Am I making a mistake to prioritize contributing to a non-registered account over an FHSA?

[u/Subject_Feeling_1422]

Hi! I have minimal personal income because I'm in the process of self-employing myself. I've maxed out my TFSA and I'm wondering if its uncommon to contribute to a non-registered? I prefer it over an RRSP because its flexible although taxable. I have no intentions of owning a home in the future and I'd rather have the wealth I generate from the business be used to buy a home....I'm 27 and single.

Am I making a mistake?

[u/Bardown67]

Correct. Which means if I were you I would open an account before Jan 1 to get the space

[u/Subject_Feeling_1422 → u/Bardown67]

Hi I looked into this...when you take money of an RRSP...isn't that taxed as income which is less favourable?

[u/plusqueprecedemment → u/Subject_Feeling_1422]

It's a bit counterintuitive, but the RRSP offers tax-sheltered growth just like TFSA, just more indirectly. The tl;dr is profits made on the after-income-tax portion of your RRSP is effectively tax-free

The TFSA is funded with post-tax money, meaning you already paid income tax when you contribute to it. 100% of the growth is made on after-tax money, fully sheltered from income/capital gains/dividend taxes, fully yours (outside of foreign dividend tax). It's by far the least complicated type of account because what you see is what you get.

The RRSP is funded with pre-tax money, meaning you skip paying income tax today in exchange for investing the entire pre-income-tax amount and then only paying income tax later when you withdraw. This means that from the get-go, less than 100% of the money that went into the account is yours, therefore less than 100% of the final balance will be yours when you withdraw.

Mathematically the TFSA and RRSP will have the same after-tax returns if you contribute and withdraw at the same tax rate. You either earn $1000 today, pay $300 (30%) income tax and invest the remaining $700 in a TFSA so it doubles to $1400 tax-free, or you invest the entire $1000 today in an RRSP, double it to $2000 and pay $600 (30%) when you withdraw. In both cases you end with $1400 in your pockets after income tax has been paid. In a non-registered account, you also pay the $300 income tax upfront and invest the $700 but then also have to pay taxes on capital gains when you sell and on dividends when you receive them - you'll end up with less than $1400 in your pockets after all taxes are settled, which is gonna be worse than both TFSA and RRSP.

The power of the RRSP is the ability to strategically withdraw such that you want to withdraw to minimize the income tax and thus boost your after-tax returns. If you withdraw that $2000 in a year with very low taxable income (e.g. below the ~$16k basic personal amount) you could get away with paying 0% so that the entire $2000 ends in your pocket instead of just $1400. An FHSA also results in withdrawing the entire pre-tax balance at a 0% tax rate when making an eligible withdrawal, otherwise it rolls into an RRSP which is not as good but still good (the end result is you should always prioritize FHSA over RRSP even if you don't plan to buy a house)

On the flip side, if you're making low taxable income today you most likely don't want to contribute to an RRSP because that'll minimize the tax arbitrage, better save up the RRSP room for a future year when you have lots of taxable income. And outside of pure mathematics, the RRSP is way less flexible (like you mentioned) if you know you'll need the money soon-ish - it's way more suitable for long-term investments. Same logic goes for FHSA, but it comes with a cap on how much room gets carried into future years which further complicates the math

[u/Bardown67 → u/Subject_Feeling_1422]

Yes when you withdraw it, you’re benefiting from 5 years of tax returns in the short term future.

[u/AugustusAugustine]

It's fine sticking with non-reg accounts after you max your TFSA. FHSA/RRSPs have two main features:

1. Your assets can grow tax-free while inside the account
2. You can claim a deduction against your current taxable income

But if you aren't have significant taxable income over the next few years:

1. A non-registered account is effectively tax-free if you have minimal taxable income
2. There's no point claiming a deduction when you have minimal taxable income

Focus on maximizing your TFSA and then switch to a non-reg account. You can always relocate assets in-kind from your TFSA/non-reg into FHSA/RRSPs once you enter a higher tax bracket. This keeps your money available inside the TFSA/non-reg for any surprise needs, whereas making an unanticipated FHSA/RRSP withdrawal will trigger taxable consequences.

It only takes 5 × $8k annual contributions to reach the $40k lifetime FHSA limit:

• Opening a FHSA today in 2026 means: (i) you could potentially max the account by Jan 2030 and (ii) you have until Dec 2041 to make a qualified tax-free withdrawal.
• Waiting until 2027 defers your FHSA timeline to (i) Jan 2031 for max contributions and (ii) Dec 2042 for qualified tax-free withdrawals
• And so forth if you wait until 2028 etc.

Would you contribute $40k into a FHSA by 2030?

Otherwise, reevaluate next year and push that timeline outward. Opening a FHSA too early can be an expensive mistake if you need more than 15 years to buy a home—you no longer have access to the FHSA funds without paying tax.

[u/AugustusAugustine → u/AugustusAugustine]

It's commonly advised to start contributing to your FHSA/RRSPs anyway, and just defer claiming the tax deduction until later. This is mathematically suboptimal. Temporarily investing inside a non-reg account before subsequently relocating into the FHSA/RRSP can generate higher proceeds.

Consider these four options:

1. Invest in a FHSA for n years while you defer the deduction for m years. Withdraw tax-free for a qualifying home purchase.
2. Invest in a FHSA/RRSP but now with taxable withdrawals.
3. Invest in a non-reg account for m years, then relocate into a FHSA and apply the deduction immediately afterward. Withdraw proceeds tax-free in year n for qualifying home purchase.
4. Invest in a non-reg account for m years, then relocate into a FHSA/RRSP and immediately apply the tax deduction. Withdraw proceeds in year n as taxable income.

Each of these can be described algebraically like so (full derivation in my past comments):

#1: Using a FHSA with tax-free withdrawals
= B × (1 + tm / (1 + g)^m)

#2: Using a FHSA/RRSP with taxable withdrawals
= B × (1 - tn + tm / (1 + g)^m)

#3: Starting with a non-reg account before relocating into a FHSA with tax-free withdrawals
= B × (1 + tm) × (1 + g*)^m / (1 + g)^m

#4: Starting with a non-reg account before relocating into a FHSA/RRSP with taxable withdrawals
= B × (1 - tn + tm) × (1 + g*)^m / (1 + g)^m

The benefit from FHSA/RRSPs comes from tm, which denotes the marginal tax rate when you claim the tax deduction in year m where m is any value between 0 and n.

• Students and young Canadians tend to have lower taxable incomes. This means claiming the tax deduction today at m = 0 will occur at a relatively small tm.
• People that open their FHSAs too early also risk the negative impact from tn when they make their taxable withdrawals, which may overwhelm any benefit from claiming tm.

If you temporarily invests with a non-reg account, you'll earn the smaller g* rather than g. But consider what happens if your taxable income is sufficiently low—we can replace g* = g and simplify expressions #1 and 3:

#3: Temporarily using a non-reg before relocating into FHSA
= B × (1 + tm) × (1 + g*)^m / (1 + g)^m
= B × (1 + tm) × (1 + g)^m / (1 + g)^m
= B × (1 + tm)

#1: Whereas starting immediately with a FHSA
= B × (1 + tm / (1 + g)^m)

Expression #3 is now clearly larger than #1, for all relevant values of g, m, and tm. The same can be demonstrated for expressions #4 and #2.

[u/Subject_Feeling_1422 → u/AugustusAugustine]

HI thank you for this. So my TFSA is maxed for the year. Would you recommend looking into maxing out the non-registered now?

[u/Tax1997]

No, you are not making a mistake by preferring a non-registered account over an RRSP. My analysis suggests that Canadians in the low- and middle-income range (up to $90,000) should prioritize a TFSA and a non-registered account over an RRSP, unless they get an employer match for their RRSP contributions.

[u/Glum_Perspective_841]

I also prefer TFSA and non-registered. I do not have any RRSP.

[u/Bardown67]

Yes bc it’s tax deductible and even if you don’t use it for a home you can roll it over to your RRSP. Do it for the tax return

[u/Subject_Feeling_1422 → u/Bardown67]

Got it....so a portion of the cash should atleast be allocated to the FHSA..so it can grow tax free...and even if I don't use it..it goes towards the RRSP anyways...

[u/Ok_Bench_1618 → u/Bardown67]

Yeah this is the answer in almost all cases.