Saving for a down payment: TFSA vs RRSPThe Federal government has taken great strides to make financial savings easier for Canadians over the last few years, by expanding the amount of money first-time buyers can withdraw from their RRSPs under the Home Buyers Plan ($25,000 from $20,000) and introducing the Tax Free Savings Account (TFSA), which allows individuals to invest their savings without paying taxes on their earnings.
The thing is, by expanding these options, individuals looking to buy a home now have more decisions to make – namely, should they pull their hard-earned down payment out of a TFSA or RRSP? Below are some of the differences between the two:
1. Recontribution timing. After the funds are withdrawn and the home is purchased, it’s time to replenish your savings. With the HBP, you have two years from the sale of the house to start putting your RRSPs back in – and 15 years to have the total paid off. If you don’t meet the annual repayment amount, that money will be added to your income for that year and you’ll have to pay taxes on it. With TFSAs, there are no time limits and no penalties, so you can replenish your savings as you see fit.
2. Withdrawal limits. With the RRSP HBP, you can only withdraw a maximum of $25,000 per person from your RRSPs. With the TFSA, there is no withdrawal limit.
3. Conditions. With the HBP, you have to be a first-time homebuyer. With TFSAs, you don’t.
While there seems to be a lot more flexibility with TFSAs, the biggest benefit to RRSPs are the tax savings (because you aren’t taxed on that income until you withdraw it for retirement). That’s why many of our clients originally have their down payment sitting in a TFSA or non-registered account, and then deposit it into a RRSP to get a tax break. For this to work, you have to have the funds sitting in your RRSP account for 91 days before the home purchase.
In the end, the decision to use a TFSA down payment or RRSP HBP is up to you and your personal financial situation.
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