The following article is a guest post by Kyle Grooms, a financial security advisor in Toronto, and looks at tactical ways to use TFSAs and RRSPs to save for a down payment.
A common thread that ties recent generations is the desire to own a home. I feel this is a safe statement, however antidotal it might sound, considering conversations with grandparents, parents and peers. As a financial advisor working with young professionals, this seems to be their number one short-term financial goal. This article will focus on a strategy that will look to provide value and flexibility in people’s approach to saving for their first home.
After a review of some the rules and regulations associated with the First-Time Home Buyers’ Plan (HBP), some people may come to the conclusion that it is complicated and rigid in character. I think the HBP is a great way to save for the purchase of a new home for the average Canadian; however, I would not disagree with the above assessment of the program. A recent study by Canada Revenue Agency (CRA) indicated that close to 50 per cent of people do not replenish their RRSPs after withdrawing for a home via the HBP. This is likely due to two reasons: cash flow and not having the proper advice. Unfortunately, the result of not replenishing RRSPs defeats the original purpose of utilizing the HBP.
Here’s a strategy to consider before buying your first home: Contribute to your TFSA (2009-2022 contribution room is $81,500) the years leading up to your big purchase. Since HBP funds can only be withdrawn if the funds have been in your RRSPs for 90 days or more, transfer the balance of your TFSA into an RRSP at least 90 days before you plan to make your withdrawal. Waiting until 90 days before you plan to withdrawal your funds leaves you in a better position to determine if you will be able to afford to replenish your RRSP. This provides you with flexibility to determine if, once you purchase your home, you will be able to contribute 1/15 of your withdrawal back into your RRSP each year for 15 years.
If it is foreseeable that you will not be able to do this (keeping in mind there is a two-year window until you have to begin replenishing you RRSP), do not transfer your TFSA to an RRSP – just use your TFSA. However, if you are confident that you will be able to replenish your RRSP, the same strategy (contributing to TFSA first) might be useful in regards to the tax refund you will receive that year. While contributing to your RRSPs each year can help you at tax time, investing in a TFSA over many years and later transferring all of it to your RRSP in the same year you purchase a home could result in the most value come tax season. The higher return could then be utilized to help replenish your RRSP.
Some people choose to replenish their HBP as quickly as possible, even though the federal government allows 15 years from the year the first payment is required. But it’s important to remember that because you are replenishing money that you have already claimed on previous tax returns, these HBP repayments are not considered new contributions and cannot be claimed again. Therefore, it is wise to contribute the minimum (1/15 of your withdrawal) repayment amount to your HBP, so you receive a tax refund for any amounts you contribute above the minimum (this is done when filing your taxes).
Ratehub.ca has resources outlining the First-Time Home Buyers’ Plan (HBP), including eligibility, withdrawal and replenishing rules, and more can been found on the CRA Home Buyers’ Plan website. I strongly encourage people contemplating the use of the HBP to utilize these resources and consult an advisor, so they can utilize the best savings strategy before making an offer on a home and taking on a mortgage in Canada.
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