REGISTERED ACCOUNTS: WHAT THEY ARE AND HOW DO THEY WORK

This article highlights the most important points of Canadian tax-free savings accounts.

Tax-free savings account (tfsa): Ideal for an emergency fund or to save for an important personal project

Contributions

The government fixes the maximum amount you can put annually into the account.
To know how much you are allowed to contribute any given year, you should login into your CRA account before April.
If you cannot contribute to your account in a specific year, this will create room for contribution that you can carry on for next year.

Taxation

Contributions are not tax-deductible but withdrawals are tax free!
You can open as many TFSA accounts as you want as long as you do not exceed the authorized limit for the year. The CRA will impose a 1% tax penalty on all exceeding amounts.
Withdraw any surplus from the account as soon as you are aware of it.

Think of opening a TFSA

To save for an unexpected event, for a trip, a new vehicle , to pay for your studies , etc.
If you have surpassed your RRSP contribution limit.
To combine liquidity and account growth.

Registered Retirement Savings plan (RRSP): The central piece of your retirement strategy

Contributions

All contributions are considered including the ones in your group RRSP employer’s account.
The government informs beforehand the limit date to contribute, usually the last days of February or beginning of March, that is, before the close of the fiscal year.
Take note of the date since there are not extensions nor exceptions, if you miss the date you will have to wait one whole year.

Taxation

Withdrawals from your RRSP are taxable as revenue.
It is essential that you have a strategy in place during what is called the “withdrawal phase” to make sure that your hard-earned savings and interests are not significantly reduced by a high tax rate with each withdrawal.
According to RRSP rules, you can transfer some amounts to other registered accounts like the HBP (Home buyers plan) or HFSA.

Think of opening an RRSP

As an income source for your retirement
For tax optimization during your most productive years.
If you have a group RRSP -with your employer- but you want to have control of the funds where your money is invested.

💡 Pro tip: Contribute to your RRSP at the beginning of the fiscal year. If you are eligible for a tax refund, use it to contribute to your TFSA at the end of the civil year and maximize the growth options on your savings account.

first home savings plan (FHSA): A helping hand with your home’s downpayment

Contributions

You can contribute up to $8,000 and to a maximum of $40,000 within the account’s total life-time.
Contributions must be done during the civil year.
You can transfer money from your RRSP to your HFSA but always minding the maximum contribution limit.

Taxation

Your contributions are tax-deductible.
If you exceed the annual contribution limit you will be penalized with a 1% tax for the excess amount.
Withdrawals are tax-free as long as they are used to purchase an eligible property.

Think of opening a FHSA

If in the last four years your have not lived in a house that you nor your spouse own.
If you are planning to save for a downpayment within the next 8 to 10 years.
If the property you wish to purchase qualifies for FHSA.

What account should I choose?

It depends of you current financial situation and goals.

You want to save with fleixibility in the short to medium term :

TFSA ➜ Contributions are not tax-deductible, but withdrawals are tax free and with no penalties.

You are planning to save for retirement:

RRSP ➜ It can reduce your taxable annual revenu in your most productive years allowing you to constitute a source of income for the future.

You would like to save for your first home:

FHSA ➜ You have the best of two worlds: Contributions are tax-deductible and withdrawals are tax-free for a faster downpayment accumulation.

💡In a perfect world, everybody should have a TFSA account to constitute an emergency fund and a private RRSP for retirement. The FHSA is conditional to whether or not you plan to purchase a property in Canada.

Frequently asked questions about registered accounts in Canada

Can I have more than one account (TFSA, RRSP, and FHSA)?

Yes, you can open several TFSA, RRSP and FHSA accounts with different financial institutions. Just make sure not to go over the authorized contribution by the CRA limit for each type of account.

What happens if I withdraw from my RRSP early?

You will have to pay taxes on every withdrawn amount according to your applicable tax rate. This is why it is important to use the RRSP as a source of revenue until retirement or in combination with another account like HBP (Home buyers plan) for the purpose of purchasing a property in Canada.

Which account is best if I’m a student or have a moderate income?

TFSA is generally the best option since you do not need immediate income-tax deductions and because it is a more flexible account.

What kind of property qualifies for FHSA?

A detached and semi-detached homes; townhouses; mobile homes; condo units; and apartments in duplexes, triplexes, fourplexes and apartment units.

KNOW THE RULES OF REGISTERED ACCOUNTS

Registered accounts are complex and with strict rules regarding opening the account, contributions and withdrawals. Once it has been opened, the money invested in a registered account is subject to its rules. Making unplanned withdrawals can have tax consequences that can negatively impact your hard-earned savings and its growth.

Contact a financial security advisor to get more information about the rules and applicable conditions of each account so you can make the best out of the important advantages they each offer.