FHSA vs TFSA: Which is Better?
Saving for the future doesn’t have to be complicated, but choosing the right account can significantly impact your long-term wealth. Two of the most popular savings options available to Canadians are the Tax-Free Savings Account (TFSA) and the First Home Savings Account (FHSA). While both offer attractive tax advantages, they serve different purposes.
This guide will help you understand the key differences between the two accounts so you can decide which one is better suited for your financial goals.
What is the First Home Savings Account?
The FHSA is a newer savings tool designed to help Canadians save for their first home. Contributions to the FHSA are tax-deductible, similar to an RRSP, and the earnings on your investments within the account are tax-free. The real benefit comes when you're ready to purchase your first home—qualified withdrawals are also tax-free, making the FHSA a powerful vehicle for homebuyers.
Contribution Limit: $8,000 annually, with a lifetime maximum of $40,000.
Eligibility: Canadians aged 18 to 71 who haven’t owned a home in the last four years.
Typical Scenario: Sarah, 28, is saving for her first home. She contributes $8,000 annually to her FHSA to maximize her tax deductions and speed up her savings for a down payment.
What is the Tax-Free Savings Account (TFSA)?
The TFSA is one of the most flexible savings tools available in Canada. Unlike the FHSA, the TFSA doesn’t restrict your withdrawals—whether you’re saving for a down payment, an emergency fund, or retirement, the TFSA offers tax-free growth and withdrawals for any purpose.
Contribution Limit: $7,000 for 2024, adjusted annually for inflation.
Eligibility: Canadians aged 18 or older.
Typical Scenario: David, 35, is not focused on buying a home yet, so he uses his TFSA for retirement savings and general investments. He can withdraw funds if needed without facing penalties.
FHSA vs TFSA: Key Differences
| Feature | FHSA | TFSA |
|---|---|---|
| Primary Purpose | Saving for a first home | General savings and investments |
| Contribution Limit | $8,000 annually | $7,000 annually (2024) |
| Tax-Deductible Contributions | Yes | No |
| Tax-Free Withdrawals | For home purchases | For any purpose |
| Eligible Withdrawals | First home purchase only | No restrictions |
| Unused Contribution Room | Carries forward | Carries forward |
Which is Better for You?
Deciding between the FHSA and TFSA largely depends on your financial goals.
If you're planning to buy your first home in the next 5 to 10 years, the FHSA is designed for you. The tax deductions on contributions will save you money, while the account’s tax-free growth can help accelerate your down payment savings.
If homeownership isn’t on your radar, or you want to prioritize more general savings, the TFSA is a better option. It offers the same tax-free growth benefits, but with no restrictions on withdrawals, making it perfect for retirement savings, emergency funds, or even short-term goals.
Real-Life Comparison
Consider two individuals with different financial goals:
Kelly is 30 years old and plans to buy her first home in five years. By contributing $8,000 annually to her FHSA, she’s saving for her down payment while also reducing her taxes. Kelly maximizes her FHSA and uses her TFSA for short-term savings.
Tom, on the other hand, doesn’t have homeownership in his immediate future. Instead, he contributes $7,000 annually to his TFSA, where he can invest in stocks and bonds. The flexibility to withdraw funds at any time suits his lifestyle.
Maximizing Both Accounts
It doesn’t have to be an “either-or” decision. If you’re in a position to contribute to both accounts, you could maximize the benefits of each:
Maximize your FHSA contributions for tax-deductible savings toward your first home.
Use your TFSA to save for other financial goals without restrictions.
The Bottom Line
Both the FHSA and TFSA are exceptional savings vehicles, each offering unique tax advantages. The FHSA is ideal for first-time homebuyers looking to build up a down payment quickly, while the TFSA provides unmatched flexibility for a wide range of savings goals.