RRSP vs TFSA vs FHSA: Understanding the Key Differences

In Canada, there are several investment accounts designed to help individuals save for their future. Three of the most commonly used are the Registered Retirement Savings Plan (RRSP), the Tax-Free Savings Account (TFSA), and the First Home Savings Account (FHSA). Each of these accounts serves different purposes and offers distinct tax benefits. Let’s break down the key differences between them and understand when to use each one.

1. RRSP (Registered Retirement Savings Plan)

Purpose:

An RRSP is primarily used to save for retirement. The funds in an RRSP can be invested in a variety of assets such as stocks, bonds, and mutual funds.

Key Features:

• Tax Deductibility: Contributions to an RRSP are tax-deductible, meaning you can lower your taxable income for the year you make the contribution. This can reduce the amount of income tax you owe for that year.
• Tax-Deferred Growth: The investments within an RRSP grow tax-free while they remain in the account. You will only pay tax when you withdraw the funds, usually at retirement, when your income is likely lower and you’ll pay tax at a lower rate.
• Contribution Limits: The contribution limit for an RRSP is based on your earned income. In 2025, the limit is 18% of your income, up to a maximum of $30,780.
• Withdrawals: When you withdraw funds from your RRSP, the amount is fully taxable as income. The Canadian government withholds taxes at the time of withdrawal, and you may also face additional taxes when you file your tax return.
• Required Minimum Withdrawals: Starting at age 71, you must convert your RRSP to a Registered Retirement Income Fund (RRIF) or an annuity, which requires minimum withdrawals each year.

Best For:

• Saving for retirement with tax relief now.
• High-income earners who want to reduce their taxable income.

2. TFSA (Tax-Free Savings Account)

Purpose:

The TFSA is designed to offer flexibility for saving and investing for any goal, whether it’s buying a home, going on vacation, or retirement. It’s a versatile account that can accommodate a wide range of investment types.

Key Features:

• Tax-Free Growth and Withdrawals: Unlike an RRSP, contributions to a TFSA are made with after-tax dollars. However, any growth (interest, dividends, capital gains) is completely tax-free, and withdrawals are also tax-free.
• Contribution Limits: The annual contribution limit for 2025 is $6,500. The limit is cumulative, meaning if you don’t contribute the full amount in a given year, the unused portion rolls over to future years. The total contribution room grows every year.
• Withdrawals: You can withdraw any amount from a TFSA at any time, and the withdrawals are not taxed. Moreover, the amount withdrawn is added back to your contribution limit in the following year.
• No Impact on Government Benefits: TFSA withdrawals do not affect eligibility for government benefits like Old Age Security (OAS) or the Guaranteed Income Supplement (GIS).

Best For:

• Saving for medium- and long-term goals.
• Those who want tax-free growth and flexibility in withdrawals.
• Individuals looking to save for retirement, but with more flexibility than an RRSP.

3. FHSA (First Home Savings Account)

Purpose:

The FHSA is a newer account designed specifically to help first-time homebuyers save for their down payment. It combines features of both the RRSP and TFSA, offering unique benefits for homeownership.

Key Features:

• Tax Deductibility: Similar to the RRSP, contributions to an FHSA are tax-deductible, reducing your taxable income in the year you make the contribution.
• Tax-Free Growth and Withdrawals: Like the TFSA, the growth within the FHSA is tax-free, and withdrawals used to purchase a first home are also tax-free.
• Contribution Limits: The annual contribution limit is $8,000, with a lifetime limit of $40,000.
• Eligibility: To contribute to an FHSA, you must be a first-time homebuyer and a resident of Canada. The funds must be used to purchase a home within 15 years of opening the account.
• Withdrawals: Withdrawals are tax-free if they are used for a qualifying home purchase. If the funds are not used for a home purchase, the tax treatment of the withdrawal will depend on whether the funds are transferred to an RRSP or withdrawn as cash.

Best For:

• First-time homebuyers looking to save for a down payment.
• Individuals who want the benefits of both RRSP and TFSA in one account.

Key Differences at a Glance

Conclusion: Which One Should You Use?

Choosing the right account depends on your financial goals:

• If you’re saving for retirement and want to reduce your taxable income today, the RRSP is likely your best option.
• If you want flexibility for a variety of savings goals and prefer tax-free growth, the TFSA is a great choice.
• If you’re a first-time homebuyer, the FHSA provides the best of both worlds: tax-free savings with the added bonus of contributing to your home down payment.

Ultimately, you may find that using a combination of these accounts aligns best with your long-term financial strategy. It’s always a good idea to consult a financial advisor to ensure you’re making the most of these valuable savings tools.