Choosing between registered accounts is client-specific, but some basic principles apply.Kenneth Cheung/iStockPhoto / Getty Images
As the March 3 registered retirement savings plan (RRSP) contribution deadline looms, Canadians are making their usual last-minute calculations to maximize their tax refunds. But with other registered accounts in the mix, where should Canadians prioritize their savings?
As the answer isn’t one-size-fits-all, financial advisors are tailoring their advice based on multiple variables, including income, goals and employer benefits.
“Think long-term,” says Nick Giovannetti, certified financial planner, partner, president and chief operating officer at Stewart Fisher Financial in Waterloo, Ont.
“The goal isn’t just to get a tax deduction today; it’s to keep as much of your money as possible over your lifetime. That’s the mindset shift Canadians need to make.”
Here are a few rules of thumb to decide between contributions to RRSPs, tax-free first home savings accounts (FHSAs) and tax-free savings accounts (TFSAs):
For future homeowners
First, if home ownership is a goal, maxing out the FHSA should be a top priority.
“For anyone even considering home ownership, the FHSA should be the first place they look to,” Mr. Giovannetti says.
“It’s the best tool for first-time buyers,” he adds.
FHSAs offer the same tax-deductible contributions and tax-sheltered growth as RRSPs, but also tax-free withdrawals without the repayment burden of the RRSP’s Home Buyers’ Plan (HBP).
Even if a client ultimately decides not to buy a home, there’s no risk in opening the account, he says.
“If you don’t end up using the FHSA for a home purchase, it essentially converts into an RRSP, meaning you don’t lose the tax benefits had you focused on an RRSP instead,” Mr. Giovannetti says. “Simply roll it into an RRSP to keep the tax deferral going and use it for retirement.”
The only nuance is that the contribution room doesn’t accrue automatically, so Mr. Giovannetti counsels his clients to open an account and start funding it right away.
That kind of flexibility has made the FHSA an essential part of Amrit Mavi’s financial toolkit. However, before Mr. Mavi, founder and partner at ATA Financial Group in Regina, recommends any specific vehicle, he first ensures his clients have an emergency fund of at least three to six months’ worth of expenses.
From there, the recommended mix between RRSPs, TFSAs and FHSAs depends on a client’s income, expected tax rates in retirement, and whether they have an employer-matching RRSP program.
Take the free money
If an employer offers an RRSP match, clients should take full advantage of it.
“A high-income earner should always maximize any employer RRSP match first,” says Cindy Marques, co-founder and chief executive officer of Money MakeCents Inc. in Toronto.
“That’s free money you’d be leaving on the table otherwise. Even a 1-per-cent match can go a very long way in supporting retirement goals.”
Tips for high-earners
For those in the higher tax brackets, RRSPs provide the biggest immediate tax advantage – but balancing them with TFSAs is essential for future flexibility.
“If you’re in a high tax bracket, contributing to an RRSP today can provide significant tax savings,” Ms. Marques says. “And using your refund to fund a TFSA or an FHSA is a great way to maximize your overall tax efficiency.”
‘Extra’ RRSP room
Even for high earners, she notes, the FHSA can be a clever way to create “extra” RRSP room.
“As you can roll your FHSA into an RRSP later without affecting your contribution limits, it’s essentially getting an extra $40,000 of RRSP space over time,” she says.
Most advisors agree the FHSA has largely overtaken the HBP as the best way to save for a first home since no repayment is required.
“If you withdraw from your RRSP through the HBP, you have to repay it over 15 years or it gets added to your taxable income,” Ms. Marques says. “In contrast, the FHSA is a cleaner, more efficient way to save.”
That said, she acknowledges some clients will need both accounts: “A $40,000 FHSA limit may not be enough for a down payment in certain markets, so topping up with an RRSP and using the HBP can still make sense.”
The case for TFSAs
For those in lower-income tax brackets, a TFSA often makes more sense than an RRSP, Mr. Giovannetti says.
“Lower-income Canadians don’t benefit as much from the RRSP tax deduction and, in retirement, RRSP withdrawals can increase their tax burden or reduce government benefits,” such as Old Age Security or the Guaranteed Income Supplement, he says.
Having money that’s readily accessible is also a key consideration for Ms. Marques.
“A TFSA gives you the flexibility to withdraw funds without losing contribution room or triggering taxes,” she says. “That’s crucial if you’re not in a position to lock up your money for the long term.”