Canadians have access to several different types of savings accounts, but TFSAs, RRSPs and FHSAs are among the most popular – and three savings vehicles everyone should be aware of. They’re free to open and offer several advantages over traditional saving and investment accounts.
Let’s break down how they can help you.
Tax-Free Savings Account (TFSA)
The Tax-Free Savings Account (TFSA) is widely used by Canadians to invest and grow their money tax-free. Unlike traditional investment accounts, where capital gains and dividends are subject to taxation, the TFSA shields your profits from the taxman. If you lose money on your investments, however, capital losses are not tax-deductible, like they would be in other investment accounts.
At any point in time, you can withdraw your money without any tax fees and have it safely deposited directly into your bank account (subject to a few days’ delay). As an added bonus, any dollar amount withdrawn from the account will be added back to your contribution room the following year.
It’s never too late to open a TFSA and reap the benefits, provided you’re over 18 and have a valid social insurance number (SIN). Contribution room accumulates from the year you turn 18, with additional room added each year. For example, if you turned 18 in 2018 and have yet to contribute, you’d be able to contribute $43,000 as of 2024.
| Year | Amount | Contribution limit |
|---|---|---|
| 2024 | $7,000 | $95,000 |
| 2023 | $6,500 | $88,000 |
| 2022 | $6,000 | $81,500 |
| 2021 | $6,000 | $75,500 |
| 2020 | $6,000 | $69,500 |
| 2019 | $6,000 | $63,500 |
| 2018 | $5,500 | $57,500 |
| 2017 | $5,500 | $52,000 |
| 2016 | $5,500 | $46,500 |
| 2015 | $10,000 | $41,000 |
| 2014 | $5,500 | $31,000 |
Registered Retirement Savings Plan (RRSP)
Registered Retirement Savings Plan (RRSP) is THE account Canadians use when saving for their retirement. Each year, you can contribute up to a specified limit determined by the government of Canada, or up to 18 per cent of your earned income from the previous year, whichever is the lower amount. If you don’t have the funds to contribute to the account for this year, you can make up for it later. RRSPs have a cumulative contribution limit so you’re able to contribute any unused room the next year, in addition to that year’s contribution room. If you’re unsure how much you can contribute, check your notice of assessment. It’ll be the last line of that tax statement, showing the maximum amount you can contribute next year. You can also check manually, by adding up each year’s individual contribution room and subtracting that total to any contributions made to the account.
Beyond retirement readiness, RRSP contributions offer the added advantage of tax deductibility, potentially reducing one’s tax rate. Your tax rate is determined by your level of income, so if you were to contribute $30,000 into your RRSP, it would lower your taxable income by $30,000, potentially putting you in a lower tax bracket. You can take the money out whenever you want, but unlike a TFSA, once you withdraw your money, you can’t re-contribute that amount in the future. You will also be taxed on what you withdraw, as if it were income earned in the year you withdrew it. That’s why most people contribute when their income is high to potentially lower their tax rate, and withdraw the money when they’ve retired and are in a presumably lower tax bracket.
First Home Savings Account (FHSA)
The First Home Savings Account (FHSA), is relatively new and was introduced in 2023 to help Canadians afford a home sooner. This account is similar to a TFSA in that it offers tax-free gains and withdrawals if you use the money stored in the account toward buying a home or other qualifying purchases. However, if you spend it on anything else, you’ll be taxed as if it were income earned (similar to the RRSP). Another similarity to the RRSP is that contributions into a FHSA are tax deductible. You can contribute up to $8,000 every year with a lifetime contribution limit of $40,000, and a carryover limit of unused contribution room up to $16,000.
Once you open your account, you have until December 31st, 15 years from that date, to withdraw your funds. If your 15 years are up, then the money within your FHSA gets transferred into your RRSP, tax-free, and will not impact your RRSP contribution room.
Comparison Table
| TFSA | RRSP | FHSA | |
|---|---|---|---|
| Requirements to open an account | – Have a valid SIN – 18 years old or older | – Have employment income and file a tax return – You must be a Canadian resident – Have a valid SIN | – Be a Canadian citizen between 18 and 71 years old – Have a valid SIN – Make sure neither the account holder nor their spouse have owned a qualifying home where they lived in the current year, or at any time in the preceding four calendar years |
| Intention of the account | This one is used for a little bit of everything: An emergency fund, passive income, savings for a rainy day, retirement savings, big purchase savings, etc. | To save for retirement | To buy your first home |
| Lifetime of the account | None | December 31st of the year you turn 71 years of age | Fifteen years since the year opened, or December 31st of the year you turn 71 years of age |
| When you can start to contribute | When you turn 18 and have a valid SIN | As soon as you receive employment or business income, and have filed a tax return. There’s no minimum age for opening an RRSP, however you must be over 18 years old to contribute more than $2,000 a year | When you turn 18 and have met the requirements listed above |
| What you can hold in the account | – Cash – Mutual funds – Most securities listed on a designated stock exchange – Guaranteed investment certificates (GIC) – Canada savings bonds and provincial savings bonds – Certain shares of small business corporations | ||
| Yearly contribution limit | Changes every year, usually around $6,000 Contribution for 2024: $7,000 | Either 18% of last year’s earned income or the maximum amount for the current year, as specified by the CRA. – whichever is less Contribution max for 2024: $31,560 | $8,000 |
| Where to find your contribution limit | The Canadian government determines the contribution room each year, which is indexed to inflation and rounded to the nearest $500. | Check your Notice of Assessment from the CRA. You get this after you file your income tax every year | Check out this contribution calculator here. |
| Lifetime limit to contributions | Unlimited | Unlimited | $40,000 |
| Penalty for over contribution | Yes – You will have to pay a tax equal to 1% per month on the highest excess contributed amount in that month. You will continue to pay the monthly 1% tax until the excess amount is removed | ||
| Carry over contribution room | Yes – contribution room starts accumulating from the year you turned 18 | Yes – contribution room starts accumulating the year you pay your taxes and have earned income | Yes – up to $16,000 Your contribution room starts the day you open the account |
| Can you re-contribute amounts that you’ve withdrawn? | Yes | No | No |
| Are contributions tax deductible? | No | Yes | Yes |
| Withdrawals & its taxation | You can withdraw any time without any worry of fees or taxes | You can withdraw anytime but withdrawals will be taxed as if they are income earned in the year you withdrew it | You can withdraw any time. If the amount is being put towards a qualifying home, then it’ll be tax free, if not, then you will be taxed on it as if it were income earned of the year you withdrew it |
| Capital gains and losses | Capital gains are tax-free but capital losses are not tax deductible. In traditional investment accounts, you’re able to offset your capital losses against your capital gains, but since you’re not taxed on your capital gains within these accounts, you will not be able to claim anything as capital losses. | ||
