How will you finance the downpayment of your new home-- Home Buyers Plan (HBP) or TFSA?
Options to Finance the Down Payment for your Home
When you are ready to buy a home. What are the options open to you to finance your downpayment?
You are now thinking seriously about buying your first home. Among your early considerations for this home purchase 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 new Tax-Free Savings Account (maybe you are among the early adopters who already have a TFSA) and you’re wondering which of these might be the best home financing option for you.
Let’s us take a look at the options:
• The HBP allows a first time homebuyer to make a tax-free withdrawal of up to $20,000 from a Registered Retirement Savings Plan (RRSP) for the down payment (the 2009 Federal Budget proposes to increase this amount to $25,000). There are strict eligibility requirements including meeting the definition of ‘first time home buyer’ and the amounts withdrawn from the RRSP must be repaid over a 15-year period to avoid being taxed on the full amount of the RRSP withdrawal.
• Your RRSP contributions are tax deductible but your TFSA contributions are not, so the funds you need for a down payment can accumulate more quickly in an RRSP than in a TFSA. Here’s an example:
Your marginal tax rate is 30% and you can afford to contribute $4,000 to your RRSP because of the tax deduction you receive but 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.
• On the other hand, there are no ‘first-time home buyer’ restrictions when you use a TFSA withdrawal to fund your down payment, there are no dollar limits on the amount you can use, and there is 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 those tax savings to make TFSA contributions and eventually make your down payment using a combination of the HBP and a TFSA withdrawal. But because the TFSA is new, it could take you a number of years to build up enough of a TFSA balance to fund or partially fund your down payment.
These are your choices – 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.
This is presented for general information only. Consult your financial advisor for advice on the right choices for your financial situation.
Labels: Canada's Action Plan, Canadian Taxation, HBP, home buyers plan, home buying, investment, mortgage, RRSP, tax credits, tax deductions, tax free savings account, tax planning, TFSA
posted by laramaryann @ 10:04 PM
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