TFSA, RRSP or FHSA: in what order should you use your room?

Three accounts, three roles

The TFSA, the RRSP and the FHSA are often presented as rivals, yet they answer different needs. Comparing them in one block rarely gives a useful answer; it is better to understand what each one is for first.

The TFSA lets savings grow tax-free and be withdrawn tax-free. It is a flexible account, suited as much to an emergency fund as to a project with no fixed date.

The RRSP reduces the tax of the year you contribute, with tax payable when you withdraw. It is designed for long-term saving, retirement in particular.

The FHSA is aimed at buying a first home. It combines a deduction logic with a tax-free withdrawal logic, under specific conditions that you confirm with the Canada Revenue Agency (CRA).

These three accounts are tax wrappers: what matters is what you put inside and why. The wrapper itself produces no return. This article contains no limit and no percentage, because those figures change and should be read at the source.

Start with the goal, not the account

The right question is not “which account should I pick?” but “what is this money for, and when will I need it?”. The answer naturally points the way.

If your project is a first purchase, the FHSA is designed for it. If you are thinking about a distant retirement, the RRSP is often at the heart of the plan. If you want flexibility for surprises or projects with a vague timeline, the TFSA offers the most freedom to withdraw.

Of course, life does not always fit into three boxes. One goal can call on two accounts, and a goal can change along the way: someone saving for retirement may decide to buy a home, and the other way around.

To clarify your situation, write down on a sheet of paper:

• each financial goal for the coming years;
• the time horizon of each (short, medium, long);
• how comfortable you are with the value moving along the way;
• the amounts you can afford to set aside.

This list is an excellent starting point for a conversation with an authorized person.

How income affects the decision

The RRSP works through a deduction: the contribution reduces your taxable income for the year. The higher your income, the more that deduction generally weighs, because it applies to higher tax brackets.

At a more modest income, the deduction weighs less, and the TFSA may prove more advantageous: withdrawals are not taxed and do not push up your income in later years. That difference can also affect certain benefits and credits calculated from income.

These effects are calculated, not guessed. They depend on your current income, the income you expect in retirement, your other sources of income and the tax rules in force. For Quebec taxes, Revenu Québec is the official source, just as the CRA is for federal taxes.

An authorized person can assess your case with you. They cannot promise an outcome, but they can show you the effect of different scenarios under clear assumptions, which you can then check yourself.

If your income varies from year to year, say so: it can change the moment when a contribution is most useful.

Where to find your unused room

Each account has its own contribution room, and it is not always found where you expect. Your notice of assessment and your CRA online account show your room. Do not rely on memory or on a bank statement alone: a financial institution does not know about your contributions made elsewhere.

Here is a simple way to find it:

• open your CRA online account, or find your latest notice of assessment;
• look separately for the room tied to each of the three accounts;
• note the date of the information, because it does not reflect what you have contributed since;
• add up your recent contributions to estimate what remains.

Unused room does not always disappear: in some accounts it carries forward from one year to the next, while in others the rules differ. The exact conditions are confirmed with the CRA.

Keep your contribution and withdrawal statements too. If the CRA ever asks a question or reviews your file, these documents will save you long searches, and they help the person assisting you work from reliable figures.

What happens when you withdraw

Before contributing, look at the exit. Each account treats withdrawals in its own way, and that is often what gets forgotten.

In a TFSA, withdrawals are not taxed. Rules exist on when contribution room is restored after a withdrawal, but they have their quirks: check with the CRA before contributing again, or you risk going over the limit.

In an RRSP, withdrawals are taxed as income, and the room you used is not recovered in the same way. Some programs allow the RRSP to be used for a home purchase or for education, with repayment conditions: confirm these programs at the source.

In an FHSA, a withdrawal for the purchase of a first home must meet specific conditions. A withdrawal that does not may be taxed.

The idea to keep: an account that looks convenient going in can prove restrictive coming out. Ask the question at the start, while the choice is still open, and ask an authorized person to explain the exit before the entry.

A good habit is to write down, for each account, what it is for and in which circumstances you would accept touching it.

A hypothetical scenario

Imagine Léa, who has a steady income and is unsure how to split an amount she has available. She dreams of buying a first home in a few years, but she is also thinking about retirement and wants to keep a reserve for surprises.

She begins by opening her CRA online account and noting her room for each of the three accounts. She then lists her three goals and their horizons: the reserve right now, the home in a few years, retirement much later.

With that information, she meets an authorized person registered with the AMF. She asks them to present several possible splits under the same assumptions, and to explain for each one the tax consequences of a withdrawal. She also asks about the fees tied to the products where the money would be invested.

This scenario is fictional and guarantees nothing. It shows an approach: know your room, name your goals, compare scenarios side by side and decide with full knowledge. The final split belongs to Léa, and she can revisit it when her situation changes.

Common mistakes

Mistakes around these accounts are rarely dramatic, but they cost tax or lost room. They are also easy to avoid.

• Going over the contribution limit, often because contributions were made in several places without adding them up. Penalties may apply.
• Contributing without a plan, simply because a deadline is near and “it is the time to do it”.
• Withdrawing from an account without knowing the tax consequences, or whether the room is restored.
• Choosing an account because of an ad or a relative’s opinion, without checking that it fits your own goal.
• Forgetting that the account is only a wrapper: the product held inside has its own fees and its own risks.
• Not updating your information after a change in your situation (job, family, project).

Each of these mistakes can be spotted in a few minutes when your documents are at hand. A yearly check of your room, on a set date, is often enough to avoid most of them.

Questions to ask

A well-prepared meeting is more useful than a long one. Here are questions to put to an authorized person, and to write down so you can compare the answers.

• Given my goals, in what order would you consider using my room, and why?
• What are the tax consequences of a withdrawal in each of these accounts?
• How was my unused room calculated, and where can I check it?
• Which products would be held in each account, and what fees apply?
• How are you paid for this recommendation?
• What happens if my income or my plans change?

Ask for the answers in writing when possible. A clear explanation that stays the same from one meeting to the next is a good sign. An evasive answer is information too.

To check that the person is authorized to advise you, look them up in the AMF public register before the meeting: it is free and takes a few minutes.

Talk to an authorized person

For a personalised plan, a person registered with the AMF can run the numbers with you. General information on a page does not replace that advice: it helps you arrive prepared, with the right questions and the right documents.

CompareTaux shows no rates and makes no decision for you. The service passes your request to an authorized person, who replies to you directly. You remain free to compare more than one person and to decline any proposal.

Before committing, review your CRA online account, take the time to read the documents you are given and keep a copy of everything you sign. For the official rules, the three sources to consult first are the CRA, Revenu Québec and the AMF.

Finally, remember that no ideal order exists in the abstract. It depends on you, your goals and your unused room, and it can be revised as your life changes. A yearly check-in is generally enough to make sure the plan still holds.

Frequently asked questions

Sources

• Canada Revenue Agency (CRA)
• Revenu Québec
• Autorité des marchés financiers (AMF)
• Financial Consumer Agency of Canada