TFSA vs RRSP for first time home buyers?

[v_tofu]

Hey All,


Just wondering if I can get some advice on the following:

Our possession date for our home is coming up at the end of march 09

-Currently have 25,000 deposit on house

-Have about 15 000 in RRSP (between myself and fiancee).

We went to see my financial advsior today, planning on depositing another 10 000 into RRSPs

My idea was that come March, we take out the 25,000 via home buyers plan and put it towards our down payment for a total of 50,000.

However, My financial Advisor said it would be better for the 10 000 to be placed in the TFSA instead.

can someone elaborate as to why? The only advantage I really see is that I will have less RRSP to pay back in 15 years. But If i put the money into RRSPs, I will get a tax break for this year (haven't contributed to any this year).


cheers,

[someguy91]

Home Buyers' Plan only goes up to $20k. Since you have 10 to deposit (to bring the RRSP to 20), put 5 in RRSP and 5 in TFSA so that you'll zero out your RRSP & TFSA come March.

[Wonderdollar]

Hey All,


Just wondering if I can get some advice on the following:

Our possession date for our home is coming up at the end of march 09

-Currently have 25,000 deposit on house

-Have about 15 000 in RRSP (between myself and fiancee).

We went to see my financial advsior today, planning on depositing another 10 000 into RRSPs

My idea was that come March, we take out the 25,000 via home buyers plan and put it towards our down payment for a total of 50,000.

However, My financial Advisor said it would be better for the 10 000 to be placed in the TFSA instead.

can someone elaborate as to why? The only advantage I really see is that I will have less RRSP to pay back in 15 years. But If i put the money into RRSPs, I will get a tax break for this year (haven't contributed to any this year).


cheers,


Did your FA give any reason for depositing $10,000 in TFSA (which you can not do before 1st Jan 2009 anyways) instead of putting in RRSP and utilize under First time Home Buyer Plan?

If you both have the room then contributing to RRSP and taking out for HBP makes more sense as you would get tax break according to your marginal tax brackets. However, make sure to put money in RRSP savings account or only in monthly renewable GICs as you would need to take the money out without losing a portion and paying any penalties.

[Wonderdollar]

Home Buyers' Plan only goes up to $20k. Since you have 10 to deposit (to bring the RRSP to 20), put 5 in RRSP and 5 in TFSA so that you'll zero out your RRSP & TFSA come March.


Home buyer plan lets you withdraw up to $20,000 each spouse making a total of $40,000. So, if the total RRSP of $25,000 is in such a way that no one has more than $20,000 then, both can withdraw total of $25,000 and also can get tax break.

[v_tofu]

Did your FA give any reason for depositing $10,000 in TFSA (which you can not do before 1st Jan 2009 anyways) instead of putting in RRSP and utilize under First time Home Buyer Plan?

If you both have the room then contributing to RRSP and taking out for HBP makes more sense as you would get tax break according to your marginal tax brackets. However, make sure to put money in RRSP savings account or only in monthly renewable GICs as you would need to take the money out without losing a portion and paying any penalties.


Thanks for the response.

The reason for doing the TSFA in Jan 23 was that he said:

1. paying off RRSP of 15000 is better than 25000

2. Something about how TSFA is more or less the same??? I was confused as to the way he put it. Somethign about how putting money in RRSP you get the tax break after, but putting the money into TSFA you get the tax break first?

[mr_raider]

It's the other way around. Money contributed to TFSA is not tax deductible, withdrawal is tax free. Money contributed to RRSP is tax deductible, withdrawal is taxed.

RRSP allows you to defer tax until you withdraw it, TFSA is taxed before contribution.

[Bullseye]

TFSA may indeed be better, but we'd have to know both your tax brackets before establishing which is correct. If one of you is below the 31% rate, then RRSP's would likely not be the best route.

[Lyrrad0]

I'm confused at why they would think TFSA would be a reasonable option. If you deposit money in January and withdraw in March, you only get 2 months or so of tax free interest, which seems negligible, and you lose the room until the next January. By contrast, if you deposit into the RSP, you get a tax deduction on the amount you deposit, although you do have to pay it back.

I thought that if you use the RSP HBP, you don't have to pay taxes on the withdrawal unless you fail to make the yearly repayment into the RSP.

[budfrogs]

It depends on what your plans are in the future also.

If you plan on putting more money into the TFSA you will not be able to until 2010. Although if you are buying a new house you may not have anything else to save this year.

As someone else pointed out you will not have much savings using the TFSA from Jan to March. Only 3 months worth of interest. This isn't a huge savings.

If you put into RRSP:
15K into RRSP - You get tax back on that so you may get 40% back in April. Although depending on your income if it drops you into another tax bracket you may want to keep part of the deduction for another year.

You can then use your tax refund to either start paying back your loan to yourself or put it towards your mortgage and pay back the loan over the 15 years. The loan payments are not that much on $15K spread over 15 years.

If I was in your shoes I am not sure what I would do. The large tax refund is nice. I think I would do the RRSP route but that is more because the loan payback requirement means it would be a priority for me to replenish my retirement savings.

[budfrogs]

Please let us know what you end up deciding!

I am looking to get a house in the next couple of year and have been trying to figure out the same things and where to park my money and so on until buying time.

[v_tofu]

TFSA may indeed be better, but we'd have to know both your tax brackets before establishing which is correct. If one of you is below the 31% rate, then RRSP's would likely not be the best route.

Hey bullseye,

Combined salary gross for the two of us is around 65-70K

we each make about 33K roughly

[v_tofu]

It depends on what your plans are in the future also.

If you plan on putting more money into the TFSA you will not be able to until 2010. Although if you are buying a new house you may not have anything else to save this year.

As someone else pointed out you will not have much savings using the TFSA from Jan to March. Only 3 months worth of interest. This isn't a huge savings.

If you put into RRSP:
15K into RRSP - You get tax back on that so you may get 40% back in April. Although depending on your income if it drops you into another tax bracket you may want to keep part of the deduction for another year.

You can then use your tax refund to either start paying back your loan to yourself or put it towards your mortgage and pay back the loan over the 15 years. The loan payments are not that much on $15K spread over 15 years.

If I was in your shoes I am not sure what I would do. The large tax refund is nice. I think I would do the RRSP route but that is more because the loan payback requirement means it would be a priority for me to replenish my retirement savings.


my thoughts exactly.. the tax refund would be great, as the wedding will happen 2 months after the posession date, and I calculated the bhp payments to be about $150/month for 15 years. I'll ask my more financially knowledageble friends for more advice, but I do have to decide in about a week, as the RRSP contribution must be made soon, as I need it by March (90 day period)

[Bullseye]

Hey bullseye,

Combined salary gross for the two of us is around 65-70K

we each make about 33K roughly

You really don't make enough money to benefit much (if at all) from RRSP's, then. It would depend on some other factors to really know (children, pensions, expected retirement income, etc), but this may be why your advisor is recommending TFSA's instead.

[setell]

I agree with Bullseye here, you don't make enough to really benefit from a RRSP. Why don't you sign up with ING's pre-TFSA offer. That way you can start earning interest before Jan 1st and earning a few months of interest is better than nothing. I think ING is one of the very few in the market right now where you can start a TFSA before the program officially starts.

[v_tofu]

You really don't make enough money to benefit much (if at all) from RRSP's, then. It would depend on some other factors to really know (children, pensions, expected retirement income, etc), but this may be why your advisor is recommending TFSA's instead.

Hi Bullseye,

would u be able to elaborate on how I don't beneif tfomr RRSPs?

From my past contributions, I usually recieve a tax break for about 1-2k. I believe i contributed about 5k last year.

If I don't do any contributions this yr, what will my tax break be like?


Also, as another poster suggested, i only recieve no tax on the interest recieved from the TSFA? is this true? So the 5k i put into the TSFA, will be counted as income?? I'm confused. This would seem like the less favorable option between the two. especially since i will need the money in about 3 months

[AllWheelDrift]

Hi Bullseye,

would u be able to elaborate on how I don't beneif tfomr RRSPs?

From my past contributions, I usually recieve a tax break for about 1-2k. I believe i contributed about 5k last year.

If I don't do any contributions this yr, what will my tax break be like?


Also, as another poster suggested, i only recieve no tax on the interest recieved from the TSFA? is this true? So the 5k i put into the TSFA, will be counted as income?? I'm confused. This would seem like the less favorable option between the two. especially since i will need the money in about 3 months
You're forgetting that you'll have to pay tax when you eventually withdraw from your RRSP, and because of your relatively low income, your tax rate now is low and will be the same or higher when you withdraw from your RRSP.

RRSPs work best when your current income is significantly higher than it will be at retirement. As it stands, you may be worse of contributing to your RRSP because when you retire, your RRSP withdrawls will be considered income and will not only be taxed, but also result in clawbacks on GIS/OAS. With a TFSA you won't get the immediate tax break but instead avoid taxes and GIS/OAS clawbacks at retirement.

[Bullseye]

What he said ^^^

Listen to the man, he knows what he's talking about.

[Astro5]

Hi Bullseye and others,
Sorry to hijack this thread.. but I'm in the same situation. My common-law partner is considering the same thing, TFSA or RRSP for our new home (first time buyers for both of us).

He makes $64,000 a year and has about $15,000 in savings right now. No TFSA or RRSP set up yet. He's been working for the government for the past year and has a pension (defined benefit plan).
We're planning on purchasing our first home sometime this year.

Any advice on what he should do? Should he start an RRSP with all of his $15k(deadline within this week!) so we can use the HBP for our new house, or should he start a $5k TFSA and contribute the rest ($10k) into an RRSP?

Many thanks for any advice you'd be able to provide!

[AllWheelDrift]

Hi Bullseye and others,
Sorry to hijack this thread.. but I'm in the same situation. My common-law partner is considering the same thing, TFSA or RRSP for our new home (first time buyers for both of us).

He makes $64,000 a year and has about $15,000 in savings right now. No TFSA or RRSP set up yet. He's been working for the government for the past year and has a pension (defined benefit plan).
We're planning on purchasing our first home sometime this year.

Any advice on what he should do? Should he start an RRSP with all of his $15k(deadline within this week!) so we can use the HBP for our new house, or should he start a $5k TFSA and contribute the rest ($10k) into an RRSP?

Many thanks for any advice you'd be able to provide!
I'd say $15k into RRSP before the deadline. That should generate ~$5k tax refund which he should put in a TFSA.

[T-Bone]

Take note you must make the contributions to your RRSP 89 days before you withdraw those funds for the Home Buyers Plan.

http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-e.html#P306_28865

You cannot deduct the amount by which the total of your contributions to an RRSP during the 89-day period just before your withdrawal from that RRSP, is more than the fair market value of that RRSP after the withdrawal.

The same rules apply if you contributed to your spouse's or common-law partner's RRSP during the 89-day period just before that individual made the withdrawal from the same RRSP under the HBP.

You might want to use the TFSA so you don't get hooked by the 89 day requirement...remember that there will probably be some delay in the paperwork process, so give yourself at least a few weeks after you apply for the HBP withdrawal through your Financial Instution as well.

[Astro5]

Thanks AllWheelDrift and TBone - it's certainly most helpful! I'll advise my partner to start an RRSP with his $15000 and take the refund (~$5000) to start an TFSA. We're likely not going to be buying our first home in the next 90 days so we'd be okay with using his RRSP for the HBP when we do buy.

Thanks again!

[gettingadeal]

Just a caution that the 30% or so tax savings only counts when you have the income to support it AND don't have other credits that reduce your tax owing (like student loans, dependants, transit passes, etc...). For example, I was playing with my RSP amount and at first found that I could put up to 16K before my tax savings would start to slide off. But then I found I have medical expenses that qualify to increase my tax credits and so this changed my optimum RSP from 16K to about 13K.

Best thing is to look at your tax owing without any RSP (line 39 on Sch1 and line 50 on ON428 for Ontario) and that's how much tax you can eliminate. So if your tax owing is only 2500, than a 15K RSP will still only save you 2500 this year.

[edkate]

Hi, we are in similar situation and we are kinda lost...well i am because i do all the budgeting and financial planning in the family:(
Since there are so many knowledgable people here - PLEASE HELP ME! we are to go the bank tomorrow to put/not to put money back into RRSP~:confused:
Situation is this:
i went back to school january for dental hygeine. We opened Student LOC with BMO - paid $11,500 for first year of school. Month and a half later i decided to drop out - family circumstances. I got partial refund of $7,000.

The rest of the money on LOC we coverd with money withdrawn from RRSP - that is we got $5000 and paid $500 fee for withdrawing it ( i must say it was our first time opening RRSP account knowing we would be able to use it later for Life Long Learning plan)--life went on.

Hubby just got a T4 with total income of $48,xxx. I have $21,xxx income for last year.
He has RRSP account with $5000 on it. I have $0.
We are thinking to buy our First house this year using RRSP for partial downpayment and the rest $20K will come from my mom (she sold house before house market crash).
We have about $10,000 savings now (didn have it last january to pay off that LOC)
Student LOC is being used for our car purchase in june (BMO hasnt confirmed my status of non-student yet) - BTW Can we write off the interest on this LOC?

Deadline for RRSP is March 1st, right? so my actual question is this:
is it too late to pay that amount of money back to RRSP? should it be $4500 or $5000? i have NO clue! Any other suggestions?

And one last question:
when paying back the $5k or $4.5K - do i still have to wait 89 days before withdrawing the money for First Time home buyers plan Or or it's considered a "payback" and no holding time?
Pleeeeeease help!

OR we just open TFSA for $5k each and dump the money there????? i am completly clueless.....

[Bullseye]

No, interest is not deductible. Only OSAP loans are tax deductible.

It's not too late to replace the money you withdrew from your RRSP. You'd have to put in $5k to replace it, as that was what was withdrawn.

Who's RRSP did you withdraw from, though? If it's yours, I would not recommend replacing it, as your income tax rate is too low to justify it. Also, your tax rate on the withdrawl will be low. The $500 you had taken was just a mandatory holdback, not the actual taxes you owe on that withdrawl. The actual taxes will be calculated when you do your tax return, it could be less than $500 (and therefore you'd get some of it back), or it could be more (and you'd owe more).

Either way, I'd consider putting the max you can afford (up to HBP limit) into an RRSP for that downpayment. Not sure about the rules for the holding period, though, maybe someone else can answer that.

I'd also consider paying down the BMO LOC, but it would depend on the rate.

You'd have to consider the CMHC fee you'll pay on your purchase, and then decide whether the loan paydown or the RRSP contribution would be better.

[onlineharvest]

Hey All,


Just wondering if I can get some advice on the following:

Our possession date for our home is coming up at the end of march 09

-Currently have 25,000 deposit on house

-Have about 15 000 in RRSP (between myself and fiancee).

We went to see my financial advsior today, planning on depositing another 10 000 into RRSPs

My idea was that come March, we take out the 25,000 via home buyers plan and put it towards our down payment for a total of 50,000.

However, My financial Advisor said it would be better for the 10 000 to be placed in the TFSA instead.

can someone elaborate as to why? The only advantage I really see is that I will have less RRSP to pay back in 15 years. But If i put the money into RRSPs, I will get a tax break for this year (haven't contributed to any this year).


cheers,

I'm not sure what the rules are for the TFSA, but I know that any money deposited in the RRSP for the purposes of the HBP must be in there for at least 90 days before taking it out. If you take posession in March, you've run out of time - all you can withdraw is the available $15000

If you move in in March, really, what do you expect from any deposit? It does not have enough time to make any significant leap. I'd suggest you just hold it in whatever money market or interest bearing account it already sits in.

[Sepiraph]

Hey is there any disadvantage to the HPB? From my understanding it is essentially a tax-free loan from your own RRSP account, so I take it that the actual investment in the RRSP will still able to grow tax-free WHILE I'm using that loan? I'll call CRA to verify tomorrow.

Another question I have is what if your RRSP value dropped, are they counting the present market value or the original value?

[AllWheelDrift]

Hey is there any disadvantage to the HPB? From my understanding it is essentially a tax-free loan from your own RRSP account, so I take it that the actual investment in the RRSP will still able to grow tax-free WHILE I'm using that loan? I'll call CRA to verify tomorrow.

Another question I have is what if your RRSP value dropped, are they counting the present market value or the original value?
When you use the HBP you take the money OUT of your RRSP, so it's not growing tax-free anymore because it's gone until you repay it. For the same reason, it's the present value (because you actually have to sell the investments) that matters.

So for example, if you contributed $20k to your RRSPs and invested some/all of it in equities and the value has dropped to $15k, you could only take out $15k under the HBP, and you've be left with $0 in your RRSP.

Then over the next 15 years you'd find yourself paying back $1k/year and in the mean time you'd be missing out on the growth in your RRSP.

On the other hand, keep in mind that you're using pre-tax dollars to save mortgage interest which isn't taxed, but that you'd pay tax on growth of your RRSP when you withdraw.