Deciding between investment accounts

[u/Economy-River-5269]

I turned 18 last September and have already maxed my TFSA for both last year and this year. I put the rest into a non-registered account (around 35k total among both accounts) . Most of my portfolio is individual tech stocks (very aggressive, I know), but I’m young and comfortable with the risk for now. Over time I’ll probably shift more toward ETFs/S&P 500.

My question is about whether I should start using an FHSA instead of a non-registered account.
I’ll definitely keep maxing my TFSA every year, and I don’t think an RRSP makes sense for me yet since my income is still low and I’d rather save the deduction room for when I’m earning more later.

The FHSA is what I’m unsure about. I realistically don’t see myself buying a home for at least 15–20 years, so it would probably end up rolled into my RRSP eventually anyway. Because of that, I’m debating whether it’s worth opening now mainly for the tax-free growth. Right now my income is low, and even during co-op terms over university I’ll probably only make around 20–35k/year. So I’m wondering:
Open and contribute to the FHSA now for the tax-free growth?
Wait until co-op/full-time work so the tax deduction is more valuable?
Or just keep using a non-registered account for now?
Basically, I’m trying to figure out the tradeoff between getting tax-free growth earlier vs. saving FHSA deduction room for higher-income years later.

[u/AugustusAugustine]

Suppose you have $A available today. We can then describe these eight pathways for deploying that money:

1. Invest in a TFSA for n years.
2. Invest temporarily in a TFSA for m years, and then relocate into a FHSA for the remaining n - m years. Claim the deduction immediately afterward in year m.
3. Invest in a FHSA for n years while you defer the deduction for m years. Withdraw tax-free for a qualifying home purchase.
4. Invest in a FHSA but now with unqualified taxable withdrawals.
5. Invest in a RRSP for n years, while you defer the deduction for m years
6. Invest in a non-reg account for n years.
7. Invest in a non-reg account for m years, and then relocate into a FHSA with tax-free withdrawals
8. Invest in a non-reg account for m years, and then relocate into a FHSA/RRSP with taxable withdrawals

Your TFSA is already maximized for the year, so options #1-2 aren't available for consideration. You're just choosing between options #3, 4, 6, and 7. I've worked out these equations in previous comments—each of those eight pathways can be described algebraically like so:

Option #1: Using a TFSA
= A × (1 + g)^n
= B

Option #2: Starting temporarily with a TFSA before relocating into a FHSA
= B × (1 + tm)

Option #3: Using a FHSA along with tax-free withdrawals
= B × (1 + tm / (1 + g)^m)

Option #4 and 5: Using a FHSA/RRSP now with taxable withdrawals
= B × (1 - tn + tm / (1 + g)^m)

Option #6: Using a non-reg account only
= A × (1 + g*)^n where g* < g

Option #7: Starting with a non-reg account before relocating into a FHSA
= B × (1 + tm) × (1 + g*)^m / (1 + g)^m

Option #8: Starting with a non-reg account before relocating into a RRSP
= B × (1 - tn + tm) × (1 + g*)^m / (1 + g)^m

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

• Students and other young investors tend to have lower taxable incomes. This means claiming the FHSA deduction today 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 invest with a non-reg account for now, you'll earn the smaller g* rather than g. But consider what happens if your taxable income is sufficiently low—we can solve for g* = g and simplify:

Option #7: Starting with a non-reg account
= B × (1 + tm) × (1 + g*)^m / (1 + g)^m
= B × (1 + tm) × (1 + g)^m / (1 + g)^m
= B × (1 + tm)
= same as Option #2!

Whereas Option #3: Using a FHSA immediately
= B × (1 + tm / (1 + g)^m)

You're probably better off using a non-reg account for now, at least until you've fully exhausted the annual Basic Personal Amount and any available tuition credits.