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TFSA vs RRSP vs FHSA? Which to invest in first? | Canadian Finance for Beginners

BY baxj4
July 28, 2025•
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Guide to Saving and Investing in Canada – For Beginners

Objective

Purpose: Beginner's guide on how to save and invest money in Canada using tax-advantaged accounts and the stock market.
Content Type: Blog/article & detailed tutorial notes.

Key Topics Covered

  • Understanding income tax in Canada
  • Types of registered savings accounts (TFSA, RRSP, FHSA, RESP)
  • Introduction to investment options (HISA, GICs, Bonds, Stocks, Mutual Funds, ETFs)
  • How the stock market works (including key terms)
  • How to choose and invest in ETFs (Exchange Traded Funds)
  • Practical tips on brokers, taxes, currency exchange, and diversification
  • Personal investment philosophy and bonus tips

1. Understanding Income Tax in Canada

  • Income tax: Money paid to government based on earnings; funds healthcare, education, infrastructure.
  • Collected by both federal and provincial governments.
  • Progressive tax rates mean higher income leads to a higher tax percentage for additional amounts.
  • Example calculations provided for federal and BC provincial tax.
  • Overall tax: About 24% on $100,000 income in BC (example case).
  • Tax-saving options exist to reduce taxable income, mainly through registered accounts.

2. Registered Savings Accounts (RSAs)

Definitions

  • Non-registered account: Regular account; all earnings are taxable.
  • Registered accounts: Government-recognized, offering tax benefits.

Key Tax Benefits

  • Tax Deductible: Reduces taxable income (e.g., RRSP contributions).
  • Tax Deferred: Pay tax upon withdrawal, typically in retirement when income is lower.
  • Tax-Free Growth/Withdrawal: No taxes on withdrawals (e.g., TFSA).

Main Registered Accounts

a. TFSA – Tax-Free Savings Account

  • Not tax-deductible but growth and withdrawals are tax-free.
  • Annual contribution limit set by government (e.g., $6,500 for 2023).
  • Unused contribution room carries forward.

b. RRSP – Registered Retirement Savings Plan

  • Contributions are tax-deductible; growth is tax-deferred.
  • Withdrawals in retirement, usually at a lower tax rate.
  • Contribution limit: 18% of income up to a government-set annual max.
  • Early withdrawals penalized and room not restored, except for:
    • Home Buyers’ Plan (HBP): Withdraw up to $60,000 tax-free for a home (must repay).
    • Lifelong Learning Plan: For education (must repay).

c. FHSA – First Home Savings Account

  • Tax-deductible contributions, tax-free withdrawals for first home/ Planned for first-time buyers.
  • Max $8,000 per year, $40,000 lifetime.
  • Can combine with HBP for a larger, tax-free home down payment.

d. RESP – Registered Education Savings Plan

  • For saving for children’s post-secondary education.
  • Growth is tax-deferred; withdrawals taxed in student’s hands.
  • Lifetime limit: $50,000 per child.
  • Govt grants: Up to $500/yr, lifetime max $7,200.

e. Other Accounts

  • RDSP and RRIF: For disability and retirement income, respectively.

f. Non-Registered Accounts

  • No tax benefits, but more flexibility (no contribution/withdrawal limits).

3. Which Account to Contribute To?

  • Depends on individual goals and income:
    • TFSA prioritized for flexibility and tax-free withdrawals.
    • RRSP useful for high-income earners.
    • FHSA for first-time home buyers.
    • RESP for parents.
  • Strategy: Max out TFSA first, then RRSP, then FHSA/RESP as per goals.

4. Investing Within Registered Accounts

Six Main Investment Options

  1. High-Interest Savings Accounts (HISA): Low risk, modest returns.
  2. GICs (Guaranteed Investment Certificates): Low risk, guaranteed principal and rate.
  3. Bonds: Loans to governments/corporations; lower risk, lower return.
  4. Stocks: Ownership in companies; higher risk, higher potential returns.
  5. Mutual Funds: Pooled investments managed by fund managers (average Canadian MER ~2%, high fees).
  6. ETFs (Exchange Traded Funds): Diversified, lower fees (MER as low as 0.03%).

Additional Options: Real estate, commodities, crypto (not covered in detail).

5. Stock Market Basics

Key Terms

  • Share: Unit of ownership in a company.
  • Stock Exchange: Marketplaces (e.g., TSX, NYSE, NASDAQ) for buying/selling shares.
  • Index: Benchmark for market performance (e.g., TSX 60, S&P 500).
  • ETF: Basket of stocks/bonds, easy diversification, low fees.
  • Broker: Platform to buy/sell investments (e.g., Wealthsimple, Interactive Brokers).
  • Capital Gains: Profit from selling assets. Tax depends on account type.
  • Dividends: Profits paid out to shareholders (usually small for growth-focused investors).
  • Market Volatility: Prices rise and fall unpredictably in the short run; hope for long-term growth.

6. How to Pick ETFs

Parameters to Evaluate

  • Rate of Return: Focus on 5+ year averages for perspective.
  • MER (Management Expense Ratio): Lower is better; high fees can cost thousands over time.
  • Holdings: Diversification by sector, company size (market cap), and geography.
  • Asset Allocation: Stocks vs. bonds for risk/stability balance.
  • International Exposure: Global ETFs add stability and opportunity.
  • Where ETF is Listed: Canadian or U.S. exchange affects taxes/currency fees/dividends.

Note on Tax & Currency

  • Currency Risk: CAD/USD exchange impacts returns for U.S. ETFs.
  • Foreign Withholding Tax (FWT): 15% on U.S. dividends, but can be avoided/recovered depending on account and ETF type.
  • Currency Conversion Costs: Can be significant; choosing a broker with a flat fee is advisable.

7. Step-by-Step: How to Find and Buy ETFs

  1. Log into Brokerage Account: Use research tools and screens for ETFs.
  2. Apply Filters: By market cap, sector, country, etc.
  3. Review & Shortlist: Check each ETF’s info on official or trusted financial websites.
  4. Compare: Use forums and online reviews (e.g., “ETF1 vs ETF2”).
  5. Decision: Invest according to research, risk appetite, and strategy.

8. Sample Portfolio & Personal Philosophy

  • Five favorite ETFs, focus on indexes plus some tech and semiconductor exposure.
  • Start small ($100), learn by doing, and expand as you gain knowledge.
  • Use the same ETFs across all registered accounts.
  • Gather info from events, forums, advisers, and self-study.

9. Bonus Tip: Time, Not Timing

  • Long-term mindset crucial: Markets are volatile.
  • Time in the market beats timing the market.
  • Patience and ongoing learning are keys to success.

Useful Actions

  • Subscribe to creator for more content.
  • Use official government resources (CRA, Canada.ca) for latest rules.
  • Attend local financial events, join discussion forums, and consult financial professionals for complex issues.

Key Takeaways

  • Canada has many taxes but also offers excellent tax-free/tax-deferred savings options.
  • Know your goals and match accounts/investments appropriately.
  • Diversification, low-cost investing, and long-term focus are winning strategies.
  • Start learning and take action—time works in your favor.

Quick Reference

| Account | Tax Deductible? | Tax Deferred? | Tax-Free Growth? | Withdrawal Rules | Annual/Lifetime Limits | |---------|----------------|---------------|------------------|------------------|-----------------------| | TFSA | No | No | Yes | Flexible | Set by govt, carried over | | RRSP | Yes | Yes | No (taxed on withdrawal) | Early withdrawal penalized | 18% of income, annual max | | FHSA | Yes | Yes | Yes (home purchase only) | Home purchase only | $8k/yr, $40k lifetime | | RESP | No | Yes | No (taxed in student's hands) | For education | $50k/child, $7,200 grants | | Non-Reg | No | No | No | Flexible | None |

End of summary.

    TFSA vs RRSP vs FHSA? Which to invest in first? | Canadian Finance for Beginners