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Financing your new house – Home Buyers Plan or TFSA?

It’s not quite time yet but you’re beginning to think seriously about buying your first home. Among your early considerations are how much home you will be able to afford and how you are going to finance your purchase. You’ve heard about the Home Buyers Plan (HBP) and the Tax-Free Savings Account (TFSA) and you’re wondering which of these might be the best home-financing option for you. Let’s take a look at both options:

The Home Buyers Plan

  • Allows a tax-free withdrawal of up to $25,000 from a Registered Retirement Savings Plan (RRSP) for the down payment
  • Carries strict eligibility requirements, including meeting the definition of “first-time home buyer”
  • The amounts withdrawn from the RRSP must be repaid over a 15-year period to avoid being taxed on the full amount of the withdrawal
  • Your RRSP contributions are tax-deductible, so the money you need for a down payment can accumulate more quickly in an RRSP than in a TFSA. Here’s an example:
    • Assuming your marginal tax rate is 30% and you can afford to contribute $4,000 to your RRSP because of the tax deduction you receive
    • You can afford to contribute only $2,800 to your TFSA in after-tax income because your TFSA contribution is not tax-deductible and does not create any tax savings
    • Assuming your RRSP and TFSA investments both earn a 5% annual return, after five years, you will have accumulated $23,800 in your RRSP and just $16,245 in your TFSA.

Tax-Free Savings Accounts

  • No “first-time home buyer” restrictions
  • No dollar limits on the amount you can use
  • No requirement to repay your TFSA withdrawal, so you won’t encounter tax issues down the road
  • Your TFSA withdrawal will create more contribution room in the year following the withdrawal and that could be a benefit
  • If you are able to maximize your RRSP contributions, you might consider using any tax savings to make TFSA contributions and eventually make your down payment using a combination of the HBP and a TFSA withdrawal.

Whether it’s buying your first home, figuring out how to pay for it, or any other aspect of your financial life, a professional advisor can help you make the right choices for your situation.

Date reviewed: February 17, 2015

This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), presents general information only and is not a solicitation to buy or sell any investments. Contact a financial advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.