One of the first questions that potential investors often ask is which account should I use – Registered Retirement Savings Plans (RSP), Tax Free Savings Account (TFSA), or First Home Savings Account (FHSA)? All of these accounts offer benefits to investors and understanding the differences between them is the first step in making a choice.
Canadian residents with Social Insurance Numbers can open all three accounts – for RSPs you must be under 71 with an earned income, for TFSAs you must be at least 18 or older, and for FHSAs you must be between 18 and 71, and have not owned a home in the current year or previous four years.
RSP contributions are tax deductible, meaning putting money into an RSP lowers your taxable income at tax time. TFSAs grow tax free – any growth or earnings in the account is not taxed, even when withdrawn from the account. FHSA contributions are tax deductible and grow tax free in the account, with the biggest benefit being that funds withdrawn to purchase a qualifying home are also tax free and do not have to be paid back.
Each account also has different rules surrounding how much can be put in and if it can be used in other years. The annual RSP limit is 18% of your earned income from your previous year’s tax return, up to a maximum – for 2024 that is $31,560. You can carry forward unused room from previous years and start building up that RSP room as soon as your start earning an income. The 2024 contribution limit for TFSAs is $7000, unused contribution room can also be carried forward to future years. FHSA contribution room is $8000 per year, to a lifetime maximum of $40,000. You can carry participation room forward, up to a maximum of $8000 in the following year. Contributions are monitored, so you do have to be careful not to over-contribute to any of these accounts.
You can withdrawal funds from your RSP at any time, but it is subject to withholding taxes and you have to claim that amount as income for that tax year. You can also withdraw, without taxes, from an RSP to purchase your first home; however, that amount has to be paid back under the Home Buyer’s Plan. There is no limit or time restriction on taking from a TFSA, however money taken out in one calendar year cannot be added back in until the next one. Money can be withdrawn from an FHSA for a qualifying home purchase without paying any tax, but if you make a non-qualifying withdrawal from the account, it will be subject to income tax.
RSPs must be cashed out or rolled over into RRIFs (Registered Retirement Income Fund) before the end of the year that you turn 71. The RIF rollover process can happen at any point before then, but it is at 71 that it must be completed. TFSAs have no age limit, you have access to those funds in their tax-free status regardless of your age. FHSAs can be open for up to 15 years, until the end of the year that you turn 71, or until the year that follows your qualifying withdrawal – whichever of these events that comes first.
All three of these accounts have many options – depending on your time frame, risk tolerance, and overall financial situation. You can invest in mutual funds, GICs, High interest savings account, and more in an RSP, TFSA, or FHSA.
There are many factors to consider when deciding which account type is best for you – the answer is that it could be all three. RSPs, TFSAs, and FHSAs all offer great opportunities to help investors save for different financial goals. It is easy to feel overwhelmed with investing and natural to have questions. The first step is to start – set up a time to meet with an advisor and find out more.
Come in and speak to one of our advisors today.
Note Unless otherwise stated, mutual funds, other securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions. The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.