Putting together funds for a down payment often takes time and a solid strategy that goes beyond tucking away a few dollars each month. As a Canadian, we are fortunate to have access to a number of investment savings accounts that can optimize our savings towards home ownership.
Putting together funds for a down payment often takes time and a solid strategy that goes beyond tucking away a few dollars each month. As a Canadian, we are fortunate to have access to a number of investment savings accounts that can optimize our savings towards home ownership.
Registered Retirement Savings Plan (RRSP)
An RRSP is a retirement savings plan registered with the federal government. When you contribute to an RRSP, those funds are exempt from tax, capital gains, and dividends, so long as the funds remain in the plan. You usually have to pay tax when you cash in, make withdrawals, or receive payments from your RRSP.
The amount you invest into an RRSP reduces your net income, but lowers the income tax you pay, therefor offering a tax break. However, RRSPs have an annual contribution limit, meaning you can only invest so much income into them per year.
What it does is lower your taxes while your saving for a home. It has the overall impact of reducing your yearly income through your contribution. A caveat here though is your contribution is lost with each withdrawal, and it doesn’t allow you to do tax-free withdrawals with the exception of the Home Buyer’s Plan.
Under the RRSP account, Canadians also have access to the Home Buyers Plan, which allows for first time home purchasers to withdrawal $35,000 tax free dollars from their RRSP towards buying a new home. However, those withdrawn funds must be paid back within a 15 year period. If you don’t, you will be subsequently taxed on it.
Tax Free Savings Account (TFSA)
A TFSA is a tax sheltered account that allows users to hold a variety of investments. Unlike an RRSP, a TFSA won’t offer you any up-front tax breaks, but any savings you put into the account can grow tax free. Whenever you want to withdraw money from your TFSA, those funds are also exempt from taxes. Similar to an RRSP, however, a TFSA will only allow you to contribute a specific amount of funds per year. In 2022, TFSA contribution limit was $6,000.
You can use a TFSA for anything. It doesn’t really have constraints, but it allows you to also use various investment vehicles. You can choose to do something more risky with stocks, or go based on your own risk appetite and look at mutual funds, etc.
The important thing to note is investing it within the TFSA, just putting cash in there doesn’t do you much good since the likelihood of housing prices increasing will be higher than the interest you will earn just sitting in there.
First Home Savings Account
One of the newest types of investment savings accounts on the market, the tax-free FHSA was unveiled in April and is part of the government’s 2022 budget and will be made available in 2023. Marrying together some of the features of a TFSA and RRSP, the main goal of the FHSA is to help more Canadians purchase their first home and more ownership more accessible.
Some of the key things to note so far is that deposits and withdrawals are free. So you won’t be taxed on them, and money that’s withdrawn or any investment growth is not taxed. Just like a TFSA or RRSP, the amount of money you can contribute to an FHSA is capped annually. Users can put up to $8,000 a year into a FHSA, up to a lifetime maximum of $40,000. An FHSA can also be opened for 15 years. Should you not max out the contribution limit every year, it is lost and not carried forward unlike a TFSA.
When it comes to using investment savings accounts to create a down payment, it is possible to use multiple types of accounts towards your savings goal.
It’s often that people will start with one account, then when they max that out, move onto savings through another account. At the end of the day, its always best to consult a professional who will be able to help you navigate all of this. Most banks offer someone who will be able to help you set up these accounts. You might also consider consulting with a Financial Planner and of course once you’re ready to start your home buying journey, a Realtor.
If you think you’re ready to start your home buying journey, get in touch with us today! We would love to chat about how we can help you get into the market.
