Last updated November 29, 2024.

Every time RRSP season rolls around, people ask me: which is better – Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA) or First Home Savings Account (FHSA)? The answer depends on your financial goals, income, and savings timeline. Each of these accounts offer unique benefits and drawbacks, helping you save for retirement, your first home or other life goals.

Let’s break down the pros and cons of each option to help you decide what works best for you.

RRSP (Registered Retirement Savings Plan)

Pros

• Retirement-focused savings: RRSPs allow tax-sheltered investment growth, making them an excellent tool for building your retirement nest egg.
• Immediate tax benefits: Contributions reduce your taxable income, and investment growth inside the RRSP isn’t taxed until withdrawn. This is especially helpful if you’re in a high tax bracket now and expect to be in a lower one during retirement.
• Homebuyer and education incentives: There are two instances where you can withdraw money early from an RRSP without incurring income tax. The first is when buying your first home as you can withdraw up to $60,000 without penalty or tax, and you have up to 15 years to repay the amount borrowed from your RRSP. The same exception applies when withdrawing from an RRSP to pay for post-secondary education (Lifelong Learning Plan). The Lifelong Learning Plan allows you to withdraw a max of $10,000/year towards education up to a $20,000 total maximum.
• FHSA transfer option: If you are a first time home buyer, you now have another tax-sheltered savings option called the First Home Savings Account. You can make tax-deductible contributions or directly transfer existing RRSP assets into this new plan subject to certain limits and make a tax-free withdrawal to purchase a home.

RRSP: Cons

• Taxable withdrawals: Any withdrawal (other than for buying a first-home or education) adds to your taxable income, potentially pushing you into a higher tax bracket.
• Loss of contribution room: By withdrawing early, you lose tax deferred growth of your income in the RRSP unless it’s for the Home Buyers’ Plan or Lifelong Learning Plan. Withdrawal fees also usually apply when withdrawing early.
• Early withdrawal penalties: When you withdraw funds you lose that RRSP room and will not be able to add those funds back in unless it was a home buyers or educational withdrawal

TFSA (Tax-Free Savings Account)

Pros

• Tax-free growth and withdrawals: The income from TFSA investments is completely tax-free. Unlike with an RRSP, you can withdraw from your TFSA at any time, and the amount won’t be added to your taxable income.
• No fee impact: There are no fees at the branch level when you withdraw your funds at a financial institution, although some accounts (such as accounts with investment advisors), may still have fees.
• Flexible savings tool: Use it for any goal—retirement, emergencies, or even estate planning, as funds can be passed on tax-free.
• Contribution room restoration: Compared to an RRSP, a TFSA can be a better choice if you expect to remain in the same or higher income bracket in retirement. An RRSP is better if you are in a higher tax bracket while working and expect to be in a lower tax bracket in retirement.

TFSA: Cons

• No tax deduction: One difference when investing in a TFSA instead of an RRSP is that you don’t receive any break on your income tax for the amount that you invest. For this reason, if you’re self-employed or someone who typically has an income tax bill at the end of the year—or if you’re investing for your retirement and want to save on your income tax—an RRSP might be a better option.
• Overcontribution risks: Some people treat TFSAs as they would a regular checking or savings account, depositing and withdrawing money throughout the year. But there are legal limits to how much you are allowed to contribute.
• Easy access temptation: It can be too easy to “borrow” funds from your long-term savings, making you lose the benefits of compound interest and potentially setting back your long-term savings goals.

FHSA (First Home Savings Account)

Pros

• Tax advantages: Contributions (up to $8,000 annually and up to $40,000 lifetime) are tax-deductible, and both growth and qualifying withdrawals are tax-free when used for a qualifying first home purchase.
• No repayment required: Unlike RRSP withdrawals for the Home Buyers’ Plan, you don’t need to repay FHSA funds used for a home purchase.
• Flexible rollover option: Unused FHSA funds can be directly transferred to your RRSP without affecting your RRSP contribution room, allowing for retirement savings.
• Joint purchase option: If you open an FHSA and later meet a partner who owns a home you can still use your FHSA towards a home purchase (even if your partner owns a home)

FHSA: Cons

• Restricted use: Funds must be used for a qualifying first home purchase; otherwise, withdrawals are taxed as income.
• Limited time frame: FHSAs must be used within 15 years of opening the first FHSA (but could be earlier depending on age and if qualifying withdrawals have been made), or funds can be directly transferred to an RRSP/RRIF.
• Eligibility requirements: You must be 18+ (and not over 71), a Canadian resident and a first-time homebuyer to open the account, with additional requirements in order to make tax-free qualifying withdrawals.
• Overcontribution penalties: Contributions exceeding your limit incur a 1% monthly penalty (this applies to RRSP and TFSA also).

Which Savings Tool is Right for You?

• RRSPs are ideal if you’re focused on retirement savings and currently in a high tax bracket.
• TFSAs offer flexibility and tax-free growth, making them a great choice for short-term goals or if you anticipate a high-income during retirement.
• FHSAs are perfect for first-time homebuyers looking to save for a down payment while enjoying tax benefits.

Each account has its strengths, and the best choice depends on your financial situation and goals. Consider consulting a financial advisor to create a savings strategy tailored to you

Need advice?

You can book a one-to-one planning appointment with one of our wealth management professionals at Vancity, to talk about options relating to your situation. They can also help advise you on the different types of investment products for RRSPs.

Not a Vancity member? Open an account today.

_{Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this article is from sources believed to be reliable; however, we cannot guarantee that it is 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 information is for informational  and educational purposes and is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters.  Using borrowed money to finance the purchase of securities involves greater risk than purchasing using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. Please see our Terms of Use. or complete.  This material is not intended to be investment, tax or other advice and should not be relied on without seeking the guidance of a professional to ensure your circumstances are properly considered.}