Add RRSPs versus TFSAs to the list of decisions you have to make as a prospective home buyer.
Some serious saving is going to be required to meet the minimum 5-per-cent down payment for buying a home, not to mention the 20-per-cent threshold for avoiding costly mortgage default insurance. Two ideal vehicles for saving are registered retirement savings plans and tax-free savings accounts. Which is best?
Here's the case for the TFSA. It lacks one of the flashy benefits of using an RRSP to save for a home, but it compensates by offering more real-life flexibility.
RRSPs have been the go-to source of money for house down payments since the early 1990s, when the federal government introduced the Home Buyers' Plan. Today, the plan allows first-time buyers to withdraw up to $25,000 from their RRSPs to put toward the cost of a house.
TFSAs have only been around since 2009, which means the thinking on how best to use them is still evolving. The general principal with a TFSA is that people 18 and older can contribute $5,000 annually and pay no taxes on whatever type of investment or savings gains they generate.
Money invested in RRSPs compounds tax-free as well, but you have to pay taxes on money withdrawn from a plan. Not with the Home Buyer's Plan, however. A $25,000 withdrawal under the plan is $25,000 in cash for your down payment.
The best argument of all for using RRSPs to save for a home? It's the tax deduction you get when you contribute to a plan. Invest the tax deduction in your RRSP and you've got an extra savings boost.
No, you don't get a tax deduction when you contribute money to a TFSA. What you do get is freedom from the rigid requirements for repaying money withdrawn from an RRSP to pay for a house.
"You have to pay yourself back when you use the Home Buyers' Plan," said Carol Bezaire, vice-president of tax and estate planning at Mackenzie Financial. "But with the TFSA you don't."
The point of the Home Buyers' Plan is to help people afford to buy homes without permanently damaging their retirement savings. That's why you have to start repaying what you withdrew through the plan in the second year after the year you made your withdrawals.
The default repayment schedule is one-fifteenth of the withdrawn amount for 15 years. Ms. Bezaire said your annual RRSP contribution is automatically reduced by the amount of your required repayment. This means your tax deduction will be for the net amount of money you put in your RRSP.
You can take money out of a TFSA at any time and pay it back if and when you want, subject to certain restrictions. It's also a lot quicker and simpler to withdraw money from a TFSA as opposed to using the Home Buyers' Plan. There's little or no paperwork to fill out with the TFSA - in many cases you can just go online and transfer money from your TFSA to your chequing account.
Using a TFSA to save for a home has another more subtle benefit as well. It allows the money in your RRSP to more effectively do what it's supposed to do, which is grow into a source of income you can use when you leave the work force.
The big benefit of contributing to an RRSP early on in your adult years is that you put your money to work generating compound growth over the decades ahead. By withdrawing money to buy a home, you're giving your retirement savings a vacation that could last as long as 15 years.
The biggest flaw with TFSAs right now is that you're limited to contributions of no more than $5,000 per year. You can carry unused room forward, which means the most you can now put in a TFSA if you haven't used one before is $15,000. Remember, you can withdraw up to $25,000 through the Home Buyers' Plan.
If you've got a three- or five-year plan to save for a home, TFSAs could still serve you well because of the additional contributions you'll make. If you've got a shorter timeframe, you'll likely have to augment your TFSA home savings plan with other savings or an RRSP withdrawal using the Home Buyers' Plan.
The Home Buyers' Plan is a nice, neat program that you're going to hear a lot about if you're getting into the housing market because it's a major factor in helping people afford homes. TFSAs are a better way to go, though.
"I used the Home Buyers' Plan myself," Ms. Bezaire said. "I prefer the TFSA's flexibility."
The Home Buyers' Plan
Facts and figures on the federal Home Buyers' Plan:
Purpose: Allow people to borrow from RRSPs to buy a first home
Total amount withdrawn since inception in 1992: Approximately $26.5-billion
Average withdrawal amount: $10,850.00
Number of HBP withdrawals since inception: 2,437,728
Five-year trend: Number of users and average withdrawal size has declined
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