RRSP-TFSA-FHSA: Which one to choose?

If you would like to purchase your first property, you’ll have to think about the most effective strategy for dividing your savings between an RRSP, TFSA and/or FHSA.

Even if buying your first home is already behind you, you’ll still want to annually review how best to divide your savings. Since you likely don’t want to compromise one of your plans to the benefit of another but would prefer to reach all your financial goals under the best possible conditions, taking a serious look at this question is worth it.

Why choose an RRSP?

The Registered Retirement Savings Plan (RRSP) helps Canadians save for retirement and lessen their tax burden during the accumulation period. This is effectively a tax deferral method since these funds will become taxable upon withdrawal (generally during retirement).

There are two key advantages of contributing to an RRSP:

• Your RRSP contributions are deductible from your taxable income, which allows you to pay less in taxes and may even entitle you to a tax refund
• The interest earned on your investments isn't taxed as long as it remains in your RRSP

Your unused contribution room can be carried over from year to year.

Each year, Canadian workers receive more RRSP contribution room (18% of income earned up to the annual limit), which is added to the unused contribution room of previous years, if applicable. You will be penalized if your contributions exceed the annual limit. For more information on calculating contribution room and penalties, speak with an advisor.

With the Home Buyers’ Plan (HBP), you can use funds from your RRSP to purchase a property without tax implications. The HBP allows you to withdraw up to $35,000 from your RRSP, on which the issuer will not withhold tax. You then have 15 years to repay the total amount you withdrew, interest free.

With the Lifelong Learning Plan (LLP), contributions to your RRSP can also be used to finance your or your spouse’s education, if either of you wishes to continue their studies. The LLP allows you to withdraw up to $10,000 from your RRSP per calendar year to finance full-time studies. And if you repay the amount you withdrew within ten years, the issuer will not withhold tax.

For more information on the RRSP, take a look at these articles:

• Pssstt! 3 hidden RRSP benefits!
• Registered Retirement Savings Plan (RRSP): Why Invest?

Why choose a TFSA?

A Tax-Free Savings Account (TFSA) is a savings plan that keeps your money sheltered from taxes and available to you at all times. Withdrawing from a TFSA is easy and tax free, and you can re-contribute the amount you withdrew the next year.

A TFSA is the ideal savings tool for your short-, medium- and long-term plans, such as a vacation, wedding or renovation.

It’s also a wise choice for building or consolidating an emergency fund to prepare for unexpected events or financial troubles.

Finally, you can use your TFSA to save for retirement, especially if you’ve exhausted the annual contribution room of your RRSP.

For more information, check out the article The advantages of investing in an RRSP and a TFSA.

Why choose an FHSA?

The main goal of the First Home Savings Account (FHSA) is to facilitate the access to property in Canada. It combines the tax advantages of the RRSP and TFSA, making it a beneficial registered account for those who are planning to buy a first home. Contributions to an FHSA are tax deductible and returns are tax free.

You can contribute up to $8,000 per year to an FHSA, for a total of $40,000 over a maximum of 15 years. You can also carry forward contribution room from one year to the next, for a maximum potential annual contribution of $16,000 per year. If you meet the required conditions, you can use the funds saved in your FHSA to finance the purchase of a first home without having to pay taxes on withdrawals, and without having to repay the amounts withdrawn.

If you don’t expect to buy a property, an FHSA can be used as an additional saving vehicle for your retirement. It can be especially interesting if you’ve exhausted the annual contribution room available in your RRSP. You can then transfer these savings to your RRSP, regardless of the remaining contribution room, or to an RRIF when the time is right—all free of tax implications.

For more details on the FHSA and to find out if you’re eligible or if it would help you make your plans come to fruition, consider the following articles:

• FHSAs in 10 questions
• Is the FHSA for you?

In conclusion

Talk to an advisor to find out which strategy is right for you. They will carefully analyze your goals and situation to find your ideal approach.