Using Your RRSP and TFSA to Save Towards a Home Purchase
May 5, 2015 | Posted by: Calum Ross
While the RRSP has long been the preferred way to save towards buying a home, the introduction of the TFSA in 2009 changed that. The TFSA offers another great way to save towards the purchase of a home. While the RRSP is exclusively for first-time homebuyers, the TFSA is for homebuyers property virgins, and non-property virgins. Whether you’re buying your first home or looking to upsize, your TFSA is your golden ticket to homeownership.
While the recent federal budget was largely characterized as a rich person’s budget by the media, there was some good news for average Canadian families. The talk in Ottawa for months was that the Conservative government would be doubling the TFSA. While the budget fell slightly short of that, the TFSA contribution limit was nearly doubled from $5,500 to $10,000. The near-doubling of the TFSA takes place immediately. That means if you’ve already contributed $5,500 this year, you can sock away an extra $4,500.
The TFSA offers a lot more flexibility than RRSPs. While the RRSP is strictly for retirement savings, buying a first home, or going back to school, TFSAs are perfect for a variety of savings goals. Whether you’re saving for a new car or family vacation, the TFSA is the perfect savings vehicle to do that.
While you can tap into your RRSP if you’re a first-time homebuyer, what if you’ve already bought your first home and you’re looking to upsize? Unfortunately, if you’re already a homeowner you can’t use your RRSP to save towards your next home. That’s where your TFSA comes into play.
Using your TFSA you can build up your down payment a lot faster than if you socked away your money in a high-interest savings account. Here’s why: although you’re contributing after-tax dollars, you don’t have to pay the taxman on any money you withdraw from your TFSA. That means if you have a spouse, your spouse and you can sock away to $20,000 a year towards the down payment on your next house. If your spouse and you save the maximum of $20,000, you can have $60,000 saved in only three years, enough for the down payment on a home.
RRSPs have been around for a long time now. As such, they’re no longer considered the new kid on the block. If you’re a first-time homebuyer, you have the option of tapping into your RRSP through the RRSP Home Buyers’ Plan (or HBP for short). Under the HBP, eligible first-time homebuyers can withdraw up to $25,000 from their RRSPs for the down payment on a home. If your spouse is also a first-time homebuyer, you can both withdraw $25,000 for a combined $50,000.
While the HBP is great, it does come with a few catches. Any money borrowed from your RRSP must be repaid in 15 years, starting in your second year. Also, funds withdrawn from your RRSP must be in your account for 90 days or money. To qualify as a first-time homebuyer, you mustn’t have owned a home in the last four years. If your spouse owned a home and you lived together, you also don’t qualify as a first-time homebuyer.