As housing prices rise, so do the necessary downpayments. In response to this need the Canadian government introduced the First Home Savings account - a new tool for Canadians to save. However, this begs the question, what government program is the best for growing your home nest egg the Home Buyers Plan (a program available through your RRSP) or the new First Home Savings Account? Let’s compare their key features:
RRSPs & The Home Buyers Plan
Having an RRSP allows you to not only save for retirement but also a home through the Home Buyers Plan (HBP).
Your RRSP contribution room is based on your income (check your latest Notice of Assessment or your myCRA account) and these contributions are tax deductible – therefore most workers have an RRSP to reduce their annual income tax burden. The RRSP contribution calendar is March to February and claimed in the spring (i.e. March 2024 to February 2025 contributions are claimed on 2024 tax returns in spring 2025).
So how does the RRSP help save for a home – the Home Buyers Plan. The HBP allows you to borrow up to $60k per person from your RRSP to purchase a home (recently increased from $35k). And unlike regular RRSP withdrawals, HBP withdrawals are tax-free.
But beware, the borrowed money must be recontributed to your RRSP within 15 years which may not be an issue if you make regular contributions over those years. However, if you cannot make the minimum payments, you must pay the tax on the amount not paid.
FHSA (First Home Savings Account)
FHSAs are specifically for people preparing to buy their first home or reenter the housing market after being out of it for 4+ years. That said, FHSAs have some similarities to RRSPs.
First, FHSA contributions are tax deductible. However, their contribution calendar is from January to December instead of March to February. Also, the contribution room is the same for everyone - $8k per year, starting the year the account was opened, with a lifetime limit of $40k.
Next, withdrawals. Unlike RRSPs, there is no cap on FHSA withdrawals. When it’s time to buy, you can withdraw the entire account, tax-free. And recontributions ... there are none.
Of course, there isn’t one solution that works for everyone but given the features of both accounts, the FHSA is quickly becoming a favourite for young investors looking towards buying their first home over the RRSP. That said, given the size of today’s downpayments, it’s about having the right mix of accounts rather than a one-account solution. For instance, TFSAs and non-registered accounts are also powerful options to consider for savings goals.
In conclusion, as with most financial planning goals the best strategy is to start by consulting your advisor who can develop a custom solution to fit your unique needs.
To explore the best home saving strategy for you contact KLT Wealth Management.
- Courtney Beach, QAFP
