Comparing the Fhsa to Rrsps and Tfsas

March 22, 2023

Key points:

  • Starting April 1st, new home buyers will be able to use the First Home Savings Account tool to help save for their first home purchase.
  • Depending on your situation as a home buyer, other tools like RRSPs and TFSAs may also be great options for saving.
  • Make sure to speak to a tax advisor to determine the product best suited for you.

FHSA, RRSP, TFSA…How do they compare?

In this video, I discuss how the government’s new product for new home buyers, the First Home Savings Account, compares to existing products such as the Tax Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).

Starting April 1st, Canadians will have a new choice when it comes to how they save for the purchase of a new home: The First Home Savings Account. This account allows qualified first-time home buyers to contribute up to $8,000 annually, up to a maximum of $40,000.

Contributions are fully tax deductible. And the withdrawal is fully tax free.

In a previous video I discussed all the details of the FHSA. In this video I’d like to discuss how the FHSA account compares to the two existing options – The Home Buyer’s Plan via the RRSP and a TFSA.

I’d like to include a disclaimer that this video is intended for educational purposes only. I am not an accountant and you should consult with your tax advisor to determine best suitability for your unique circumstances.

When is the FHSA the right tool?

For first-time home buyers who have a long time horizon of at least 5 years, then the FHSA is the tool for the job. 

The reason it’s great for savers with a longer time horizon is because of those limitations I mentioned at the beginning of the video.  You are limited only to $8,000 per year up to a maximum of $40,000. That means it will take 5 years to maximize your contributions.

If you have 5 years or more to save up, then the FHSA has some key benefits over the RRSP home buyer’s plan.

Those benefits include:

  • Income earned by your investments in the FHSA are tax free. That means that if the value of your FHSA increases to $50,000, for example, you can withdraw that entire amount without any tax implications.
  • Unlike the RRSP home buyer’s plan, you are not required to repay any amount back over 15 years.

This account will appeal to young Canadians starting their careers and building up for their first purchase over a longer time period. 

Pros and cons of an RRSP

However, if your plans to buy are more immediate, then you might get more advantage from an RRSP. 

Why? Because the limit on your RRSP contribution is determined by your annual taxable income and the contribution room accumulates year after year. Each individual will have to find out what their personal contribution limit is, but there is a good chance that it is more than $8,000 if you’ve been working and earning income for a number of years. 

The current limit for a withdrawal from your RRSP under the HBP is $35,000.  If you have a contribution room of $35,000, you could make a maximum contribution into your RRSP and have it gestate for 90 days to take advantage of the tax deduction benefit and use the funds to purchase your first home. 

However, there are two cons compared to the FHSA:

  • The Home Buyer’s Plan is more like a loan from your RRSP because you are required to repay 1/15 of your withdrawal per year for 15 years.
  • You are capped at a maximum of $35,000 withdrawal even if your RRSP account is worth more. The FHSA allows you to withdraw more than the $40,000 contribution limit if the value of your investments goes up. 

Pros and cons of a TFSA

Lastly, you have the TFSA. While a TFSA doesn’t provide any specific advantages for first-time home buyers, it does provide what I call the mirror image pros/cons of an RRSP. 

The TFSA limit is communicated annually by CRA. In 2023, the limit is $6,500 and if you’ve never contributed, the accumulated total is now up to $88,000.

The cons of the TFSA are:

  • You can’t deduct the contributions from your taxable income.

But the pros over a RRSP include:

  • The ability to earn investment income tax free.
  • No limitations on how much you can withdraw out of the account.
  • No requirement to repay any withdrawals. 

Need more help or information?

So is your head spinning yet between all the acronyms? FHSA, RRSP HBP, TFSA… I think we have the whole alphabet included. 

Assuming you have a long time horizon to fully take advantage of the benefits of the FHSA, this account should form the foundation of any young Canadian’s savings plan to buy a new home. If you are over 18 years of age and dream of one day owning a home in Canada, then don’t hesitate to open an FHSA account immediately to start saving. 

Once your contribution limit of $40,000 is hit you can then consider looking at TFSAs or RRSPs.

However, if you are on a tighter timeline and want to purchase in less than 5 years, and have more than $40,000 set aside in savings and are trying to decide whether a FHSA is right for you, I would skip and probably recommend an RRSP. 

All I’ll say is that I wish the FHSA was available when I was saving for my first home. I applaud the government for designing and tabling a useful tool that will indeed help younger Canadians in an increasingly challenging real estate climate in Canada.

If you have any questions or would like to discuss your mortgage, you can contact me here or schedule a convenient call time directly into my calendar below.