The FHSA Edge: Why it Beats the RRSP (With 2 Key Exceptions)

Saving for your future is important, whether you’re planning to buy a home or thinking about retirement. You might have heard about Canada’s new account, the FHSA. It’s being called a game-changer because of its benefits over the RRSP, particularly if you’re considering buying your first home.

Key Takeaways

  • FHSA allows tax-free contributions and withdrawals for first-time home buyers.
  • RRSP is better for investing in US stocks and employer matching.
  • FHSA can transition into RRSP for flexible retirement savings.

Comparing FHSA and RRSP

Best Initial Pick for Your Savings

When considering where to put your money first, the FHSA usually comes out ahead compared to the RRSP. The FHSA allows you to save up to $8,000 per year, hitting a total of $40,000. When the time comes to buy a home, you can take out the full amount without paying taxes and without having to pay it back. This gives you freedom and reduces stress, especially in the early years of owning a home.

In contrast, using the RRSP Home Buyers’ Plan, you can take up to $60,000 without immediate taxes, but it needs to be paid back within 15 years. Missing a payment means additional taxes that year. So, for home buying, FHSA makes life simpler.

House Purchase Plans Compared

Looking at how each helps with buying a house, the FHSA shines. If you contribute $8,000 a year for five years, you reach $40,000. With a 6% annual return, this can grow to about $45,000. If this continues for another 10 years, you might have $80,000—all tax-free to use as a down payment.

The RRSP lets you withdraw up to $60,000 tax-free, but that’s the limit, and it comes with a repayment plan. For a larger, flexible down payment, FHSA is the winner.

Potential for Your House Payment

The FHSA offers greater down payment potential. Thanks to its tax-free growth, you could accumulate more money for the down payment on your new home. Running with our earlier example, the FHSA could grow to cover your whole down payment without the repayment strings attached that come with the RRSP. This makes the FHSA more flexible for bigger home-buying plans.

Analyzing Tax Perks

The FHSA and RRSP both let you deduct contributions from your taxes. But using FHSA to buy your first home means you won’t pay taxes on that withdrawal. This is a big benefit—it feels like getting a two-for-one deal on your taxes. First, save on taxes when you add the money, then save again when you take it out.

For RRSP, you also get a tax deduction when you contribute. But if you use the Home Buyers’ Plan, you’ll need to repay what you take out. If you miss a repayment, it affects your taxes for that year. So, FHSA scores here with its simple tax-saving benefits.

Choices for Investing

Potential for Tax-Free Growth

You have a great option in the FHSA, where your investments can grow without having to pay taxes on the profits as long as the cash stays in your account. This is similar to what you get with an RRSP, making both accounts a solid choice for growing your investments. Think of it as planting a tree that grows over time, except you don’t pay tax on the fruit it produces until you harvest it.

Comparing Different Investment Accounts

Choosing between an FHSA and an RRSP can be tricky since both offer you the ability to invest in things like stocks, bonds, and mutual funds. Here’s a simple table to help you compare:

FeatureFHSARRSP
Contribution LimitUp to $40,000 totalUp to 18% of your income, higher cap
Tax BenefitTax deductible, tax-free withdrawal for first homeTax deductible, withdrawal taxable
Withdrawal RulesNo repayment needed for home purchaseMust repay if used for a home purchase

Both types of accounts are great for building a varied investment portfolio. Whether you start with stocks or mutual funds, your money can grow without taxes on the profits while it’s invested. However, how you use the funds later might change depending on your goals, like buying a house or saving for retirement.

Smart Ways to Save for Retirement

Limits on Contributions and Choices

Choosing the right account for your savings can affect how much you can set aside and how easily you can adjust your contributions. The FHSA allows you to put away up to $8,000 annually and can grow to $40,000 over time. Meanwhile, with an RRSP, the amount you can contribute is more flexible and depends on your income—up to 18% each year.

Due to this flexibility, you might prefer to start with an FHSA and enjoy tax-free withdrawals if you’re planning a home purchase. If plans change, you can move your savings into an RRSP later.

Moving Funds Between Accounts

If you’re considering moving money between accounts, it’s smart to know how this affects your tax benefits. You can transfer funds from an FHSA to an RRSP without losing any tax advantages.

This approach offers a simple way to balance saving for a down payment and preparing for retirement. It ensures your finances remain flexible and efficient, letting you switch gears as life changes without losing your tax benefits.

Benefits of RRSP

Tax-Friendly U.S. Stocks

If you’re looking to invest in U.S. stocks, an RRSP is a smart choice. Why? Because any dividends from U.S. stocks in an RRSP are not subject to the 15% withholding tax, thanks to the U.S.-Canada tax treaty. This means you get to keep more of your money, boosting your overall return.

Matching from Employers

Think of employer matching as a bonus for your retirement savings. If your workplace offers to match your RRSP contributions, you’re essentially getting free money added to your account. For example, if you contribute $5,000 and your employer matches that, your RRSP grows by $10,000 that year. This isn’t available with an FHSA, making RRSP a strong contender when it comes to boosting your savings through employer benefits.

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AUTHOR

Christopher Liew, CFA

As the founder of Blueprint Financial, Christopher leads a team that creates personalized strategies tailored to your life and business goals—so you can secure your future and enjoy your dream lifestyle with confidence and ease.
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