Should we use RRSPs or TFSAs to make a down payment on our first home?

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Personal Finance FP Answers Family Finance

The advisor suggests using the RRSPs first, then the TFSAs, and aiming for a 20 percent down payment to avoid CMHC fees

Publication date:

14 Apr 2022 • 1 day ago • 4 minutes read • 5 Comments Should these new home buyers use their RRSPs or TFSAs to fund a down payment? Should these new home buyers use their RRSPs or TFSAs to fund a down payment? Photo by Carlos Osorio/Reuters

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By Julie Cazzin with Doug Robinson

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Q: My partner Miranda and I are going to buy our first house later this year. Should we use money from our registered retirement savings plans (RRSPs), tax-free savings accounts (TFSAs), or both to make a down payment? We have approximately $60,000 in each of our TFSAs and $20,000 each in our RRSPs. What are the pros and cons of withdrawing money from each of these accounts for this purpose? We also have $40,000 in a savings account that we use as an emergency fund, so we didn’t plan on using that money for the down payment. — Felix

FP Answers: Felix, you and Miranda did a great job saving money to buy a house together. I am encouraged to know that you have set aside a $40,000 emergency fund. This makes answering your question easier. Far too many people underestimate the importance of these savings.

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Lenders want 20 percent of the purchase price as a down payment when buying a home, or you need mortgage insurance, which will cost you. If you were to use all the money in your TFSA and RRSP accounts, you would have $160,000 available. You can buy a property priced up to $800,000 without incurring the insurance costs of Canada Mortgage and Housing Corp. (CMHC), which range from 2.4 percent to four percent of the mortgage amount. For example, if you need a $500,000 mortgage, the lowest CMHC insurance cost is $12,000. If you have 20 percent for a down payment, you can save a lot of money. Ideally, I would aim for a 20 percent down payment.

Assuming you buy a property for $600,000, you would be pursuing a $120,000 down payment. If you use your RRSP, you must repay the amount to your RRSP over the next 15 years, starting the second year after you buy your home. In this example, you both have to pay back $1,333 per year if you each use all of your RRSPs. If you do not repay, the missed payment will be added to your income that year and you will have to pay tax on it. You need to evaluate whether making these repayments fits your budget.

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Income in an RRSP is fully taxed when it is withdrawn. However, gains in your TFSA are completely tax-free forever. If you have invested $20,000 in the next 30 years, this will grow to about $100,000 with a return of 5.5 percent. All $100,000 would be taxed on withdrawal if the money was in your RRSP. If it was in your TFSA, nothing is taxable.

The clear winner is the TFSA, which means that as a deposit, you must first withdraw money from your RRSP. The advantage of the RRSP is that you enjoy tax deduction at the time of insertion. However, you have already received that tax deduction, so it makes more financial sense to grow your TFSA rather than your RRSP.

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We might consider doing this further for you. If you and Miranda have more RRSP space, you can contribute some of your TFSA money to an RRSP now and get an immediate tax deduction for the 2022 tax year. If the money is in the RRSP for more than 90 days before you withdraw it to buy your house, this will work. Using the Home Buyers’ Plan (HBP), the maximum withdrawal from an RRSP is $35,000. If you added another $15,000 to your RRSP from your TFSA, you can immediately take advantage of the tax deduction.

Such a strategy works most effectively if your taxable income for the year is more than about $50,000 after all deductions, including the RRSP amount. Your tax savings on such a contribution would start at about $4,500 and could be significantly more if your income is higher. It’s best to get more specific tax advice before considering this option, but it may work well for one or both of you. Unlike an RRSP, the amount you withdraw from a TFSA is added back to your contribution limit the following year. Therefore, this strategy will not hurt your future TFSA contribution space.

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I strongly tend to use your RRSP first and then your TFSA, aiming for the full 20 percent deposit to avoid CMHC fees. Keeping your emergency fund on top of this strategy protects you from challenges that are likely to arise. Having some money invested in your TFSA for the future is an excellent foundation for long-term financial success. I wish you much success and many years of living pleasure.

Doug Robinson is a certified financial planner and wealth advisor at Veritable Wealth Advisory in Peterborough, Ontario. Veritable Wealth Advisory is a full-service financial planning and investment firm employing multiple certified financial planners and portfolio managers with offices in Burlington, Kingston and Peterborough.

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