Many Canadians hold multiple types of investing accounts at the same time. There are advantages to using Tax-free Savings Accounts (TFSA), Registered Retirement Savings Plans (RRSPs), or a First Home Savings Account to help you reach your goals. If you need to choose which account(s) to contribute to first, consider what you’re saving for and how the accounts are different.
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Can you have an RRSP, TFSA and FHSA at the same time?
Yes, you can hold all three of these accounts at the same time. Registered Retirement Savings Plans (RRSPs), Tax-free Savings Accounts (TFSAs) and First Home Savings Account (FHSAs) offer some common benefits, such as:
- Your money is tax-sheltered while it stays in these accounts.
- You can hold savings deposits or investments of different kinds in all three accounts.
- If you don’t contribute your maximum available amount in one year, you can carry forward your contribution to a future year.
The accounts are also different in several ways. For example:
- You need earned income in order to contribute to an RRSP, but not for a TFSA or FHSA.
- Your RRSP and FHSA contributions are tax-deductible, but not for a TFSA.
- Your TFSA can be used for any type of savings goal, but there are specific rules for how you can use your FHSA or RRSP.
- There are different age limits for when you can contribute to each of these accounts.
Review the table below for a snapshot of how these three accounts are different.
Comparing RRSPs, TFSAs, and FHSAs at a glance
| Condition | RRSP | FHSA | TFSA |
|---|---|---|---|
| You need earned income to contribute | Yes | No | No |
| Your contributions are tax-deductible | Yes | Yes | No |
| Your money is tax-sheltered while it stays in the account | Yes | Yes | Yes |
| Your withdrawals are tax-free | No | Yes | Yes |
| There is an age limit for making contributions | Yes | Yes | No |
| The account can hold investments or savings deposits or both | Yes | Yes | Yes |
| You can carry forward unused contribution room to a future year | Yes | Yes | Yes |
| The account is designed with specific saving or investing goals in mind | Yes | Yes | No |
What are the tax differences for TFSAs, RRSPs and FHSAs?
One of the main ways these accounts are different is whether your contributions can be claimed as tax deductions. A tax deduction lowers your taxable income at the time you file a return. This could potentially lower how much tax you owe at tax time.
RRSP and FHSA contributions can both be claimed as tax deductions. TFSA contributions cannot. If you have a pension plan, your RRSP contribution will be reduced by an amount known as a pension adjustment , which is reported on your T4 slip each year.
Another difference is whether withdrawals are considered taxable income. RRSP withdrawals are considered taxable income, but TFSA withdrawals are not. This is because of differences in how contributions are treated:
- RRSP contributions can be claimed as tax deductions, which defers treating the money as taxable income until the time it is taken out of the account.
- TFSA contributions are made from “after tax” income, which means that when the money is taken out of the account it is not treated as taxable income.
Keep in mind that if you withdraw money from your TFSA, you may be charged penalties if you deposit money back into the account in the same year. This is because it could be considered an over-contribution. Learn more about TFSA contributions.
A withdrawal from your FHSA is not considered taxable income as long as it meets the conditions for a qualifying withdrawal.
Remember:
The main difference between an RRSP and a TFSA is the timing of taxes. An RRSP lets you defer taxes, which is an advantage if your marginal tax rate is lower in retirement. If you expect to earn a higher income after you retire, then the TFSA may be the better option for retirement savings. Speak to a financial advisor about the right approach for you.
Can you carry forward your unused contribution room to a future year?
If you don’t contribute the full amount you are allowed in any one year, you can carry forward any unused contribution room for your TFSA, RRSP or FHSA.
You can find out how much contribution room you have available in your TFSA, RRSP or FHSA on your latest Notice of Assessment.
TFSA contribution room is the same each year for all Canadians. RRSP contribution room is determined by how much income you made in the previous year. FHSA contribution room depends on how long you have had the account, and how much you have already contributed. Learn more about FHSA contribution room.
You can keep a TFSA open from when you turn 18 until any age. However, there are limits to how long you can keep an RRSP and an FHSA. An RRSP must be closed by the year you turn 71. At that time, you can either convert your RRSP to a RRIF or buy an annuity. An FHSA must be closed after 15 years, or when you turn 71, whichever is sooner.
How can you decide which account to use for your saving and investing goals?
The account you choose might depend on what you’re saving for, but some of these accounts can be used for more than one kind of goal.
- The First Home Savings Account is designed to help you save for your first home. If you don’t end up using your FHSA for a home purchase, you can transfer money into an RRSP or a RRIF.
- The Registered Retirement Savings Plan is designed to help you save for retirement. However, there are two programs that allow you to use money in your RRSP for other goals. The Home Buyers’ Plan (HBP) allows you to withdraw money from your RRSP towards purchasing a home. The HBP can be used for the same home purchase as your FHSA. The Lifelong Learning Plan (LLP) also allows you to withdraw from your RRSP for your education. Learn more about RRSP withdrawals for the HBP and LLP.
- The Tax-Free Savings Account can be used for many kinds of financial goals. You could use it as an additional retirement savings account, or to build an emergency fund.
Summary
You can hold a TFSA, RRSP, FHSA, or all three if you want to. If you’re deciding which to contribute to first, consider which of these is most important for your financial situation:
- RRSP contributions will help you save for retirement and give you a deduction at tax time. This can be helpful if your income is higher in your working years than you expect it to be in retirement.
- TFSA contributions are not tax deductible but also will not count as taxable income when you withdraw them. TFSAs can be used for many kinds of savings goals.
- FHSAs are designed to help you save for your first home. If you don’t use your FHSA for a home, you can transfer the money to an RRSP.
