Why Invest Your Savings in a TFSA or FHSA?
Once you decided to save, you must choose which type of account to deposit your money into. You could simply leave it in a regular savings account, but the idea is to make money with your savings by investing. Normally, you would have to pay income tax on these earnings. However, there are certain types of accounts that are designed for tax-free savings.
We have already
covered the benefits of a registered retirement savings plan (RRSP) for saving. Now, let's look at two other types of accounts.
TFSA
A tax-free savings account (TFSA) allows you to save without paying income tax on interest or on other types of income you earn with your money. Unlike an
RRSP, putting money into a
TFSA does not reduce the income you pay income tax on. Inversely, if you withdraw money from a
TFSA, you will not pay income tax because that money will not be considered as income.
There is a maximum amount you can deposit in a
TFSA each year. If you do not reach the maximum amount, the unused amounts accrue. This means that you can deposit more money into your
TFSA in subsequent years. For example, if you deposit $5000 and the maximum for that year is $7000, the following year you can deposit $2000 more than the maximum allowed.
FHSA
A first home savings account (FHSA) is used to buy a first home or condo. It is a little like a combination of an
RRSP and a
TFSA. When you deposit money into it, it reduces the income on which you pay income tax, just like an
RRSP. You could therefore receive a tax refund. However, when you use the money to purchase your first property, you do not have to put it back into your
FHSA, as you would with an RRSP.
The maximum amount you can deposit into an
FHSA each year is $8000, up to $40 000 for life. You have a maximum of 15 years to contribute to your
FHSA once you have opened it. When you withdraw the accrued amounts in an
FHSA to buy a house or a condo, you will not pay income tax.
Good to know
- If you withdraw money from your
FHSA for anything other than buying a house or condo, that amount will be added to your income for the current year. You will therefore pay income tax on the money withdrawn.
- You can wait before using the tax deduction associated with your
FHSA. This means that you could indicate on your income tax return that you would like the amount deposited in your
FHSA to reduce the income on which you pay income tax in a year other than the year of the income tax return. This could be a good idea if you think your income will increase rapidly.
Other conditions apply to the
FHSA, according to your situation. It is worth finding out more. You can do so by visiting the Government of Canada's website:
First Home Savings Account (FHSA) 
.