When TFSA’s were first introduced, the $5,000 annual limit may not have seemed that useful.  But as 2013 hits, the government is raising the annual contribution limit to $5,500, making the total available room a more impressive $25,500.  We’re now in legitimate home down payment territory, and it’s important to understand your options.

RRSP Homebuyers’ Plan

If you’ve been contributing to your RRSP (you have, right!?), you’re allowed to withdraw up to $25,000 to buy your first home.  The only condition is that you pay it back within 15 years.  You’re essentially borrowing your own money, but along with your mortgage payment, you’ll have to pay this back as well.

Most first-time home buyers struggle with their mortgage payments, and having this additional obligation could push some over the edge.

Saving Your Down Payment In Your TFSA

Remember that the money in your RRSP IS yours.  That $25,000 belonged to you at one point (it still does, but now it’s more complicated because of an RRSP’s withdrawal terms). 

With a TFSA, your contributions do not decrease your taxable income.  On the other hand, they do not require you to pay any taxes when you withdraw.  In terms of a down payment for your home, TFSA money is simply yours to use.  Withdraw, pay the down payment, and you’re finished.  There’s no obligation to pay it back, so your only ongoing expense will be your mortgage payments.

Not Your First Home?

The RRSP Homebuyers’ Plan is only available to first-time home buyers.  The definition of ‘first-time’ is actually a bit complicated, but the CRA website has a good guide to let you know if you are or not.  If you’re not considered a first-time home buyer, a TFSA is probably your best option.

Other Benefits Of Saving In Your TFSA

Along with being available to any home buyer, TFSA’s are great because there are no conditions on how you use them.  Consider different situations where money originally intended for a down payment may not be needed for whatever reason. 

Maybe you end up marrying someone who already owns a home and you want to use that money for renovations?  You wouldn’t qualify for this with an RRSP, but with a TFSA it’s no problem.

RRSP OR TFSA?

As usual, there’s no one-size-fits-all answer.  Many people are attracted to RRSP’s because of the impressive looking tax rebate you receive after contributing.  Many of us have simply grown up hearing that RRSP’s are the thing to do to prepare for retirement, and that’s why we contribute as much as we can.

But the TFSA, while still rather new, has been becoming increasingly popular, and no matter what your situation, you should do some research or speak to a professional to find out what’s most appropriate for your situation.