Choosing a savings account can feel like choosing one winner. For Canadians saving for a home and retirement at the same time, the better answer can be using several accounts for different jobs.
You can hold a Tax-Free Savings Account (TFSA), Registered Retirement Savings Plan (RRSP), and First Home Savings Account (FHSA) together, provided you qualify and respect each account’s rules. The useful decision is which dollar goes where first.
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Three accounts, three jobs
A TFSA offers flexible tax-free withdrawals for eligible account income and gains. Contributions aren’t deductible. An RRSP generally gives a deduction when eligible contributions are claimed, with ordinary withdrawals taxed later. Meanwhile, an FHSA combines generally deductible contributions with tax-free qualifying home withdrawals.
For an eligible first-time buyer, the FHSA’s first-year participation room is $8,000, with a $40,000 lifetime contribution limit, with room starting when an FHSA is opened. Here’s an example with $12,000 available to save. Assume an eligible buyer has sufficient room in every account and a 30% marginal tax rate. An $8,000 FHSA contribution creates a $2,400 tax saving when deducted. Putting the remaining $4,000 in a TFSA keeps it available for moving costs or emergencies.
If the $2,400 tax saving is also saved, the original $12,000 outlay supports $14,400 across the plan, before investment returns. Meanwhile, an employer’s RRSP matching program can change the priority because the employer contribution is additional compensation. Taking that match can be more valuable than following an account order mechanically.
RY
Royal Bank of Canada (TSX: RY) is a candidate for long-term retirement money, not necessarily a near-term down payment. Its Canadian banking business, wealth management, and capital-markets operations provide several earnings sources.
RBC reported fiscal third-quarter adjusted earnings of $4.28 per share. Its $1.76 quarterly dividend represented about 41% of that figure. That leaves a useful earnings cushion, although banks still face credit losses when customers struggle. At its price of $273.78, the annualized $7.04 dividend yielded about 2.6%. A $10,000 budget bought 36 shares for $9,856.08 and generated $253.44 annually at an unchanged dividend.
| COMPANY | RECENT PRICE | NUMBER OF SHARES | ANNUAL DIVIDEND | ANNUAL TOTAL PAYOUT | FREQUENCY | TOTAL INVESTMENT |
|---|---|---|---|---|---|---|
| RY | $273.78 | 36 | $7.04 | $253.44 | Quarterly | $9,856.08 |
That payment doesn’t make RBC an appropriate substitute for cash needed to close a home purchase. A 15% price decline would reduce the holding by roughly $1,478, considerably more than its annual dividend. Understanding how to buy stocks includes matching the holding period to the expense.
Considerations
An eligible buyer can also use the RRSP Home Buyers’ Plan alongside a qualifying FHSA withdrawal for the same home. However, the RRSP program generally creates a repayment obligation. The FHSA’s qualifying withdrawal, meanwhile, does not. They aren’t interchangeable sources of free money.
A TFSA adds flexibility around those more specific goals. It can hold the emergency fund or investments, depending on when the money is needed. Using several accounts doesn’t require duplicating the same investments in each one. If RBC is already a large retirement holding, adding it to every account can concentrate the same banking risk. The accounts serve different tax purposes, while the household still owns one combined portfolio.
Bottom line
All three accounts can work together. In our example, the FHSA supplies the home-buying deduction, the TFSA protects flexibility, and the RRSP can serve retirement or an employer match. RBC can contribute to the long-term investment portion. The account choice earns its value when the investments inside it suit the job.
