TFSA vs. RRSP vs. FHSA: What's the difference?
By: Steven Brennan on April 8, 2025
Saving for the future gets that bit easier when your investments can grow without being worn away by taxes.
Whether you’re planning for retirement, buying your first home or generally investing long-term, you’ll want to know how these savings accounts work and how they’re taxed (or not).
Here’s what you need to know about Canada’s most popular tax-advantaged savings options.
What is a TFSA?
A Tax-Free Savings Account (TFSA) is a registered account that lets Canadians grow their savings without paying taxes on investment earnings. Despite its name, a TFSA isn’t just a savings account - in fact, it can hold stocks, bonds, mutual funds and more.
While TFSA contributions aren’t tax-deductible, the funds inside the account can grow tax-free, and you won’t have to pay tax on withdrawals.
The only thing you need to pay attention to is the annual contribution limit. Currently, it is $7,000 for 2025 — but if you haven’t made a dent to your TFSA, you can contribute retroactively from the year that you turned 18 or from the year 2009 (if you turned 18 before that year).
If you turned 18 any time before 2009 but have never contribute to your TFSA, you can contribute up to $102,000 in 2025. If you were born in 2000 and turned 18 in 2018, you can contribute up to $50,000 in 2025.
Unlike other savings vehicles, TFSAs are highly flexible when it comes to withdrawals. You can take money out tax-free at any time, and any amount withdrawn is added back to your contribution room the following year.
Of course, you should think very carefully before withdrawing from a TFSA for non-essential expenses, as will impact your long-term financial growth. But if you need emergency funds, this is often a better option than dipping into an RRSP, which comes with tax consequences.
Related: What Canadian homeowners can claim on their taxes in 2025
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a tax-advantaged account designed to help Canadians save for retirement. Contributions to an RRSP are tax-deductible, and any investment growth inside the account is tax-deferred.
“Tax-deferred” is different than “tax-free”. “Tax-free” means that withdrawals on any returns on your investments within your tax-free savings account, well, simply aren’t taxed. If you decide to invest in an Exchange-Traded Fund (ETF) within your TFSA, for example, any investment returns that grow within that TFSA can be withdrawn without being subject to taxes.
With a tax-deferred account like an RRSP, you defer paying taxes on any money going into your account, but it will be taxed on its way out. The deferral of taxes helps you reduce the amount of declarable income you claim on your taxes on the year you contribute to your account.
However, you will have to pay taxes on returns on investments when you withdraw the funds (at this point you will hopefully be in retirement and already in a lower tax bracket, which will offset your income tax bill).
With an RRSP you are generally allowed to contribute 18% of your previous year’s income, up to an annual limit ($31,560 for 2024). But just like with a TFSA, your contribution limit can also include unused RRSP deduction room from the previous year — as well as your pension adjustment reversal.
Some employers also offer group RRSPs, which can even include matching contributions. Like a TFSA, an RRSP can hold a wide range of investments, including stocks, bonds, ETFs, mutual funds, and GICs.
Supercharge your housing fund with the Home Buyer’s Plan
And if you’re a first-time homebuyer with a RRSP, you may want to take advantage of the Home Buyers Plan, which allows you to make a tax-free withdrawal up to $35,000 from an RRSP, to buy or build a home.
That’s because after two years of making that tax-free withdrawal, you’ve got 15 years to pay it back, and any amounts that remain unpaid at the end of that period will then be taxed as income.
Learn more: Government of Canada programs to support homebuyers in 2024
What is an FHSA?
Aspiring homeowners have a shiny new savings tool available to them. Launched in 2023, also the First Home Savings Account (FHSA) combines features of both TFSAs and RRSPs, offering both tax-deductible contributions and tax-free withdrawals.
Canadians aged 18 to 71 who haven’t owned a home in the past four years can open an FHSA. The annual contribution limit is $8,000, with a lifetime maximum of $40,000. Plus, your investments inside the account, whether in stocks, bonds, ETFs or mutual funds, will grow tax-free.
You can withdraw tax-free from an FHSA as long as the funds go towards purchasing a qualifying home, and the withdrawal must be made within 15 years of opening the account.
Plus, when it comes to your taxes, an FHSA will require you to claim your tax-deductible contributions, which will lower your taxable income - just like an RRSP.
Bottom line
Tax-advantaged savings accounts can be extremely useful tools for building wealth and making your financial goals a reality. That said, choosing the right account for you will depend on your own circumstances and savings strategy.
It’s also vital to be aware of the rules around contribution limits and penalties for any account you open. A tax-advantaged account should ideally make your financial life easier, but over-contributing or failing to declare a taxable withdrawal could cost you.
