TFSA or RRSP - Depends On When You Plan To Buy A Home
The decision to invest your money either in a TFSA or an RRSP prior to buying your first home really comes down to time horizons.
If you’re planning on making a purchase in the next six months through to two years, you will probably want to be more cautious with where you put your money and how easily you can access it all if the need arises.
If you’re looking to buy a home in the shorter term, it’s best to go with a strategy that allows you to withdraw your money at any time. The money will still be sheltered from taxes in a TFSA and can be withdrawn without penalty at any time.
Key things to remember when making your decision:
RRSP room is only accumulated with earned income; whereas, TFSA room is granted every year once a Canadian resident is 18.
The RRSP option also gives you the ability to use the “Home Buyers Plan” to make a withdrawal from your RRSP tax free of up to $25,000- $50,000 if also paired with a second buyer).
To qualify, you (and anyone buying with you) must be a first time buyer- neither of you have owned in the past four years. Also, no RRSP contributions are allowed in the 90 days prior to the HBP withdrawal. Once a withdrawal is made, it must all be paid back over a period of 15 years.
The TFSA option, with the limit now at $6,000 for 2019, the total room available in 2019 for someone who has never contributed and has been eligible for the TFSA since its introduction in 2009 is $63,500.
So Which is Better?
For first time buyers, who usually are new to entering workforce, the flexibility of the TFSA usually outweighs the benefit of the RRSP tax deduction. This strategy also allows the RRSP to stay focused on the goal of retirement savings.