Your Savings Options Explained: RRSP, TFSA, and FHSA

Let’s set the scene. It is the end of the day, and you are now finally able to relax for the evening. As you sit down on your cozy couch in your living room to relax, your brain starts to ponder your mental to-do list. You have managed to set aside some extra cash throughout the year and don’t feel the need to spend it immediately.

You start to consider your options. Should I put it toward my Tax-Free Savings Account (TFSA) or my Registered Retirement Savings Plan (RRSP)? Your choice will depend on a few things: current vs. future tax rates, your income level, liquidity needs, and long-term goals. There isn’t a universal option that is better than the other, but one needs to consider a choice that provides the most favourable tax efficiency for your current situation.

It is important to understand how each of the accounts operate. RRSP: Contributions are deductible (this reduces taxable income). Investment growth in the RRSP is tax deferred until you withdraw from the account. When you withdraw from the RRSP, the amount withdrawn is taxed as income.

Tax levels can vary depending on your income tax bracket. Contribution limit is 18% of earned income (up to ~ $33,810 for 2026). An RRSP must be converted to a Registered Retirement Income Fund (RRIF) by the end of the year that you turn 71. The primary purpose of putting money into your RRSP is to save up for retirement.

TFSA: Contributions aren’t deductible, as you are using after-tax dollars. Investment growth in your TFSA is tax-free. Withdrawals from the TFSA are tax-free and have no impact on your taxable income. Contribution room for TFSAs has increased by $7,000 in 2026, which brings lifetime TFSA contribution room to $109,000 this year. Unused TFSA room from previous years can be carried forward into the following year. The purpose of the TFSA is to help account holders invest or save for both short-term and long-term purposes tax-free.

When would you want to top up your RRSP instead of your TFSA? There are a few scenarios to consider.

The first scenario is one where you are currently in a higher income tax bracket, but in retirement, you anticipate being in a lower income tax bracket. Contributing now will lower your current taxable income, and in retirement when you withdraw, you will be taxed at a lower tax bracket.

The second scenario is employer matching programs. Employer matching programs are where your employer will match up to a certain amount for every amount that you contribute toward your group RRSP. This is essentially free money. The third scenario is if you are nearing retirement and still have unused room; for some people, it makes sense to maximize the tax deductions before having to convert the RRSP into a RRIF. Overall, the greatest benefit of topping up the RRSP over the TFSA is deductibility of income. The drawback of money in your RRSP is that it is taxable at the time of withdrawal.

When would you want to prioritize topping up your TFSA over your RRSP?

The TFSA is an account that offers a lot of flexibility given its tax-free nature. People have used the TFSA as a place to save up for various things such as emergencies, a home down payment, education, and travel expenses. Prioritizing a TFSA over an RRSP would be beneficial if you were in a lower tax bracket but anticipate earning more in the future. It would also make sense to top up your TFSA if you have already maxed out your RRSP, but you are still looking for tax-free gains.

In a nutshell, the benefits of a TFSA are tax-free growth and withdrawals. The drawback of topping up a TFSA instead of an RRSP is that the contributions are not deductible.

If buying your first home is on the horizon, the First Home Savings Account (FHSA) is worth considering. This registered plan combines the benefits of both the RRSP and TFSA:
■ Contributions are tax-deductible (like the RRSP)
■ Withdrawals for a qualifying home purchase are tax-free (like the TFSA)
■ You can contribute up to $8,000 per year, with a lifetime maximum of $40,000
■ Unused room is carried forward, and funds can grow tax-free while you save

If a home purchase is part of your long-term plan, the FHSA is usually the most tax efficient first step. If not, you can stay focused on the RRSP and TFSA without worrying about missing out.

Additional things to consider are:
■ Estate planning: Both TFSAs and RRSPs can be rolled over to the surviving spouse or partner, which avoids probate.
■ Income-sensitive government benefits: When withdrawing from a TFSA, it won’t impact your income level used to calculate the government benefits received.
■ Each year, the Canada Revenue Agency will index the RRSP and TFSA contribution limits to inflation.
■ One way to maximize your tax return benefits is to top up your RRSP and use the tax-refund to top up your TFSA.

In summary, the RRSP helps you reduce taxable income today and defer taxes until retirement — this is ideal when you expect to be in a lower tax bracket later. The TFSA provides flexible, tax-free growth and withdrawals, making it perfect for both short and long-term goals.

The FHSA offers a powerful hybrid option for first-time homebuyers. There’s no single best account for everyone; each has advantages depending on your personal circumstances. Ideally, you want to optimize all available registered accounts over time. If you’re unsure which one is best for your current situation, connect with your trusted RGF Financial Advisor.

Plan well. Live happy. ■