FHSA, RRSP or TFSA?
9 things to consider when choosing a savings plan
By ATB Financial 29 September 2023 5 min read
If you—like most people—are interested in saving for your future, you’ve probably wondered which savings plan or account will help you reach your goals most efficiently, while also allowing you to take advantage of tax adjustments and access your funds when you need them.
Types of savings plans
While everyday savings accounts are great for emergency funds and other small-scale savings, if you’re planning to put aside a significant amount of money over a significant length of time, it’s wise to think of your savings as an investment and choose a registered savings plan that allows you to maximize your interest-earned while minimizing the taxes you pay on the money you save.
In 2023, the Government of Canada introduced the first home savings account (FHSA), a registered plan that allows residents to save toward the down payment on their first home—tax free. Now that FHSAs are available, you may wonder whether an FHSA, registered retirement savings plan (RRSP) or tax-free savings account (TFSA) is right for you. Let’s take a look at how FHSAs compare with RRSPs and TFSAs, and how your goals and circumstances should inform your decision.
9 things to consider when choosing your savings vehicle
What you’re saving for: As the names of these plans imply, each one is designed for a different type of savings goal. Putting together a down payment for your first home? An FHSA might be the plan for you. Saving for retirement? You’re probably looking for an RRSP. Saving for a big vacation, life change or major purchase? Start looking at TFSAs.
Your cash flow: When it comes to your freedom to liquidate your savings, some plans are more restrictive than others. FHSAs and RRSPs are both designed to hold your money until a specific future event—the purchase of a home or your retirement, respectively. TFSAs, on the other hand, can be used for any savings goal. While some investment products held within your TFSA may have restrictions on withdrawals, you can choose investment products based on how freely you think you'll need to access your funds.
Your eligibility: Find out which savings plans you are eligible to open. For instance, while the FHSA, RRSP and TFSA all require you to be at least 18, the RRSP and FHSA also have an age cap at age 71, and the FHSA requires you to be a “first-time” home buyer (someone who hasn’t lived in a home they or their spouse owned within the past five calendar years).
Whether you want to save on your own or with your spouse: While the FHSA and TFSA are individual plans, you can open an RRSP where you are the owner and the contributor,or you can open a spousal RRSP where you are the owner, but your spouse is the contributor.
How much you want to put away each year: Each of the three types of savings plan has a different annual contribution limit, and different rules about how total contribution room is calculated (based on factors like your income, your age and the number of years since you opened your plan).
Your income tax bracket: You’ll want to consider how contributions to each type of savings plan will affect how much income tax you owe—now and in the future.
- FHSA contributions are tax deductible, while interest earned and withdrawals are tax-free.
- With a TFSA you pay income tax on contributions but interest earned and withdrawals are tax-free.
- With an RRSP your contributions are tax-deductible.
How long you’ll need to save for: The FHSA and RRSP both have limits on how long your savings plan can remain open. You can save in an FHSA for 15 years, until the end of the year after you make your first qualifying withdrawal, or until you turn 71 (whichever comes first). You can save in an RRSP until December 31 of the calendar year in which you turn 71.
First Home Savings Account - Plan Comparison
|Savings goals||First home purchase||Short- or long-term goals like vacations, vehicles, house renos, lifestyle changes, education, etc.||Retirement|
|Eligible participants||Residents of Canada who are at least 18 years old and first-time home buyers||Residents of Canada who are at least 18 years old and have a valid social insurance number (SIN)||Residents of Canada who are between 18 and 70 years old, have a valid social insurance number (SIN), have earned income, and have filed a tax return in Canada|
|Plan type||Individual||Individual||Individual or joint (with a spouse)|
|Contribution limits||$8,000 per calendar year up to a lifetime maximum of $40,0001||$6,500 for 2023 calendar year + any unused contributions from previous years2||Your maximum contribution limit, which is based on your income and an RRSP limit defined by the CRA for each calendar year3|
|Tax benefits||Contributions are tax deductible.||Contributions are not tax deductible, but interest earned by funds in your TFSA is tax free,and you do not have to pay any income tax on withdrawals.||Contributions are tax deductible in the year you make them. Over the long term, tax is deferred until you start to withdraw funds from your RRSP, at which time you must pay income tax on your withdrawals unless you are enrolled in the Home Buyers’ Plan (HBP) or Lifelong Learning Plan (LLP).|
|Account life||An FHSA can stay open for 15 years, until the end of the year after you make your first withdrawal, or until you turn 71 (whichever comes first).||No limits on account life||December 31 of the year you turn 71 is the last day to contribute to the plan. By that date, the account must be closed or converted to a registered retirement income fund (RRIF or RIF).|
If you have questions about the savings and investment vehicles available to you through ATB, or want to know more about the advantages of registered savings plans, don’t hesitate to connect with our Wealth team by calling 1-855-541-4387 or filling out this short form.
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