Saving for a Home? Should You Use an RRSP or a TFSA?

When it comes time to start thinking about buying a home, you’ll hear a lot of talk about the Home Buyer’s Plan, an incentive program provided by the government through the RRSP. This plan, which has been around since the early 90s, allows future homebuyers to use their RRSP as a savings account, from which the funds can later be withdrawn and used as a down-payment on a future home. Under the Home Buyer’s Plan, you can withdraw as much as $25,000 from your RRSP, tax-free, to put towards your down-payment. This sounds extremely lucrative, especially when withdrawing anything from your RRSPs comes with such high penalties when you do it for any other reason. But, when you start speaking to mortgage brokers about financing your future home, you may hear of different options: one of these being TFSAs, or tax-free savings accounts.
TFSAs are another option to RRSPs and they may prove to be a better option for some homebuyers. This option was created in the 2009 and with these accounts, anyone over the age of 18 can invest as much as $5,000 per year into their account. Any interest that is earned while the funds are in the account, or any accumulated savings, are also tax-free while the money is in the account. And while obviously a significantly smaller amount than you can save with an RRSP, you can accumulate $25,000 in a TFSA, this option still does have many benefits over RRSPs.
One of the requirements of using your RRSP to make a down-payment on your first home, under the Home Buyer’s Plan, is that you need to at some point, pay that money back and put it back in your RRSP. Often, this time can be as little as a year and if you default on paying that money back, you’ll face some pretty strict fees. With a TFSA however, you can withdraw the money whenever you want and, while it won’t be tax-free as it is under the RRSP, you don’t have to worry about replacing that money in the near future – something definitely worth considering when you think about the expenses that will add up during that first year in your new home.
Another benefits of withdrawing from a TFSA vs. withdrawing from an RRSP is that the process is much quicker and much more simple. Generally with a TFSA you can transfer money online from one account to the next, and have your money within hours, if not minutes. Taking money out of an RRSP requires a lot of paperwork and wait time, usually weeks.
This isn’t to say that using your RRSP for the purpose of a Home Buyer’s Plan is a condemned practice, or has become a thing of the past. There are benefits that come with things like having to pay the money back, mostly that you’ll still be using that account for its intended purpose, your retirement. And, because you can receive a much larger amount of money all at one time, and put as much money as you want towards your savings any time you want, RRSPs still make sense for a lot of first-time homebuyers looking to save for their first home. But if you know that you’re not going to be buying a home for another four or five years, and you think you might benefit from TFSAs in the long-run, it’s definitely an option worth talking over with a mortgage broker now, well before you start even thinking about house-hunting.