Saving for your First Home: RRSP, TFSA or FHSA?
01 May 2023 0
01 May 2023 0

Enriched Academy Staff

Saving up the down payment for your first home in Canada can be a daunting task. At the very minimum, you are going to need 5% and even in a comparatively inexpensive city like Edmonton with an average price of $400K, you are looking at $20,000. There are lots of tips and tricks on how to save for your first house, but this article isn’t about personal budgeting, it’s about where to park your savings along the way to purchasing your new home.

The good news is there are several home buyer incentives and a few savings options when saving for your first house! You could put your money under the mattress, in a savings account at your local bank, or take advantage of one of the government’s “registered” savings accounts. These include the Registered Retirement Savings Plan (RRSP), the Tax-Free Savings Account (TFSA), and the new kid on the block, the First Home Savings Account (FHSA). The main advantage of these three accounts is the option to invest and grow your savings while cashing in on some serious tax advantages, allowing you to reach your home ownership goal even faster. It is also possible to use a combination of these accounts, but that may require a lot more income than you have at your disposal.

My retirement plan has a home buying option?

RRSPs are quite well known for punishing early withdrawals — ideally you would keep your money in your RRSP account until you retire and can then draw out the money you need at a nice, low tax rate during your retirement years. However, the Home Buyers’ Plan (HBP) is an exception to the rule. Under this plan, you can withdraw up to $35,000 from your RRSP to buy a home. Although you won’t be taxed on that withdrawal and have avoided one caveat, the catch is that you have to begin paying that money back to your RRSP starting a couple of years down the road. If you don’t pay it back on schedule over the next 15 years, the tax man will come calling as that withdrawal becomes fully taxable! It’s a good benefit, but you need to follow the rules and make sure the repayment schedule fits your budget.

To be eligible for the HBP, you must be a first-time home buyer, which means you or your spouse/common-law partner cannot have owned a home in the four years before the withdrawal. You must also have a written agreement to buy or build a qualifying home. If you're buying a home with your spouse or common-law partner, you can both withdraw up to $35,000 for a total of $70,000.

The home you purchase, or build must be a qualifying home, which includes most types of housing, including single-family homes, semi-detached homes, townhouses, condos, and mobile homes. It must also be located in Canada and must be used as your principal place of residence within one year of buying or building it.

In many cases, using your RRSP for a down payment under the Home Buyers' Plan is a good option. However, it's important to understand the rules and requirements of the program before making a withdrawal from your RRSP.

How can I use a TFSA to buy a home?

In case you missed the memo, Canadians 18 and over can deposit up to $6500 annually into a TFSA. You contribution limit also caries over from year-to-year, so you already have a sizeable contribution limit if you are in you are in your mid-twenties and have never had a TFSA before! The advantage here is that you could invest your down payment savings and would not be taxed on those returns. As the name says, after growing your portfolio for a few years, you could take those tax-free savings and head right down to the bank and put it down on a new home. The only real consideration is that you will have to wait until next year if you want to put that money back into your TFSA account. However, if you just bought a house, you are likely to be tapped for a couple of years anyways, so it may be a non-issue. A TFSA can also be used by anyone who fails to meet the criteria for a first-time homebuyer as required by the HBP and the FHSA.

Although this all sounds straightforward so far, the issue gets complicated when you start to think about using both an RRSP and TFSA. The most you could take out of your RRSP to buy a home is $35K, so once you hit that mark should you start putting your money into a TFSA? If you are looking to get into a home sooner rather than later, the immediate tax savings from an RRSP will help you reach your down payment goal faster than a TFSA providing they were invested the same way (and you reinvest those RRSP tax savings instead of spending a week in Cancun!). Beyond that, you might want to consult a financial coach for some expert advice and do an in-depth analysis of your TFSA/RRSP contribution strategy.

FHSA: The new kid on the block!

As of April 1, 2023, there is a new contender for your down payment savings dollars — the tax-free First Home Savings Account (FHSA or sometimes TFHSA). This is yet another tax-advantaged account from the federal government that takes a stab at combining the best of both the TFSA and RRSP. Although it is not 100% confirmed and the rules could still be tweaked, it basically allows you to do this:

  • Make a tax-deductible contribution of up to $8000 annually (maximum $40,000 lifetime).
  • Invest the contributions in stocks, various funds, fixed income securities, etc.
  • Withdraw the money anytime within 15 years of opening your FHSA to buy a qualifying home with no need to pay back the funds.
  • Carry forward unused contribution room, and also carry forward tax deductions and apply them in future years (if suspect your income is on the way up).
  • Transfer funds to an RRSP or withdraw the funds anytime and pay the tax if you don’t buy a home with in 15 years.

Just like the HBP, the home must be your principal residence within one year of purchase and be located in Canada.

If you have been piling up your money in an RRSP or TFSA and think the FHSA suits you better, it looks like you will also be able to transfer RRSP and TFSA funds into an FHSA. In the case of a TFSA, you would also get a tax deduction on the amount transferred (subject to the rule of course!). Moreover, at this time it is also possible to take advantage of both the FHSA and the HBP allowing a couple to withdraw up to $150,000 of combined RRSP/FHSA funds for a down payment. There are still a few other details to be worked out, but at this point, the FHSA looks like a great down payment option for first-time home buyers.

Which down payment savings account is right for me?

At Enriched Academy we are all about financial education and helping you make the best decision. We equip you with the knowledge and facts you need, but at the end of the day you are in charge of your financial life. Our goal is to always encourage our clients to make an informed decision. There is no clear winner in the RRSP vs TFSA vs FHSA debate as it depends on a myriad of other factors which only you are privy to.

One thing we do know is that when it comes to investing, procrastination is your biggest enemy and saving for a home is no exception. Buying your first home is increasingly difficult right across Canada as prices and interest rates are at record levels and there appears to be no relief in sight. There are programs in place to make it easier to save for a home, and the sooner you start taking advantage of one, two or all three of these plans the better!

The other factor that comes into play is risk and investment planning. Some people see their down payment savings as untouchable and may limit their holdings to low-risk investments or fixed income securities. On the other hand, some folks may have a shorter buying timeline or be naturally less risk-averse and try to fast track saving for a down payment with a more aggressive investment strategy.

Homebuying in Canada has become increasingly difficult in many regions. Sound financial planning and a good credit score will help you save money and obtain financing, but don’t neglect the tax advantages and investing options of the RRSP, TFSA and FHSA.

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