mutual funds, and exchange-traded funds (ETFs).

Yes, the deadline to contribute to an RRSP for a given tax year is generally the end of the calendar year. However, you may be able to carry forward any unused contribution room to future years.

In general, there are no tax implications for transferring assets to an RRSP. However, it’s important to note that transferring certain types of assets, such as publicly traded securities, may trigger a capital gain or loss for tax purposes. It’s always a good idea to consult with a financial professional or tax advisor before making any transfers to an RRSP.

In early 2022 the government announced launching the Tax-Free First Home Savings Account (FHSA) to start in 2023. Allowing potential first-time home buyers to  be able to save $40,000 tax-free. Where contributions would be tax-deductible, similar to a Registered Retirement Savings Plan (RRSP), and withdrawals for a first home would be tax-free, similar to a Tax-Free Savings Account (TFSA). 

Well, if you think that you might buy a home in the next 15 years, and you are comfortable with saving much money that you will not be able to access unless it is towards purchasing a home, then you might want to consider the FHSA. This account has very attractive features such as the ability to have $8,000 in it yearly up to a total of $40,000. This is also a tax deductible account and you and your spouse can have individual accounts to reduce your income tax as well as use your combined savings towards purchasing a house together. 

Yes, the FHSA can be used toward deducting your overall income tax up to an amount of $8,000 yearly or up to the carry over amount that you have available. Which makes this account great for people who are expecting to have a salary increase in the future. 

The FHSA is just a savings account but it combines the attributes of a TFSA and a RRSP. Basically, the FHSA lets you save money, with the ability to invest with the same investment vehicle as the TFSA (GICs, mutual funds, stocks, bonds, and ETFs). The FHSA is also a tax deductible account which can help you to decrease your yearly income tax, just like a RRSP. When you want to withdraw the money from the account you must have signed a contract to purchase the home and then you can make your withdrawals in a lump sum amount or over a series of payments. The best is that this account is tax-free just like the TFSA, that means all growth and fees in the account are tax-free. You must use the account within 15 years or the money will have to get transferred to a RRSP, or RRIF.

Pros of the Tax-free First Home Savings Account (FHSA):

  • The account being open for 15 years allows for young Canadians to save up for their future with ease
  • Couples can open individual savings accounts and use their savings towards a house they are buying
  • Account is tax deductible 
  • Qualifying withdrawals are tax-free
  • Carry over amounts are moved over year after year for future saving
  • Can be used to invest

Cons of the Tax-free First Home Savings Account (FHSA)

  • Unavailable to those who have already bought their first home
  • 15 year time limit might not be enough for everyone
  • $40,000 total contribution limit is simply not enough for a solid downpayment if the housing market is booming 
  • Withdrawals are strictly for buying a home, thus this is not an ideal savings account if you need access to your money 
  • Cannot be combined with the Home Buyers Plan (HBP) if you have already been saving in your RRSP

The FHSA will have the same investments available as the TFSA. You can invest with the following investments: 

  • mutual funds
  • securities listed on a designated stock exchange
  • guaranteed investment certificates
  • bonds
  • certain shares of small business corporations
  • ETFs 

Yes, you can combine the funds from your FHSA and the Home Buyers Plan (HBP) together, this allows you to contribute up to $35,000 from your HBP and $40,000 from your FHSA which is a grand total of $75,000 towards purchasing a home. 

Now that you have read our guide on the Difference Between TFSA, RRSP, & FHSA. Talk to a financial advisor today for FREE.

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