TFSA, FHSA and RRSP

The Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and First Home Savings Account (FHSA) are financial accounts with key differences in terms of contribution limits, withdrawal rules, tax benefits, and eligibility.

Contribution Amounts and Limits

TFSA: The annual contribution limit for a TFSA is set by the Canadian government and can change. In 2022, the limit was $6,000, and in 2023, it’s $6,500. The lifetime contribution limit for 2022 was $81,500, and for 2023, it’s $88,000. Exceeding these limits results in a 1% monthly tax on the excess amount.

FHSA: You can contribute up to $8,000 annually to an FHSA, with a maximum account value of $40,000. Contributions may be eligible for an income tax deduction.

RRSP: Contributions are tax-deductible, with the limit based on 18% of your yearly income or a maximum amount (e.g., $30,780 in 2023). Unused contribution room can be carried forward.

Withdrawals

TFSA: You can withdraw any amount from your TFSA at any time, tax-free. Withdrawn amounts can be recontributed in the future if you have available contribution room. TFSA withdrawals don’t need to be reported on your tax return unless there’s a taxable benefit.

FHSA: Maximum withdrawal is $40,000. Eligible for withdrawal after signing a house purchase contract. Must reside in the purchased house within a year of acquisition. The qualifying home needs to be in Canada or be Canadian co-operative housing. The entire available FHSA funds can be withdrawn tax-free if qualifying requirements are met. Joint homebuyers can contribute from their respective FHSA funds. The FHSA must be closed within a year after a tax-free withdrawal for a home purchase, and it cannot be reopened. Qualifying withdrawals must be made within 30 days of moving into the home.

RRSP: Withdrawals are generally considered taxable income. After age 71, you must close your RRSP and convert it to an RRIF or purchase an annuity. Withdrawals from RRIF or annuity are subject to tax. Overcontributions may result in tax penalties.

Tax Benefits

TFSA: Contributions are not tax-deductible, but income and management fees in your TFSA are tax-sheltered. Withdrawals from TFSAs are tax-free.

FHSA: Contributions may be eligible for an income tax deduction, withdrawals are tax-free, and the income is tax-sheltered.

RRSP: Contributions are tax-deductible, reducing taxable income. While income within the RRSP is tax-sheltered, withdrawals are subject to taxation. The tax rate on withdrawals is generally lower than the deduction claimed at the time of contribution.

Eligibility

TFSA: To open a TFSA, you must be a Canadian resident over 18 years old and possess a valid Social Insurance Number (SIN).

RRSP: Canadian residents can open an RRSP between ages 0 and 71. Some financial institutions may require you to have income to open an RRSP.

FHSA: Individuals must be Canadian residents, at least 18 years old, and must not have previously lived in a qualifying home in the 5 years prior to opening an FHSA. A qualifying home is one of two options. The first is a home you owned or jointly owned. The second is a home your spouse/common-law partner owned or jointly owned.

Summary

There are three main savings accounts offering Canadians different ways to save their money. Each of the three accounts has a different set of rules regarding contribution limits, withdrawal implications, tax benefits, eligibility. The TFSA offers tax-free savings with no withdrawal limits, the RRSP offers tax-deductible deposits to a certain limit and taxable withdrawals, and the FHSA offers tax-deductible contributions and tax-free withdrawals for the purchase of a first home in Canada.  It is recommended to speak with a financial advisor to determine the best savings option for you.