RRSP, TFSA, or FHSA?

When it comes to saving, choosing between an RRSP (Registered Retirement Savings Plan), a TFSA (Tax-Free Savings Account), or an FHSA (First Home Savings Account) can be complex. Each of these accounts has distinct benefits and is suited to different financial goals.

Let’s explore their characteristics to help make the best choice based on financial needs.

1. RRSP: A Powerful Tool for Retirement

The RRSP is primarily known for retirement savings. Contributions are tax-deductible, and the income generated within the RRSP (interest, dividends, capital gains) is tax-sheltered.

Those in a higher tax bracket benefit the most from RRSP contributions due to the tax savings.

• For retirement: The RRSP is ideal if the primary goal is to build income for retirement.
• For specific projects: Until recently, in 2023, the RRSP was also favored for saving toward a down payment on a first home, thanks to the Home Buyers’ Plan (HBP), which allows eligible buyers to withdraw up to $60,000.
• For education: The RRSP can also be used for going back to school through the Lifelong Learning Plan (LLP), which allows tax-free withdrawals of up to $20,000.

The main advantage of an RRSP is tax savings. However, except for HBP and LLP withdrawals (which must be repaid according to each plan's rules), all other RRSP withdrawals are taxable.

Another key feature of the RRSP is that contributions are limited to 18% of income, up to an annual maximum.

2. TFSA: Flexible, Tax-Free Savings

A TFSA offers exceptional flexibility. Unlike an RRSP, contributions are not tax-deductible. However, like an RRSP, investment income in a TFSA is tax-free. Withdrawals From TFSA are also tax-free.?

TFSA contribution room accumulates annually from age 18.

Who is the TFSA for?

• For those with lower or moderate incomes: TFSAs are often recommended over RRSPs, as financial advisors suggest them for short- or medium-term goals, such as buying a car, traveling, emergency funds, or renovations.
• For retirement savings: A TFSA can also be used for retirement savings, especially for those who have maximized their RRSP contributions.

The main advantages of the TFSA are its flexibility in terms of withdrawals and contributions. Withdrawals are tax-free, without restrictions, and contribution room accumulates indefinitely. In addition, amounts withdrawn in a given year are added to the following year's contribution room as of January 1.

3. FHSA?: the ideal tool for first-time buyers

The FHSA helps Canadians save for their first home, combining benefits from both RRSPs and TFSAs. Contributions are tax-deductible, but withdrawals (for purchasing an eligible home) are tax-free.

The annual contribution limit is $8,000, with a cumulative maximum of $40,000. The money can be invested for tax-free growth. If the funds are not used to purchase property within 15 years, they can be transferred to an RRSP or RRIF (Registered Retirement Income Fund).

Who is the FHSA for?

• First-time homebuyers: It’s the best tool for saving toward a down payment.
• For tax optimization: Even if there are no immediate homebuying plans, those eligible for an FHSA can still benefit from tax deductions.?

4. Which Plan to Choose?

Beyond income level and financial goals, several factors influence the choice of savings plan.

Many advisors recommend opening an FHSA early to start accumulating funds for a first home purchase. However, the FHSA has a maximum lifespan of 15 years. For an 18-year-old opening an FHSA, they must maximize it ($40,000) or purchase a home within 15 years. Otherwise, they must withdraw (and pay taxes) or transfer the funds to an RRSP.

RRSP vs TFSA

The analysis and data below are based on the types of benefits available to Quebec residents. Results may differ depending on province of residence. Consulting a financial advisor for a personalized assessment is recommended.

A common saying is: If your income is low or moderate, prioritize the TFSA to enjoy tax-free withdrawals.

Beyond income, family and social circumstances should also be considered.

Example 1: A Single Person with a Modest Income of $50,000

Contributing $1,000 to an RRSP, results in 13.63% gain on investment. Since the net income is within the income bracket, three credits are reduced:

• Tax credit for people living alone (Qc.): 2.62%
• Solidarity credit (Qc): 6%
• GST/HST credit (federal): 5%?

Adding the 26.53% tax savings from the RRSP contribution, the total tax reduction is 40.16%.

Example 2: A Family with Two Children (Aged 6 and 17) and a Household Income of $70,000 (60%-40% Split)

By reducing taxable income by $5,000 with an RRSP contribution, the family gains a minimum benefit of 25.35% through:

• Solidarity credit (Qc): 6%
• Family Allowance (Qc): 4%
• GST/HST credit (federal): 1.85%
• Canada Child Allowance: 13.50%

Adding the estimated 26.53% tax savings from the RRSP contribution, the total tax reduction is 51.88%.

Example 3: The same family, but with a household income of $160,000 (60%-40% split), who would reduce their income by $15,000 through RRSP contributions. This family would obtain a minimum capital gain of 6.89% through:

• Canada Child Allowance: 5.70%

• Family allowance (Qc): 1.29%

Adding the estimated 36.12% tax savings from the RRSP contribution, the total tax reduction is 43.11%.

Lower-income households benefit more from RRSP contributions with a smaller investment due to reductions in various social benefits and tax credits that phase out at higher income levels or become potentially ineligible.

A researcher named Claude Laferrière has demonstrated this: Courbes de Claude Laferrière (French only)

FHSA vs. RRSP/TFSA

If buying a first home within 3–5 years, the FHSA should be prioritized.?

If home purchase is not in the short term, the TFSA is recommended due to its flexibility. Withdrawals can be made without restrictions and later contributed to an FHSA for a down payment.?

Diversification Strategy?

Using these savings plans together is often the best approach, depending on available contribution room and short-, medium- and long-term projects.?

Use a:?

• TFSA for short-term goals or as an emergency fund.
• RRSP to reduce taxable income, optimize taxes, and save for retirement.

• FHSA (if eligible) to maximize a home down payment or even optimize retirement savings.