Registered Accounts in Canada

Which account is right for me? (RRSP or TFSA or FHSA)

First off if you have made it this far congratulations! The most recent data from Stats Canada shows that only 58.1% of Canadian families participate in at least 1 of the 3 registered accounts. Unfortunately that data is from 2020 and since then the ease of account creation has improved significantly with companies like WealthSimple, MooMoo and QuestTrade ever growing. Before we can decide which account is right for us we first need to understand the differences of the accounts. I find the best way to do that is a good old head to head versus match.

RRSP VS FHSA 🏡

Contributing to RRSP and FHSA

• RRSP: 18% of the income you earned last year up to a maximum ($31,560 for 2024)
  • plus any existing room you have accrued in previous years. The easiest way for one to see their contribution limit is to login to MyCRA
  • eligibility starts when you are 18
  • contribution deadline typically the last day of February of the following year
    • Ex/ February 29th 2024 was the deadline for contributing to an RRSP for the 2023 tax year.
• FHSA: $8,000 per year with a lifetime maximum of $40,000
  • your accrual begins when you open an account and the maximum you can carry forward is $8,000
  • eligibility first-time home buyers
  • contribution deadline is the last day of the year
    • Ex/ December 31st 2023 for 2023.

Withdrawing from RRSP and FHSA

A full breakdown can be found on the canadian governments site here.

• RRSP: funds fall into two buckets “retirement” or one of the “tax free plans”
  • In retirement you can convert your RRSP into a RRIF and use this money to fund your life along with any government benefits you may have. This money is taxable as it was originally claimed as a tax deductible (deferring tax) and now is time for the government to claim their share
  • Tax Free options are the Home Buyers Plan (HBP) and Lifelong Learning plan(LLP). Both of these allow you to withdrawal money tax free from the RRSP however it must be paid back over 15 years with a 1 year grace period.
    • the amount allowed to be withdrawn tax free started at 25k was increased to $35k in 2021 and now sits at $60k at time of writing
  • taking money out pre-retirement is possible but is not advised as it gets added directly to your income and taxed at your marginal rate.
• FHSA:
  • Tax-free withdrawals can only be made if you are buying a qualified home
    • The big benefit here over the HBP of the RRSP is that the funds do not have to be paid back
  • You can withdrawal as much as you would like outside buying a qualified home but then it would be added to your income and taxed at your marginal rate much like your RRSP

My Thoughts on RRSP vs FHSA 💭

I like the increased options offered by the RRSP. I am likely biased as we purchased our home in 2021, well before the introduction of the FHSA. However, if your main focus is in purchasing a home and you are an eligible first time home buyer FHSA mathematically makes the most sense. If you are able to squirrel away more than $8,000 a year you can add that to the RRSP as you are allowed to use both RRSP’s HBP and a FHSA

RRSP VS TFSA 💰

The main difference between these two is that TFSA contributions are not tax deductible whereas RRSP’s are.

Contributing to TFSA:

• TFSA: A flat amount is defined by the government each year and your total contribution room is dictated by summing the amounts each year since your 18th birthday.
  • You can check your total available contribution room in the MyCRA portal
    • *I have noticed that it is rather slow to update and thus it is better to keep track of your deposits yourself.

  • Annual TFSA Dollar Limits:

    Year(s)	Amount
    2009 to 2012	$ 5,000
    2013 and 2014	$ 5,500
    2015	$10,000
    2016	to 2018 $ 5,500
    2019	to 2022 $ 6,000
    2023	$ 6,500
    2024	$ 7,000

  • $95,000 total at time of writing if you were 18 years of age in 2009
• RRSP: amount is based on income see above

Withdrawing From TFSA

• The biggest benefit to the TFSA is that it does not have any tax implications when withdrawing your hard earned money. The reason for this is that the contributions are made with after tax income meaning you have already paid the taxman.
  • when withdrawing from the TFSA you gain the amount as contribution room back on January 1st of the following year.
  • Let’s look at an example
    • I have contributed the maximum today in 2024 of $95,000
    • It has grown to $102,000
    • I withdrawal $2,000 in December for Christmas gifts
    • Let’s pretend the CRA sets the contribution amount to $8,000 in 2025
    • Starting January 1 2025 I now have $10,000 in contribution room

How would I choose? 🤔

• Nothing beats free money so if your employer has a matching program take full advantage and reach their maxing cap first.
  • Personally at work we can choose an RRSP or TFSA match. I am currently signed up for the RRSP match
• If I was eligible for first time home buyers and buying real estate was my number 1 priority I would contribute in the following order FHSA -> RRSP (HBP Up To LIMIT) -> TFSA
  • The reason for this is it would maximize my tax return the following year making my access to funds to purchase real estate even higher
• If I am uninterested in buying real estate and I make a modest amount of money say $55,000 I would use this order TFSA -> RRSP -> FHSA
  • This is mostly due to the assumption that you are likely early in your career and your higher earning years are ahead of you. Said another way you would benefit from keeping your RRSP contribution room for when you are in a higher tax bracket.
  • If a small portion of your income is in a higher bracket you could simply contribute to that amount to your RRSP to reduce the marginal rate
    • Calculator for Ontario for 2024
      • $51,900 has a marginal rate of 20.05%
      • $55,00 has a marginal rate of 24.15%
      • If I take the difference of $3,100 I would receive $746 in savings.
• If you can’t decide you could simply play Humpty Dumpty and contribute evenly to all 3 or exclude FHSA if you are uninterested in real estate.
  • Back in the day I did 50/50 between RRSP and TFSA nothing wrong with that.
    • Looking backwards I wish I contributed more to my TFSA when I was starting out.

What is my current breakdown? 💻

My plan for 2024 is roughly:

• 60% RRSP
• 40% TFSA

The reasoning behind this is I am still in the career building stage meaning I still have salary growth ahead of me and am not quite yet a peak earning years. I have a significant amount of TFSA room and would like to max that out before my peak earning years.

Lessons I have learned the hard way 🥊

• I did not take the RRSP match immediately the first time that I was offered it. That resulted in me missing out on around $1000 of free money
  • This was 6 years ago and compounded at 7% means I have missed out on $1,500.73
    • compound calculator
    • By the age of 65 that number will be over $10,000. 😱
• By starting with a 50/50 split in my first year of software development making $50,000 a year in 2018:
  • I used RRSP contribution room that would have been more efficient tax wise today.
  • When we went to buy a house I didn’t have access to as much money as I could have otherwise (HBP was at a cap of $35kat the time).

Final Thoughts 💭

If you take one piece of information from this post I hope it is that in Canada we have 3 fantastic registered accounts to aid you in your financial journey and please please please take advantage of them.

Cheers!