The Best Way to Save: Complete Guide to TFSA, RRSP, & FHSA

There’s a new registered savings account in Canada! Starting in early spring 2023, Canadians can register for a First Home Savings Account (FSHA). The option comes as a response to increasingly inaccessible housing prices across the country. It’s clear that the government wants to provide Canadians with options to make homeownership a reality, but how much of a benefit is the account over previously available saving options?

TFSA | FHSA | RRSP

Tax-Free Savings Account (TFSA)

What is a Tax-Free Savings Account

Starting with the basics, a Tax-Free Savings Account (TFSA) is a registered tax-advantaged savings account that can help you earn money tax-free. This is a common account that many Canadians will already be taking advantage of for long-term savings and safe investments. You can think of a TFSA as a basket, where you can hold qualified investments, that may generate tax-free interest, capital gains and dividends.

Contribution amounts and limits of a TFSA

Maximum contribution amounts change yearly as outlined by the CRA. The maximum amount allowable into a TFSA is $6,500 for the 2023 calendar year. If you were 18 or older in 2009, your TFSA contribution room grows each year.

If you have been over 18 since 2009 and have a valid social insurance number, your total maximum contribution limit up to and including 2022 is $81,500. The annual limits vary from $5,000 to $10,000 depending on the year and are indexed to inflation.

To find your contribution room, you can use:

CRA My Account
MyCRA Mobile App
Your representative
Tax Information Phone Services (TIPS) at 1-800-267-6999

Tax Benefits of a TFSA

The contributions made to a TFSA are not tax-deductible, but investment income earned within your TFSA is generally tax-free. The single biggest benefit of a TFSA is that the growth of all assets within it is tax-free. You won’t pay a penny in income tax even when you withdraw from your account or sell the assets inside the TFSA. There are no mandatory withdrawals.

Your withdrawals do not affect your eligibility for federal income-tested benefits and credits. Earned income is also not a factor. You and your spouse/common-law partner can pool contributions to ensure that you’re maximizing your tax-free contributions. The TFSA can also be an efficient tax strategy for estate planning, as the contribution maximums are a realistic savings guide on the route to a down payment.

Who is eligible for a TFSA

Any Canadian resident who is 18 or older and has a valid social insurance number (SIN) can open a TFSA. This includes non-residents of Canada who have a valid SIN and are 18 years of age or older.

Pros & Cons of a TFSA

Pros:

Tax-free withdrawals:

Withdrawals from a TFSA are tax-free.

Unused contributions rollover:

Unused TFSA contributions roll over to the next calendar year.

No age limit for contributions:

Unlike an RRSP, there is no age limit for contributing to a TFSA.

Withdrawals do not affect government benefits:

Withdrawals from a TFSA do not affect eligibility for government benefits and credits.

Cons:

Contribution limits are low:

Contribution limits are lower than those of an RRSP.

No tax deduction for contributions:

Contributions made to a TFSA are not tax-deductible for income tax purposes.

Interest rates may be lower than other investments:

Interest rates on tax-free savings accounts are typically lower than other investment options.

Section 2: First Home Savings Account

What is the FHSA?

Now for the newest addition! A First Home Savings Account (FHSA) combines the features of an RRSP and TFSA. The FHSA is a registered plan allowing Canadians to save for a first home, tax-free. In an FHSA, contributions and qualifying withdrawals to purchase a first home are non-taxable.

Contribution amounts and limits of an FHSA

Once you’ve opened an FHSA, you’re allowed to contribute up to a lifetime limit of $40,000, with an annual contribution limit of $8,000. Unused FHSA contribution room may be carried forward. However, an FHSA’s carry forward is different from an RRSP’s.

Who is eligible for an FHSA

Just as with a TFSA, to open an FHSA, an individual must be a resident of Canada and at least 18 years of age. In addition, individuals must be first-time home buyers, meaning that they have not owned a home in which they lived at any time during the part of the calendar year before the account was opened or at any time in the preceding four calendar years.

Pros & Cons of an FHSA

Pros:

Tax-free interest earnings.
Free withdrawal from FHSA savings for any qualifying home purchase or home-buying expense.
Contributions are tax-deductible.
Unused contributions can be carried forward.
The lifetime limit is a strong amount for a starter home.

Cons:

Contributions are limited each year.
Withdrawals are subject to penalties if they do not qualify as a home purchase or home buying expense.

Registered Retirement Savings Plans (RRSPs)

What is a Registered Retirement Savings Plan?

A Registered Retirement Savings Plan (RRSP) is an investment and savings account that allows you to grow your money with tremendous tax benefits. Like a TFSA, RRSPs can hold numerous qualifying investments, including stocks, bonds, and mutual funds. And because your money grows tax-free, it can be a powerful way to take advantage of compound growth.

Canadians can establish an RRSP to contribute individually, or with their spouse/common-law partner. Deductible RRSP contributions can be used to reduce your tax, and income earned on the RRSP is usually exempt from tax. Generally, tax is deducted from an RRSP upon receiving payments from the plan.

Contribution amounts and limits of an RRSP

The contribution limit for RRSPs is 18% of earned income from the previous year, up to a maximum amount set by the revenue agency each year.

The RRSP contribution limit for 2023 is $30,780. The Canada Revenue Agency calculates your deduction limit as the lesser of the:

18% of the earned income you reported on your tax return in the previous year and

The annual RRSP limit as listed by the CRA

If you go over your RRSP contribution limit by $2,000 or less, you won’t face penalization. The only negative here is that you can’t deduct these excess contributions from your taxable income. Additional contributions exceeding $2,000 over your RRSP contribution limit are penalized at a 1 per cent tax per month.

Over-contributions must be reported to the CRA within 90 days after the last day of the tax year of over-contribution. Reports after that timeline are subject to an additional penalty equating to 5 per cent of taxes owed plus an additional 1 per cent every month, for a maximum of 12 months.

Tax Benefits of an RRSP

Contributions made to an RRSP are tax-deductible, meaning they can reduce your taxable income for the year in which they were made. Money held within an RRSP – both the amount you contributed as well as any money realized – is sheltered from tax until the point of payment or withdrawal.

Unable to fulfill your contribution limit? Unused RRSP contributions roll over to the next calendar year. Another significant benefit to RRSPs is that investments can earn compound interest and savings are protected from creditors – leaving a great account to start investing early.

Who is eligible for an RRSP

Anyone who has earned income and filed a tax return in Canada can contribute to an RRSP until December 31st of the year they turn 71.

Pros & Cons of an RRSP