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TFSA or RRSP For Down Payment Source?
May 19, 2022 | Posted by: Matt Broom-Hall
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This past week I had a great chat with some first time home buyers. They knew that their RRSPs would be eligible for the Government of Canada Home Buyer's Plan but weren't sure about their TFSAs.
This got me thinking more in depth about the TFSA vs. RRSP as downpayment sources.
First off, if you're wondering the same as my other clients, the TFSA doesn't qualify for the Home Buyer's Plan. This is due to the difference in the way it's structured - more about that below.
As a refresher, the HBP allows you to withdrawal up to $60,000 per person without paying taxes and gives you 15 years to put the funds back in to your RRSP account.
So, is there a best strategy for down payment if you had the opportunity to choose between a TFSA or RRSP?
Using a TFSA
The TFSA is a registered plan like an RRSP, but differs because TFSA contributions are not tax deductible. The flip side is that withdrawals from a TFSA are not taxable, and that includes any gains earned inside the account.
A TFSA is ideal for saving up for a down payment on a house, and can be a viable alternative to the HBP for a first-time homebuyer.
Unlike an RRSP, you don’t need earned income to create room for a TFSA contribution. For instance, a person with a starting salary of $40,000 will create just $7,200 in RRSP contribution room for next year. With the TFSA, they’ll already have $38,000 in contribution room available ($76,000 when combined with a same-aged partner).
The other issue with the HBP is that your income is likely to be low when you're developing your career. Since you’re in a lower tax bracket, your RRSP contributions will result in a lower tax refund — making the TFSA a more optimal choice.
The HBP is a great option for first-time home buyers who have already invested in RRSPs and don’t have any savings outside of their RRSPs.
For those without any savings inside a RRSP, it makes more sense to use the TFSA from the beginning to save for a down payment on a house.
Have questions? Feel free to reach out!