Should You Use Your TFSA or RRSP to Save for a Down Payment?

When it comes to saving up for a down payment on your first home, it’s best to do so in a dedicated account. Because saving up for a down payment might take a few years, it’s even better to put your money in a tax-sheltered account like an RRSP or a TFSA.

But which account is best for you depends on your circumstances and goals. Below is a short guideline to determine whether you should use your TFSA or RRSP (or both!) to save for a down payment.

Saving for a down payment in your RRSP

Most people only think of their RRSP as a way to save for retirement. But if you’re buying your first home, your RRSP can be one of the best places to save for a down payment.

Under the Home Buyers’ Plan (HBP), you can borrow up to $25,000 from your RRSP without penalty to buy a home. You then have 15 years to repay the amount, beginning the second year after the year you purchase your home. This works out to $1,667 a year. If you don’t repay this amount in any given year, you must pay taxes on the amount. If you’re buying a home with a partner or a spouse and you’re both first-time homebuyers, you can withdraw up to $25,000 each from your RRSPs for a total of $50,000.

By claiming your RRSP contributions on your tax return, you can get a tax refund. If you deposit that refund into your RRSP, this can help give your down payment savings a boost and get you into a home sooner.

As long as you can stick to the repayment schedule, taking advantage of the HBP makes your RRSP an excellent place to save your down payment.

Saving for a down payment in your TFSA

The TFSA is also another a great option to save the money for your down payment.

Currently, the annual TFSA contribution limit is $5,500. And if you were 18 or older in 2009 when the TFSA was introduced and a Canadian resident, you have $46,500 in contribution room. This means you can stash up to that amount in your TFSA where it will grow tax-free until you’re ready to buy. You can withdraw this money without penalty at any time, for any reason, making the TFSA the most flexible tax-sheltered account.

And there isn’t a requirement to repay the amount you withdrew. This relieves the stress of trying to replenish your savings while carrying the new costs of homeownership at the same time.

The bottom line

When choosing an account for saving up for a down payment, make sure you consider how much of down payment you need, how you plan to replenish your savings once you have a mortgage to pay, and which account is best for your income and goals. Both the TFSA and the RRSP are excellent savings vehicles for your down payment. And they can be used individually or together to help you become a homeowner.

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