TFSA vs. RRSP vs. FHSA: Choosing the Best Investment Account (Plus U.S. Equivalents!)

Like anything financial or investment-related, it depends 😜

When it comes to investing, picking the right account is just as important as picking the right investments. A great stock in the wrong type of account? That’s like putting premium gas in a car that takes diesel—it just doesn’t work.

If you’re Canadian, you’ve likely heard of the TFSA (Tax-Free Savings Account), RRSP (Registered Retirement Savings Plan), and FHSA (First Home Savings Account). But if you’re in the U.S., you’re looking at options like the Roth IRA, 401(k), and HSA (Health Savings Account).

Each of these accounts has tax advantages, but which one is best depends on your goals. Let’s break them down.

Tax-Free Savings Account (TFSA), allows you to

• Set money aside in eligible investments, and they grow tax-free throughout your lifetime

• Any Interest, dividends, and capital gains earned in a TFSA are tax-free for life.

• Your TFSA savings can be withdrawn from your account at any time, for any reason, and all withdrawals are tax-free. 1

• Your eligibility is based on being a resident of Canada, valid SIN, and being older than 18 years

What’s the catch?

• There are predetermined contribution amounts/limits 2

  • 2009 -2012 was $5,000.

  • 2013 -2014 was $5,500.

  • 2015 was $10,000.

  • 2016 -2018 was $5,500.

  • 2019 -2022 was $6,000.

  • 2023 was $ 6,500

  • 2024-25 is $ 7,000

Registered Retirement Savings Plan (RRSP)

• For both employees and the self-employed in Canada. 

• No Age Requirement to start- as long as you’ve earned income and live in Canada under 71y.o to contribute 

• Pre-tax money is placed into an RRSP and grows tax-free until withdrawal, at which time it is taxed at the marginal rate. 3

• Contributors may deduct contributions against their income. For example, if a contributor's tax rate is 40%, every $100 they invest in an RRSP will save that person $40 in taxes, up to their contribution limit.

• The growth of investments is tax-deferred. Unlike with non-RRSP investments, returns are exempt from any capital gains tax, dividend tax, or income tax.  This means that investments under RRSPs compound on a pre-deferred basis.

What’s the catch?

• There are predetermined contribution amounts/limits 4

• The RRSP contribution limit is 2025 is 18% of earned income an individual has reported on their 2024 tax return, up to a maximum of $32 490 according to CRA

• Over contributions will be subject to penalties (1% /month).

Financial Health Savings Accounts (FHSAs)

What is it?

• Tax Free Savings Account

• Started in 2023

• Eligible contributors can contribute up to $8000 per year

• Lifetime Maximum of $40 000 per person

Eligibility

• Canadian Resident

• Be at least 18 years old

• Not lived in a home owned by the contributor in the year that the account is opened or the previous 4 years

Contributions

• Contributions are tax deductible like RRSP contributions 

• Growth inside the FHSA will be taxed deferred similar to RRSP and TFSA

• Funds withdrawn to purchase a home are not taxed, like TFSA

• If in any year contributor does not contribute $8000, the unused contributed does not carry forward

Usability

• Account holders will have 15 years from account opening to purchase a home

• Two people can pool funds in FHSA together to purchase a home

• Account must be closed within one year after using funds to purchase a home

• Withdrawals for any purpose other than purchasing a first home will be fully taxable within the year of withdrawal

These detailed insights into FHSA, TFSA, and RRSP intricacies empower you to make informed financial decisions tailored to your goals

Wealthsimple recently published an article about “33 Pressing Questions about RRSPs, TFSAs, FHSAs,” I cover a few of them below.

First Home Savings Accounts (FHSA)

What happens to the portion of an FHSA I don’t use to buy a house? It can be rolled into your RRSP — without being taxed and with no effect on your RRSP contribution room. Just remember that you will be taxed on the money at your marginal rate when you withdraw it, since it will then be coming from your RRSP and is subject to the same rules.

Tax-Free Savings Accounts (TFSAs)

Impact of Pension Deductions, Group Plans, and Dividends:

Group Plan Contributions Count: If you're part of a Group RRSP, Registered Pension Plan, or Deferred Profit-Sharing Plan, contributions from these plans impact your TFSA contribution room. However, dividends and interest received do not affect TFSA limits.

Dividend Income Consideration: Unlike RRSPs, TFSA contribution room remains unaffected by dividends received. This means you can enjoy investment income in the form of dividends without worrying about its impact on TFSA limits.

Registered Retirement Savings Plans (RRSPs)

Income Splitting and Spousal RRSPs:

Balancing Household Income: Spousal RRSPs offer a tool for balancing household income in retirement. By contributing to a lower-income spouse's RRSP, couples can potentially reduce overall taxation, ensuring a more equitable distribution of retirement savings.

Impact on Contributing Spouse's Room: It's essential to recognize that contributing to a spousal RRSP reduces the contributing spouse's RRSP contribution room. Understanding this impact helps in optimizing contribution strategies.

TFSA vs. Roth IRA: Best for Tax-Free Growth

TFSA (Canada)

✅ Contributions are after-tax (no immediate tax deduction)
✅ Withdrawals are tax-free
✅ Can be used for anything—retirement, a house, a vacation, or just growing your wealth
✅ Annual contribution limit (2025): $7,000

Roth IRA (U.S.)

✅ Contributions are after-tax (no immediate tax deduction)
✅ Withdrawals are tax-free (after age 59½ and if the account has been open for 5+ years)
✅ Income limits apply (Single: $146,000 phase-out starts in 2024)
✅ Annual contribution limit (2024): $7,000 ($8,000 if 50+)

🔹 Best For: People who expect to be in a higher tax bracket in retirement and want tax-free withdrawals.

RRSP vs. 401(k): Best for Retirement Tax Deferral

RRSP (Canada)

✅ Contributions are tax-deductible
✅ Grows tax-deferred until withdrawal
✅ Withdrawals are taxed as income
✅ Contribution limit (2025): 18% of the previous year’s income (up to $32 490)

401(k) (U.S.)

✅ Contributions are tax-deductible (Traditional 401(k))
✅ Grows tax-deferred until withdrawal
✅ Employer match available in many cases
✅ Withdrawals taxed as income after age 59½
✅ Contribution limit (2024): $23,000 ($30,500 if 50+)

🔹 Best For: People who want a tax break today and expect to be in a lower tax bracket in retirement.

FHSA vs. HSA: Specialized Accounts with Tax Perks

FHSA (Canada) – First Home Savings Account

✅ Contributions are tax-deductible
✅ Grows tax-free
✅ Withdrawals for a first home are tax-free
✅ Lifetime contribution limit: $40,000

HSA (U.S.) – Health Savings Account

✅ Contributions are tax-deductible
✅ Grows tax-free
✅ Withdrawals for qualified medical expenses are tax-free
✅ Annual contribution limit (2024): $4,150 (single), $8,300 (family)

🔹 Best For: FHSA is for first-time homebuyers, while HSA is for people with high-deductible health plans looking for tax-free medical savings.

Not sure which one would most benefit you?

Do you have an accountant? If yes, please go speak to that person. If not, you may want to seek some professional advice.

For those who like the DIY approach, you can use the above that WealthSimple created.

If you’re interested in the services/products Wealthsimple offers, please consider using the link to open your account.
Lastly, if you want a further breakdown of the FHSA and the First Time Home Buyer Plan (FHBP) through your RRSP, click here