If you’re thinking of buying a home in a few years, it’s time to start saving. Avoiding high-risk ventures is likely a good idea, since you don’t want to lose your money, so no-risk options like high-interest savings accounts and GICs are your best bet.
But which savings platform do you choose?
Here’s what you have to choose from:
Using an RRSP to save is a great idea, as it’s a tax-free shelter. As an added bonus, if you’re a first-time homebuyer, you can also use the Home Buyers’ Plan (HBP). This system allows you to withdraw upwards of $25,000, given that the funds have been in the RRSP for longer than 90 days.
If you’re buying with a partner who’s also a new buyer, you can each remove $25,000. But keep in mind that the money you take out—alone or with someone else—has to be withdrawn no later than 30 days after the closing date.
You then have one grace year, and then must start to repay the withdrawn amount, with 15 years to pay back the entire amount.
For example, you borrow $33,000 from your RRSP. You’ll then need to pay $2,200 back each year for 15 years. You can choose to pay back more than that amount in any year, thus decreasing your annual payments going forward.
Any funds removed from your RRSP through the HBP are tax-free. But be careful: if you can’t pay your annual payment, you’ll have to declare it as taxable income on your yearly return, so know what you’re getting into before you start.
With not as many restrictions as RRSPs, TFSAs offer a simpler way to grow your money tax-free. There are no restrictions for first-time homebuyers, and second- or third-time buyers can still make tax-free withdrawals.
You can take and give as much as you want to and from your TFSA, up to your limit (which is likely $41,000). Using your TFSA also allows you to leave your RRSP alone, letting it compound over time until you retire.
That said, there is no refund for saving money in a TFSA; the refund from your RRSP could be used toward your down payment (and that can be very handy!).
Other than RRSPs and TFSAs, you don’t have any great options. You could save in a non-registered account, but you’ll be taxed on any interest, which is really not ideal. If you have no contribution room, which is highly unlikely, this is your next choice.
The upside is that you can withdraw and deposit freely without worrying about paying the funds back.
Making a choice
You should consider both RRSPs and TFSAs, as they allow your savings to grow without being taxed. RRSPs provide you tax refunds whereas TFSAs have fewer restrictions, so use a combination of both to give yourself more options when you make the plunge and buy your next home!