The RRSP, TFSA and FHSA can each help you save for a house and a comfortable retirement… but how do you choose which one is best for you?
Consider your financial goals, compare your expenses with your income, work with a financial planner to predict tax rates, and learn about the differences below to help you decide.
Let’s begin with the Registered Retirement Savings Plan (RRSP). It is used mainly for retirement savings, but may also be used for educational pursuits, a home purchase, and reducing your taxes owing through tax-deductible contributions. This savings plan usually appeals to those in higher tax brackets and individuals looking to shelter some of their taxable income each year.
You can only invest up to a certain amount into your RRSP per year. There is an annual RSP contribution limit, which is either 18% of your previous year’s earned income, or the current year’s annual limit – whichever is less. Unused contribution room is carried into the following year, and there are penalties for over-contributing, so it is important to be aware of this limit.
You may open an RRSP at any age, but you need earned income and a filed tax return to do so. You will need to convert your RRSP to a Registered Retirement Income Fund (RRIF) by the end of the calendar year you turn 71. This then becomes part of your retirement income through regular investment withdrawals, and helps support your lifestyle along with any other life savings, the Canada Pension Plan (CPP), Old Age Security (OAS), and potential workplace pensions.
PRO TIP: Investment growth inside your RRSP is tax-deferred until you withdraw it, and if you can wait to begin making withdrawals until after you have retired, it could mean lower taxes owing on your RSP withdrawals due to being in a lower tax bracket.
Let’s look at the Tax-Free Savings Account (TFSA) next. This versatile and flexible account is mainly used for general savings. It appeals to lower-income earners and anyone with short-term financial goals, such as vacations or home renos. It can also help you save for retirement or for a home purchase, and the account can stay active for life. You must be 18+ to open a TFSA.
Like the RRSP, the TFSA has an annual contribution limit, unused contribution room is carried forward, and over-contributing can trigger penalties.
Unlike the RRSP, TFSA contributions and withdrawals are tax-free, which is ideal for investors who may need to withdraw money from it at any time.
PRO TIP: Reinvest any dividends, interest, or capital gains earned within your TFSA to maximize the compounding effect over time. This can speed up your investment growth.
Last but not least, the First-Home Savings Account (FHSA) is primarily used for saving money for a home, however it may also be useful later on in retirement as it can be transferred to an RRSP (or a RRIF) providing it was not used to purchase a home.
The annual contribution limit is $8,000 per year with a maximum lifetime amount of $40,000, and if you do not contribute the maximum each year, the annual contribution limit remains capped at $8,000.
Similar to the RRSP, FHSA contributions are tax-deductible, which means you could use this account to try to decrease your taxes owing. Similar to the TFSA, however, you will not have to pay tax on your withdrawals.
You must be 18+ to open an FHSA, and may not close your account before the end of the calendar year of either (a) the 15th anniversary of your first FHSA contribution; (b) your qualifying withdrawal, or; (c) your 71st birthday.
PRO TIP: If you qualify for the FHSA, think about opening an account regardless of your homeownership goals. You will have 15 years to build savings, and if you decide to rent forever, you will have the flexibility to transfer those funds to your RRSP.
So which account(s) should you use?
All three accounts can work together quite well to build your savings. If it is not financially possible to contribute to multiple accounts, selecting an account that aligns with your expected retirement tax rate can help you choose which one is best for you.
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