TFSA vs RRSP vs FHSA: What’s Right for You?
When it comes to investing, there’s a lot to know. But one of the first things every investor needs to determine is what type of account (or accounts) will best help them meet their savings and retirement goals. Once that’s determined, let the investing begin!
There are a number of popular registered accounts held by Canadians, but three often come up when looking to save for goals like travel or a big purchase, retirement or a first home.
At first blush, the Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP) and First Home Savings Account (FHSA) have plenty in common. After all, registered accounts like these boast tax advantages on income (unlike non-registered accounts) and can hold a variety of qualified investments, such as stocks, exchange-traded funds (ETFs), mutual funds, guaranteed investment certificates (GICs), bonds and more.
However, while all offer tax benefits, there are some key differences that can help you choose what’s right for you.
TFSA | RRSP | FHSA | |
What is it? | A registered plan where your investment earnings and withdrawals are tax-free | A registered plan where your contributions are tax-deductible (up to your personal deduction limit) and investment earnings are tax-deferred (you are charged taxes when you withdraw funds) | A new registered plan designed to help first time homebuyers. Your contributions are tax-deductible and investment earnings and withdrawals are tax-free if used to purchase your first home |
Who can open one? | Canadian residents with a Social Insurance Number (SIN) who are at least 18 or 19 (age of majority in your province) | Canadian residents with a Social Insurance Number (SIN) who are under age 71, have earned income and file a tax return in Canada | Canadian residents with a Social Insurance Number (SIN) who are at least age 18 (and no less than the age of majority in your province) and under age 71, and you and/or your spouse or common-law partner have not owned a home where you lived in the current calendar year or at any time in the preceding four calendar years |
Are contributions tax-deductible? | No | Yes (up to your personal deduction limit) | Yes (up to the annual and lifetime limits) |
Do my savings grow tax-free or tax-deferred? | Tax-free | Tax-deferred (added to taxable income the year you take the money out; a withholding tax will also apply to early withdrawals) | Tax-free as long as you use funds for a qualifying first home |
How much can I contribute each year? | $6,500 for 2023 plus your unused contribution room and any amounts you’ve withdrawn from previous years | 18% of previous year’s earned income, less any pension adjustment, up to maximum annual limit ($30,780 for 2023) | $8,000 annually, plus up to $8,000 of your unused contribution room, up to a maximum lifetime limit of $40,000 |
Choosing the right account (or combination of accounts) can help keep you on track to reach your goals. Visit Compare TFSA vs RRSP vs FHSA to learn more about the three registered accounts at RBC. For more from our partners at Inspired Investor, visit rbc.com/inspiredinvestor.
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