March 14, 2025
This year, Canadian citizens have an opportunity to take advantage of almost $50,000 worth of tax-advantaged money. The tax advantage comes from the big three bank accounts anyone can open when they are the age of majority in their province: a TFSA, an FHSA, and an RRSP.
Each one of these accounts have their own uses and rules a associated with them as well as broker/bank limitations whoever you decided to open these account with. in this article we will break each one of these account down to the bare bones so you can better decide and plan for your financial future.
TFSA Accounts
Tax Free Savings Account
First introduced in 2009, the TFSA was implemented for Canadians to put aside money tax-free throughout their lifetime.
Rules
When it comes to the TFSA, all growth within the TFSA is entirely tax-free when you draw your money sometime in the future, making it an excellent option for long-term investing.
- There is a maximum contribution limit to your TFSA; if you accidentally contribute more than the maximum to your TFSA, penalties will be enforced by the Canadian Revenue Agency (CRA). These penalties can result in a loss of your money; the best way to ensure you have contributed the maximum amount without going over is to use a contribution calculator to ensure your numbers line up with regulations
- Withdrawing your TFSA is easy and flexible. At any time, you can withdraw your money tax-free; however, the amount you withdraw doesn’t add to your contribution room until next year; for example, let’s say I had $6000 in my TFSA this year and I withdrew $1000 this year as well, for this circumstance lets say this year contribution limit is only $7000 so for the rest of this year I can only contribute $1000 to my TFSA, but if next years contribution limit is $7000 I can contribute $8000 because of of the contribution carryover
- Although the TFSA is entirely tax-free, there are some limitations regarding dividend-paying stocks, particularly in the US market. Although the US market is one of the strongest in the world, as a Canadian investor, our TFSA account does not exempt us from the US withholding tax, meaning that dividend income produced within the TFSA is subject to a 15 percent tax applied automatically, although if you hold us dividend-paying stocks in your RRSP, your are exempt from this withholding tax we will dive into this a bit later
For more information about TFSA’s contact your broker/bank and visit the CRA’s website for more information.
FHSA
First Home Savings Account
The FHSA account was introduced in 2023 to help Canadian particularly the younger demographic to, save up for a down payment on a home.
Rules
Like in the TFSA investments grow tax free within this account making the FHSA a powerful tool to buying your first piece of real estate.
- The maximum contribution limit to your FHSA is $8000 per year and $40000 all time, and after 15 years of your FHSA being opened, it will close, and you will have the option to transfer your money to your RRSP, not affecting the contribution room, again same with the TFSA the CRA governs the contribution room and penalizes you for over-contribution
- You must meet specific requirements to withdraw from your FHSA account for the withdrawal to be approved. Since this is a savings account for a first home, there must be a filed form labelled RC725. Talk to your broker/bank to assist you in making sure you follow all rules and regulations when making the withdrawal, as well as making sure you follow through with putting the money as a down payment for your first home
- The FHSA is still subject to the US withholding tax; however, you can transfer from your FHSA to your RRSP without any fees or chewing up the RRSP contribution room. However, the money now in the RRSP transferred from the FHSA when going to withdrawal will now be taxed regularly
For more information about FHSA contact your broker/bank and visit the CRA’s website for more information.
RRSP
Registered Retirement Savings Plan
The RRSP was introduced in 1957 as part of an amendment to the Income Tax Act that aimed to help Canadians save for retirement.
Rules
RRSP contributions are tax-deductible, reducing your taxable income and potentially paying fewer taxes each year, helping you reach your financial goals.
- RRSP contribution limit is related to your income; you can only contribute 18% of your income from the previous tax year. The max you can contribute this year is $31560; to keep up to date with the contribution limits, check with your broker/bank and follow the CRA. Since this is a registered account with them, they are the ones to enforce and penalize contributors
- When withdrawing your RRSP, taxes still apply to the withdrawal; however, up to 71 years of age, you can transfer your RRSP to an RRIF (Registered Retirement Income Fund), which pays you annually taxed income. Many people view the RRSP as a culmination of wealth. Once they hit a number, they are happy with transferring it as an RRIF to enjoy that income. Another RRSP advantage is the LLP (Lifelong Learning Plan), which allows you to withdraw up to $ 10,000 for education. You can withdraw until January of the fourth calendar year after your first withdrawal up to $20000. HBP (Home Buyers Plan): This RRSP withdrawal helps you buy or build a qualifying home. You can combine the HBP and FHSA to put a significant down payment on your first home. The LLP and HBP balances withdrawn from your RRSP must be paid back. The LLP must be paid back in 10 years, While the HBP must be Paid back in 15 years
- The RRSP is only subject to taxes when withdrawing money; however, the account investments can grow freely and aren’t subject to taxes; It is even exempted from the US withholding tax
RRSPs can be a potent tool in your financial journey. Make sure to consult your broker/bank you best utilize this account to mee your goals and be sure to follows the CRA’s rules a regulations.
Broker/Bank Considerations
Consider these criteria when choosing a broker/bank to open these accounts with:
- Commissions When Investing
- Maintenance Fees
- Security and Reputability
- Tools and Features
- Promotions and Benefits
- Accessibility and Location
- Minimum Deposits
- Tax Reporting
- Customer Support
If you are currently with a broker/bank and want to switch brokers, you can transfer your accounts over for a small fee or open them with a different broker. However, the contribution limit carries over to both accounts if you decide to have the two accounts with other brokers.
*I am not a financial advisor, planner, or professional. The information provided here is for educational and informational purposes only and should not be considered financial advice. Before making any financial decisions, please consult with a licensed financial advisor or other qualified professional who can provide guidance tailored to your individual situation. Investments involve risk, and past performance is not indicative of future results*
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