Saving while you’re still a student: RRSP, TFSA or FHSA?

Are you still using the savings account you started putting your weekly allowance into at age 14? Maybe it’s time to consider accounts that are more tax-efficient, such as the TFSA, the FHSA or the RRSP. Several options are available, but you still have to make a wise choice based on your financial situation and goals. The reality of a student is different from that of a person in mid-career.

The much-vaunted Registered Retirement Savings Plan (RRSP) is certainly the best-known savings vehicle. Perhaps you’ve already been encouraged to contribute. But is it the best choice when you’re still at school?

As its name suggests, this account is designed primarily to fund retirement. Its main strength is that your returns are tax-sheltered until withdrawal. The sooner you start investing in an RRSP, the greater its impact will be. This benefit is also true for the TFSA and, to a lesser extent, the FHSA. We’ll return to them later.

What sets the RRSP apart is that every dollar you invest can be deducted from your taxable income, which can save you tax. If you have an income of $60,000 and contribute 10% of it, your taxable income is reduced to $54,000. The tax paid on the $6,000 difference can be refunded to you.

In total, you can contribute up to 18% of your salary, or a maximum of $30,780, in 2023. If you don’t contribute the allowable maximum, your unused contribution room is carried forward to the following year.

That being said, withdrawals from your RRSP will increase your taxable income. Taxes deducted at the time of contribution constitute therefore a tax deferral. That’s why this vehicle is often used for retirement savings. An RRSP replaces your work income but is added to your other retirement income, such as public pensions.

When we’re completing our education, our incomes are often low and the taxes we pay are almost nil. So, the tax deduction may be a less attractive benefit in the short term. But, if you’re patient, you can claim your refund a few years later when your income is higher. 

Another option to consider is the Home Buyers’ Plan (HBP). The HBP allows you to withdraw $35,000 tax-free from your RRSP to buy a property, provided you repay it over a 15-year period. If your plans include home ownership, contributing to an RRSP while you’re still a student could be an option. But perhaps you’d like to learn about the FHSA first.

If you want to save for something other than retirement, such as an emergency fund or a trip, you should take a look at the TFSA. 

Finally, if you have a group RRSP to which your employer contributes according to your contribution level, you may need to think twice before giving up RRSP contributions. This benefit, offered by many employers, is an additional source of tax-free income that’s hard to turn down.

The Tax-Free Savings Account (TFSA) is a vehicle that all Canadian residents can use as early as age 18. The annual contribution limit varies according to the increase in the cost of living. In 2023, it was set at $6,500. As with RRSPs, the returns are tax-free, but the amounts you invest aren’t deducted from your taxable income.

Rather, the big advantage of the TFSA is that you can withdraw money without paying additional taxes, regardless of the amount. How so? You’re deemed to have paid the tax on your contributions because they aren’t deducted from your taxable income. This advantage provides flexibility at the time of withdrawal, making the TFSA a perfect vehicle if you want to create an emergency fund or to finance projects such as a trip or even the purchase of a property.

But it’s also an attractive tool for retirement because you can continue to accumulate returns tax-free for the rest of your life. 

If, like many students, you don’t have an emergency fund, the TFSA is a good option. It could help you avoid resorting to credit and give you a head start on saving for retirement or a home. If you want to accumulate savings to finance medium-term projects, such as going on a trip or buying a condo, the TFSA can also fit the bill. 

The First Home Savings Account (FHSA) is the newest investment vehicle available to Canadians over the age of 18. It helps you save for a down payment for the purchase of your first property. As with RRSPs, your contributions are tax-deductible. You can contribute $8,000 a year, with a lifetime limit of $40,000. As with the TFSA, the money can be withdrawn tax-free but only if you use it to purchase a property. Note that the FHSA has a lifespan of 15 years after you open it. Thereafter, the money in the FHSA must be withdrawn, becoming taxable, or it must be redirected unconditionally to an RRSP.

Home ownership is often one of a young adult’s main goals. The FHSA is a very attractive tool but it has to be used wisely. You can have only one FHSA in your lifetime, with a window of opportunity that lasts only 15 years. First, are you sure you won’t need this money in case of an emergency or to fund other projects? You should also keep in mind that a withdrawal from an FHSA, other than for the purchase of a property, is final and taxable. Another consideration is your time horizon for home ownership. Is the deduction from taxable income attractive in your current situation? These are questions you should ask yourself.

There’s no cut-and-dried answer to this question. As you can see, your financial situation and goals will determine the strategy to adopt and the accounts to invest in. You now have several avenues to consider so that you can make informed choices.