Saving for a home: RRSP or TFSA? [Guest Post]

If you’ve decided to buy a home in the future, you need to start saving money. But which account should you choose?

There are basically two types of non-taxable accounts you can use to save, each of which have different benefits. Here’s a rundown of each one:

RRSPs

A registered retirement savings plan (RRSP) is a tax-sheltered account and the amount you can contribute is 18% of your previous year’s earned income (the exact amount can be found on your most recent notice of assessment or notice of reassessment from the Canada Revenue Agency.) An RRSP is often used to save for retirement but it can also be used to save for a home.

First-time homebuyers can take advantage of the Home Buyers’ Plan (HBP), which allows you to withdraw as much as $25,000 from your RRSP as long as the money’s been in the account for more than 90 days.

If you buy a home with a partner, who’s also a first-time buyer, you can each take out up to $25,000 or $50,000 in total. That’ll give you a larger down payment, meaning you’ll have a smaller mortgage to take on. Note that you have to make the withdrawal within 30 days after the closing date.

You need to start making repayments two years after the year you make the withdrawal and are given 15 years to pay back the whole amount.

As an example, imagine you withdraw $22,500 from your RRSP. You’ll have to pay back $1,500 a month over a 15-year period. However, you can also pay back more than what’s required, which will then reduce your future annual payments.

Year	2018	2019	2020
HBP balance	$22,500	$21,000	$13,000
Annual repayment amount	$1,500($22,500 ÷ 15 years)	$1,500($21,000 ÷ 14 years)	$1,000($13,000 ÷ 13 years)
Your payment	$1,500	$8,000	$1,000

Withdrawals from your RRSP are considered tax-free for the HBP. However, if you don’t make your annual payment, you’ll need to declare the amount you were supposed to pay back as taxable income on your tax return.

TFSAs

A tax-free savings account (TFSA), is another type of tax-sheltered account. Every Canadian over the age of 18 receives $5,500 in contribution room annually and you may have up to $46,500 in room if you were 18 years or older in 2009. You can also contact the Canada Revenue Agency to find out your contribution room information.

There aren’t as many restrictions if you use a TFSA to save for a home. You can withdraw as much as you want from a TFSA if you’re buying a home for the first time or even the fourth time.

If you take money out of your TFSA, it lets you keep your RRSP intact, which means your savings will compound until you retire. What’s great is you never have to pay back what you’ve withdrawn from your TFSA.

Which one to use

If you contribute to an RRSP, you’ll get a tax refund, which you can use to build up your savings faster. But TFSAs have no restrictions on how much you can withdraw. There’s also no obligation to re-contribute the money and no penalty if you don’t. Using both will give you more flexibility when you buy a home.

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