How the New FHSA Compares to the TFSA and RRSP: What Canadian Investors Need to Know
In the ever-evolving landscape of personal finance, Canadian investors now have a new tool at their disposal: the First Home Savings Account (FHSA). Introduced in 2023, the FHSA is designed to help first-time homebuyers save for their first home with significant tax advantages. But how does it stack up against the tried-and-true Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP)? More importantly, how does it fit into your overall wealth strategy?
Let’s break it down.
What Is the FHSA?
The FHSA is a registered savings plan that combines elements of both the RRSP and TFSA. It allows eligible Canadians to contribute up to $8,000 per year, to a lifetime maximum of $40,000, to save toward the purchase of a first home.
Key FHSA Features:
- Contributions are tax-deductible, like an RRSP.
- Withdrawals for a qualifying home purchase are tax-free, like a TFSA.
- Must be used within 15 years of opening or by age 71, whichever comes first.
- Must be a first-time homebuyer (i.e., not owned a home in the past four years).
FHSA vs. TFSA vs. RRSP: A Comparison
| Feature | FHSA | TFSA | RRSP |
|---|---|---|---|
| Tax-deductible contributions | ✅ | ❌ | ✅ |
| Tax-free withdrawals | ✅ (for qualifying home purchase) | ✅ | ❌ (except for Home Buyers’ Plan or retirement) |
| Contribution limits | $8,000/year, $40,000 lifetime | $7,000/year (2024), indexed | 18% of income up to $31,560 (2024) |
| Withdrawals for a home | Tax-free | Tax-free (but no special treatment) | Home Buyers’ Plan: must repay |
| Impact on benefits (GIS/OAS) | No direct impact | No impact | Withdrawals may reduce benefits |
| Contribution room restoration | ❌ | ✅ | ❌ (unless repayment under HBP) |
| Time limits | 15 years or age 71 | None | Must convert to RRIF by age 71 |
Strategic Uses: How the FHSA Fits Into Your Wealth Plan
1. For First-Time Homebuyers: A Clear Winner
If you’re saving for your first home, the FHSA should be your first stop. It offers the best of both worlds: tax savings on the way in and no tax on the way out (provided you use it for a home). It outperforms both the TFSA and RRSP for this specific goal.
2. Combine FHSA and RRSP for Maximum Leverage
You can use both the FHSA and the Home Buyers’ Plan (HBP) under the RRSP to maximize your down payment. The HBP allows up to $35,000 to be withdrawn from an RRSP (per person), but it must be repaid over 15 years. FHSA withdrawals do not need to be repaid.
Together, a couple could potentially access $150,000+ tax-free (if they both fully contribute to the FHSA and RRSP HBP).
3. What If You Don’t Buy a Home?
If you don’t end up buying a home, unused FHSA funds can be rolled into your RRSP without affecting your RRSP contribution room. However, this loses the tax-free withdrawal benefit – funds will be taxed on withdrawal in retirement.
4. TFSA: Still a Vital Tool
The TFSA remains the most flexible and accessible savings vehicle. It should still be part of your long-term strategy—especially for emergency savings, short-term goals, or retirement income planning. Unlike the FHSA and RRSP, TFSA withdrawals are never taxed and can be re-contributed in future years.
How to Prioritize Contributions
Here’s a general guide for prioritizing between the FHSA, RRSP, and TFSA if you’re considering buying your first home in the future:
- FHSA – If you’re a first-time homebuyer, max this out first.
- TFSA – For flexibility, tax-free growth, and goals outside home buying or retirement.
- RRSP – For retirement savings and when you’re in a high tax bracket (to benefit more from the deduction).
Final Thoughts
The introduction of the FHSA is a game-changer for first-time homebuyers. It provides a powerful new way to build a down payment faster and more efficiently, with valuable tax perks. That said, the FHSA should be seen as part of a broader wealth strategy—not a replacement for the TFSA or RRSP.
Whether you’re saving for a home, retirement, or just building wealth over time, a personalized plan that considers your goals, income, and tax situation is key.
Need help building your plan? Contact our team today to ensure you’re making the most of every opportunity—from the FHSA to retirement and beyond.