Investments : What’s the difference between an RRSP, an FHSA and a TFSA?

First, here’s a comparison chart of the following registered savings plans: RRSPs, FHSAs and TFSAs.

Now, here’s more information on each of these registered savings plans.

The Registered Retirement Savings Plan (RRSP) is a registered savings account that allows Canadians to save for their retirement. Income from an RRSP or RRIF will supplement government pensions such as the Quebec Pension Plan (QPP), Canada Pension Plan (CPP) and Old Age Security (OAS).

Income generated in the RRSP is tax-free as long as the funds remain in the plan.

RRSP contributions are eligible for a tax refund. But, also, to access or increase the amounts received from social programs such as child allowances and the Guaranteed Income Supplement (GIS).

The year you turn 71 years old (at the latest), your RRSP must be transferred to an RRIF (Registered Retirement Income Fund). RRSP and RRIF withdrawals are taxable. However, your tax rate in retirement should be lower than your tax rate when you’re in the workforce.

RRSPs can also be used to buy a first home or to go back to school:

• Home Buyers’ Plan (HBP ): This program allows you to withdraw up to $35,000 from your RRSP to buy or build a qualifying home. The HBP must be repaid over a 15-year period beginning two years after the year in which you withdrew the funds.
• Lifelong Learning Plan (LLP): This program allows you to withdraw up to $20,000 from your RRSP to finance eligible training or a return to school. The LLP must be repaid over a 10-year period.

Here are the key elements of an RRSP :

• Objective: tax-sheltered savings for retirement, buying a first home (HBP) or financing education (LLP).
• Contribution rights: 18% of the previous year’s taxable income, up to the contribution limit ($30,780 for 2023 and $31,560 for 2024).
• Contribution deadline: February 29, 2024 (for tax year 2023)
• Tax deductions: contributions are tax deductible for the current or future year.
• Withdrawals: Withdrawals are taxable, except under an HBP or LLP (conditions apply).

To find out more about RRSPs, such as eligibility criteria and contribution room, consult the following guide: “The Registered Retirement Savings Plan (RRSP): Everything you need to know “

The First-Time Home Buyers’ Tax-Free Savings Account (FHSA) was introduced in Canada in 2023 to help Canadians enter the real estate market. It offers tax-sheltered savings, tax-deductible contributions (like RRSPs) and tax-free withdrawals (like TFSAs).

The contribution room is $8,000 per year, for a lifetime maximum of $40,000. Unlike the HBP (RRSP), FHSA withdrawals are not restricted. In fact, the entire FHSA balance (contributions and returns) can be used to purchase a first qualifying home.

Here are the key elements of the FHSA :

• Objective: tax-sheltered savings for the purchase of a first home.
• Contribution room: $8,000 per year, for a lifetime maximum of $40,000.
• Contribution deadline: December 31, 2024
• Tax deductions: contributions are tax deductible for the current or future year.
• Withdrawals: Withdrawals are tax-free for first-time home buyers.

To find out more about the FHSA, such as eligibility criteria and withdrawal rules, consult the following guide: “The FHSA: Everything you need to know “

The Tax-Free Savings Account (TFSA) is a registered savings account that allows Canadians aged 18 and over to contribute money, generate income and make withdrawals tax-free.

This savings plan was introduced by the federal government in 2009. The annual limit varies from year to year. In 2024, the contribution room is $7,000 and the lifetime limit is $95,000. Finally, investment income, such as capital gains, dividends and interest income, is not taxable.

Here are the key elements of the TFSA :

• Objective: tax-sheltered savings for short-, medium- or long-term projects.
• Contribution room: $7,000 in 2024 (the cumulative limit corresponds to the amount accumulated since age 18).
• Contribution deadline: December 31, 2024
• Unused contributions: unused contributions can be carried forward to the following year.
• Withdrawals: Withdrawals are tax-free (for any reason), have no maximum limit and are added to the following year’s contribution room.
• Tax impact: TFSA withdrawals have no tax impact. What’s more, they are not taken into account when calculating social programs such as family allowances and the Guaranteed Income Supplement (GIS).

To learn more about the TFSA, such as eligibility criteria and contribution room, consult the following guide: “The Tax-Free Savings Account (TFSA): Everything you need to know “

There’s no single best option, because all 3 savings plans have their own objectives and advantages. Of course, for some objectives, the plans overlap. For example, to buy your first home, you can use the FHSA and the HBP (RRSP). Another example: when it comes to retirement planning, RRSPs and TFSAs can be used depending on your situation and retirement goals.

Ideally, the best option for an individual is to invest in all 3 plans: RRSP, FHSA and TFSA. Provided you’re not already a home owner, of course (in which case, you can eliminate the FHSA directly).

That said, who really has the savings capacity to be able to maximize all 3 registered savings plans at the same time? In 2024, we will need to save :

• 18% of previous year’s income or $31,560 (whichever is less) to maximize RRSP (plus unused contributions, if any)
• $8,000 to maximize the FHSA
• $7,000 to maximize the TFSA (plus unused contributions, if any)

That’s why you need to choose a savings strategy based on your personal and financial situation and your savings goals. Consider the tax advantages of the 3 plans, your eligibility for the plans (are you 18? do you already own your home?), your marginal tax rate (is the tax refund low or high?), the duration of your savings (short-term or long-term savings?) and many other factors.

Registered savings plans, such as RRSPs, FHSAs and TFSAs, are not investments. The latter are savings accounts in which you can invest.

Eligible investments include :

• Mutual funds (MF)
• Exchange Traded Funds (ETFs)
• Guaranteed Investment Certificates (GICs)
• Stocks
• Government or Corporate obligations
• Asset allocation ETFs
• Money Market funds
• High-interest savings ETFs
• Etc.

These types of investments are offered by chartered banks, credit unions, trust companies and insurance companies.

They are also offered by online brokers (brokerage platforms) such as National Bank Direct Brokerage, Desjardins Online Brokerage (Disnat), CIBC Investor’s Edge, Questrade and Wealthsimple.

Whatever your goal, whether short-term (travel, car, renovations) or long-term (retirement savings), having a combination of savings plans is often the best option. Given the annual limits and tax advantages of the savings plans, you need to find out about the advantages and disadvantages to be able to make an informed choice.

If necessary, don’t hesitate to make an appointment with a professional financial advisor. They can analyze your situation and help you make the right choice, based on your personal circumstances and savings goals.

For more information on these 3 registered savings plans, consult the following guides:

• The Registered Retirement Savings Plan (RRSP): Everything you need to know
• FHSA: Everything you need to know
• Tax-Free Savings Account (TFSA): What you need to know

Here are answers to the most frequently asked questions about RRSPs, FHSAs and TFSAs.