Understanding TFSAs, RRSPs, and FHSAs

TFSAs, RRSPs, and FHSAs. You have likely heard all three of these terms, but might not be certain what exactly they mean. While these are all useful products designed to help Canadians financially, they have different benefits, restrictions, and regulations. Here are the key points to know about each of these products, and how they differ from each other.

What is a TFSA?

A TFSA, or a tax-free savings account, is a tool designed to help Canadians build their savings through tax-free contributions. This means you can place money into your account, and withdraw it, without it being subjected to income tax. You will not lose a chunk of your contributions to taxes. These accounts are great for people saving for the future, who want access to tax-free money throughout their lifetime. In 2024, the annual contribution limit is $7000.

What is an RRSP?

An RRSP, or registered retirement savings plan, is great for long-term contributions and savings. Many Canadians contribute to their RRSP to grow their retirement savings fund. The money you place into your RRSP can grow tax-free until it is withdrawn. However, it is taxed upon withdrawal. The good news is if you leave your savings in place until retirement, your annual income will be lower by the time you withdraw, assuming you are no longer working. This means your taxes will also be lower since you are part of a lower income tax bracket. In effect, you will not be taxed as heavily. RRSP contributions may also be tax-deductible, meaning they do not count as taxable income once they are in your account. The Home Buyers’ Plan (HBP) is a program that allows you to make a withdrawal from your RRSPs to buy a home. The HBP allows you to pay back the amounts withdrawn within a 15-year period. Your RRSP issuer will not withhold tax on withdrawn amounts of $35,000 or less. Certain conditions must be met in order to be eligible to participate in the HBP, including you must be considered a first-time home buyer.

What is an FHSA?

Finally, we have FHSAs, or first home savings accounts. This product is especially powerful as it combines the advantages of RRSPs and TFSAs. An FHSA is designed to help Canadians purchase their first home. A person can contribute up to $8000 per year, up to a lifetime maximum of $40,000. Their contributions are tax-deductible, and withdrawals are not taxed. This means you can use this full $40,000 to help buy a home, without worrying about paying taxes on it. You can keep this account open for up to 15 years. You must be a first-time buyer to open this account. 

Which one is best for you?

Your individual needs will determine which of these products is best for you. An FHSA is a great product for those saving to purchase their first home, since contributions are tax-deductible and withdrawals are tax-exempt. However, only first-time home buyers can open this type of account, so eligibility is limited. RRSPs allow you to grow savings tax-free, meaning you can earn money just by leaving funds untouched in the account. On the flip side, this money is taxed upon withdrawal. A TFSA allows you to withdraw money without paying taxes, which can be very handy for future purchases. However, contributions themselves are not tax-deductible. 

Deciding which account is right for you can be tricky, and it can be stressful trying to wrap your head around all the rules and regulations of each one. The good news is you can consult a mortgage broker, who can help you decide on the best course of action! We can discuss your short-term and long-term goals, and your income, to determine which type of account would serve your needs best. You certainly don’t need to be an expert on any of these products to open one, because you have professional guidance at the ready!

If you have any questions about your mortgage, get in touch with us at Clinton Wilkins Mortgage Team! You can call us at (902) 482-2770 or contact us here.