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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.
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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.