I was pleased to read an article in the Financial Post today if couples (or singles!) should use an RRSP or a Tax Freee Savings Account (TFSA) as a vehicle to save for a new home.
In the past Financial Advisors would recommed to their clients, who were buying their FIRST home, to possibly utilize their RRSP under the Home Buyers Plan. Under this plan, you can take out maximum $25,000 of your RRSP as a loan to purchase your first home, tax free. You must repay this loan starting in 2 years from when you take it out, and must pay it back into your RRSPs within 15 years. This is a great tool for someone who is young enough to repay the loan back and who has some savings in their RRSP.
However, the problems some people faced in the past was repaying the loan from the RRSP back. And it is only available to first time home buyers.
Now, I would recommend saving for your down payment in a TFSA. I like the idea of not touching your RRSPs. Your RRSPs should be set up as a pre-authorized payment each time you are paid (remember: PAY YOURSELF FIRST!) and those savings should be kept specifically for retirement purposes.
EXAMPLE 1: Each spouse saves $400/month and has this amount taken from their account automatically on the 1st of each month. If they put it into a non-risky investment earning 3% interest, at the end of 3 years they would have $30,171.69 saved for a down payment on a new home!
EXAMPLE 2: If the couple decides they can incur some risk and saves it into a riskier investment and if the markets turn around and go back up, they could earn up to 8%. They would have $32,644.64 saved for a down payment on a new home. And they would be able to take out these savings TAX FREE!
The major differences between saving for a down payment in the RRSP Home Buyers Plan, or using a TFSA:
- You do not have to repay the loan you take out from your TFSA; With a Home Buyers Plan you have to pay it back within 15 years.
- You can use the TFSA for any down payment or expense; With the Home Buyers Plan you can only use it for first time home purchase, no other purchase.
- If you earn little or no income you can invest with a TFSA; you must have earned income to invest in an RRSP.
Each individual has a different scenario therefore it is advisable to sit down with an Advisor and find out which route is best for you. Your Advisor will be able to show you which plan is more suitable to your lifestyle!