Canadians have three main registered accounts available, and they work in genuinely different ways. The question is less which one is best and more which one suits the money you are putting aside right now.
RRSP: deduct now, pay later
Contributions are deductible, reducing your taxable income for the year. Investments grow without annual tax. Withdrawals are fully taxable as income.
Room accumulates at 18 percent of your earned income from the previous year, up to an annual maximum, plus any unused room carried forward. Your exact limit appears on your Notice of Assessment.
The deadline is the useful quirk: contributions made in the first 60 days of a year can be deducted on the previous year’s return. RRSPs work best when you contribute while your income is high and withdraw when it is lower, typically in retirement.
TFSA: no deduction, tax-free out
Contributions are not deductible, but growth and withdrawals are entirely tax free, and withdrawals do not affect income-tested benefits.
Room accumulates every year from the year you turn 18, and unused room carries forward indefinitely. The point most often missed: when you withdraw, that amount is added back to your room, but not until January of the following year. Withdrawing and recontributing in the same year is one of the most common ways people accidentally over-contribute and trigger a penalty tax.
FHSA: designed for a first home
The First Home Savings Account combines the better half of each. Contributions are deductible like an RRSP, and qualifying withdrawals to buy a first home are tax free like a TFSA.
You can contribute up to $8,000 per year, to a lifetime maximum of $40,000. You must be a first-time home buyer to open one, and the account has a maximum lifetime before it must be used or transferred. If you do not end up buying, the funds can generally be moved to an RRSP without using RRSP room, so the contributions are not wasted.
How they fit together
These are not mutually exclusive, and most people use more than one. As a broad pattern: if you are saving for a first home, the FHSA is usually the strongest starting point. If your income is high and you want the deduction, the RRSP does that work. If you want flexibility, or your income is modest now and likely to rise, the TFSA is hard to beat.
The right mix depends on your income, your timeline, and what else is going on in your return. It is worth a conversation rather than a rule of thumb. Book a consultation and we will look at it with your actual numbers.
A note on this article: tax rules and deadlines change. This article is general information, not advice for your specific situation - for that, talk to us.