If you’re looking to save for the future, chances are you’ve heard about both the First Home Savings Account (FHSA) and the Tax-Free Savings Account (TFSA). But the big question is: FHSA vs TFSA, which one should you prioritize?
Both accounts offer fantastic benefits, but their purposes and the way they work are quite different. In this post, we’ll compare the features of both accounts, which will help you decide which one makes the most sense for your needs, and share some personal experiences along the way.
1. Introduction to FHSA and TFSA: The Basics
When we’re talking about FHSA vs TFSA, it’s essential to understand the basics of each account first.
The First Home Savings Account (FHSA) is designed to help Canadians save for their first home. It combines features from both a Registered Retirement Savings Plan (RRSP) and a TFSA: contributions are tax-deductible, and any withdrawals made to buy your first home are tax-free. Think of it as an enhanced account specifically for first-time homebuyers.
On the other hand, the Tax-Free Savings Account (TFSA) is more versatile. You can use it to save for any goal, whether it’s buying a house, a vacation, or retirement. The money you contribute to a TFSA is not tax-deductible, but the best part is that your investments grow tax-free, and when you withdraw funds, you don’t pay any taxes on them either.
With these basic definitions in mind, let’s explore further how each account works and determine which one might be right for you.
2. What Is the Purpose of Your Savings?
Before deciding between an FHSA vs TFSA, you need to think about what you’re saving for.
If buying your first home is your number one goal, the FHSA is tailor-made for you. The government created this account to make homeownership more achievable for first-time buyers. With the FHSA, you can contribute up to $8,000 per year, with a lifetime limit of $40,000, and those contributions are tax-deductible.
If you’re not sure if buying a home is in your immediate future, the TFSA might be a better option. The flexibility of the TFSA means you can save for anything — a down payment on a house, an emergency fund, or even retirement. Plus, there’s no limit on when or how you can withdraw from a TFSA, which gives you more control over your savings.
I have been saving aggressively for my first home. Since the introduction of the FHSA in 2023, I have contributed $8,000 each year, and the tax deduction on my contributions has been a significant help in replenishing my TFSA. With the rising cost of housing in Toronto, Canada, where I reside, some of the money from my TFSA can be utilized as part of the down payment for my first house, given its flexibility.
3. Tax Benefits: Immediate vs. Long-Term
When thinking about FHSA vs TFSA, tax benefits play a key role in deciding which account to prioritize.
The FHSA offers immediate tax benefits. Similar to an RRSP, contributions to an FHSA are tax-deductible, which means they reduce your taxable income for the year. So, if you contribute $8,000 to your FHSA, your taxable income for that year will be reduced by $8,000. That’s a considerable incentive if you’re in a high tax bracket and want to reduce your tax bill now.
On the flip side, the TFSA doesn’t offer immediate tax relief since contributions are made with after-tax dollars. That said, any growth in your investments (interest, dividends, capital gains) is tax-free, and you won’t pay any taxes when you withdraw. Over time, the growth can accumulate substantially without any tax implications.
I’ve personally used both accounts, and I’ve found that the immediate tax benefit of the FHSA was incredibly useful when I was trying to lower my taxable income. But for my long-term savings, the TFSA has been pivotal. The tax-free growth has allowed my investments to compound without worrying about taxes when I need the money down the line.
4. Contribution Limits and Room for Growth
Understanding the contribution limits of each account is crucial in the FHSA vs TFSA debate. Below are the contribution limits of the TFSA and FHSA over the years:
| Year | TFSA Contribution Limit | FHSA Contribution Limit |
|---|---|---|
| 2009 | $5,000 | N/A |
| 2010 | $5,000 | N/A |
| 2011 | $5,000 | N/A |
| 2012 | $5,000 | N/A |
| 2013 | $5,500 | N/A |
| 2014 | $5,500 | N/A |
| 2015 | $10,000 | N/A |
| 2016 | $5,500 | N/A |
| 2017 | $5,500 | N/A |
| 2018 | $5,500 | N/A |
| 2019 | $6,000 | N/A |
| 2020 | $6,000 | N/A |
| 2021 | $6,000 | N/A |
| 2022 | $6,000 | N/A |
| 2023 | $6,500 | $8,000 |
| 2024 | $7,000 | $8,000 |
| Total | $95,000 | $16,000 |
With the FHSA, you can contribute up to $8,000 per year, with a lifetime maximum of $40,000. If you don’t contribute the full $8,000 in any given year, the unused amount can carry forward to future years. However, once you’ve used the FHSA to purchase a home or after 15 years of opening the account, you’ll no longer be able to contribute.
The TFSA, alternatively, has an annual contribution limit that changes every year. In 2024, the limit is $7,000. Unlike the FHSA, there’s no lifetime limit, and any unused contribution room rolls over indefinitely. This means the TFSA can continue to grow year after year, and if you withdraw money, that amount is added back to your contribution room the following year.
If you’re looking for long-term growth, the TFSA is the winner in this category. You can keep contributing to it year after year, even after you’ve maxed out your FHSA or bought your first home.
5. Withdrawals: Flexibility vs Purpose
When it comes to FHSA vs TFSA, the withdrawal rules are another key difference.
The FHSA is particularly for purchasing a first home. If you don’t use the funds for that purpose, the money can be transferred into your RRSP or RRIF (Registered Retirement Income Fund) without affecting your contribution limits in those accounts. Conversely, if you withdraw money from your FHSA for any other reason, it will be fully taxed.
In contrast, the TFSA is much more flexible. You can withdraw money at any time, for any reason, and you won’t be taxed on it. Whether you want to buy a house, take a trip, or invest in something else, the TFSA gives you complete freedom over your savings.
I once used my TFSA to help my parents with an unexpected housing repair. The beauty of the TFSA is that I could withdraw what I needed to help them, and continue contributing the next year without any penalty. If I had used an FHSA for that expense, I would have been hit with taxes, and the withdrawal wouldn’t have been added back to my contribution room
6. FHSA and TFSA Together: The Best of Both Worlds?
The good news is that you don’t have to choose between the two — you can contribute to both an FHSA and a TFSA at the same time. In fact, this might be the best strategy for many people, depending on their goals.
For instance, if you’re saving for a home but don’t plan to buy within the next few years, you could prioritize your FHSA for the immediate tax break while still contributing to your TFSA to take advantage of its flexibility and tax-free growth. This way, if your plans change or if an unexpected expense arises, you’ll still have easy access to your TFSA funds without penalty.
Once you’ve maxed out your FHSA or purchased your home, you can continue focusing on your TFSA for future savings goals like retirement or emergency funds.
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7. Long-Term Strategy: After You’ve Bought Your Home
One of the most important things to consider in the FHSA vs TFSA decision is what happens after you’ve bought your home.
Once you use your FHSA to buy a home, the account is closed, and any remaining funds can be transferred into an RRSP or RRIF. This makes it a great bridge between short-term homeownership goals and long-term retirement savings. You’ll get the tax deductions now and ensure that your money continues to grow tax-deferred once it’s in an RRSP or RRIF.
Meanwhile, your TFSA can keep growing for as long as you like, and the flexibility it offers means you can use it for future savings goals, big or small. After buying your home, you might want to shift your focus to using your TFSA for retirement savings or other large purchases.
Final Thoughts: FHSA vs TFSA — Which One Should You Focus on?
So, when it comes to FHSA vs TFSA, which one should be your priority? The answer depends on your current financial goals.
- If buying your first home is your immediate priority, the FHSA should be your priority. Its tax-deductible contributions and tax-free withdrawals for home purchases make it the perfect tool for first-time buyers.
- If you’re saving for something else or want flexibility, the TFSA might be a better choice, especially if you want tax-free growth and the freedom to withdraw your funds at any time.
For many people, contributing to both accounts at the same time can offer the best of both worlds. You’ll get the tax benefits of the FHSA while still enjoying the flexibility of the TFSA.
In my experience, I’ve found that prioritizing one account over the other really depends on where you are in your financial journey. I am a millennial still saving for a home, and I have prioritized the FHSA. Once, homeownership is behind me, the TFSA will become my go-to savings tool for flexibility and long-term growth.
Whichever account you choose, the most important thing is that you’re saving and making your money work for you. Whether it’s through an FHSA, a TFSA, or both, you’re taking meaningful steps toward achieving a better financial future.
