RRSP vs FHSA for First Time Home Buyers
When considering whether to use a Registered Retirement Savings Plan (RRSP) or a First Home Savings Account (FHSA) to buy a home in Canada, each option has its advantages. Here's a breakdown:
RRSP (Home Buyers' Plan - HBP)
Tax Benefits: Contributions to an RRSP are tax-deductible, meaning they reduce your taxable income for the year. Withdrawals under the Home Buyers' Plan (HBP) are tax-free, but must be repaid into your RRSP over a period of 15 years.
Withdrawal Limit: You can withdraw up to $35,000 from your RRSP to put towards your first home. If you're buying with a partner, they can also withdraw up to $35,000, giving you a potential combined total of $70,000.
Repayment: You must start repaying the amount withdrawn two years after the withdrawal, and you have up to 15 years to repay it. If you miss a repayment, the missed amount is added to your taxable income for that year.
Eligibility: You must be a first-time home buyer, meaning you (and your spouse, if applicable) have not owned a home in the last four years.
FHSA (First Home Savings Account)
Tax Benefits: Contributions to an FHSA are tax-deductible, similar to an RRSP, and withdrawals for a first home purchase are tax-free. This combines the tax benefits of both RRSPs and TFSAs (Tax-Free Savings Accounts).
Contribution and Withdrawal: The annual contribution limit is $8,000, with a lifetime limit of $40,000. Unused contribution room carries forward to the next year (up to a maximum of $8,000 per year). Withdrawals are completely tax-free, with no repayment required.
Eligibility: You must be a Canadian resident, at least 18 years old, and a first-time home buyer (similar to the RRSP's definition).
Which Should You Choose?
Use the RRSP if:
You already have significant savings in your RRSP and want to take advantage of the larger withdrawal limit.
You’re confident you can repay the amount within the 15-year period.
You want to reduce your taxable income now and are okay with the future repayment obligation.
Use the FHSA if:
You prefer a simpler, no-repayment approach to saving for a home.
You’re starting to save specifically for a home and want to benefit from tax-free growth and withdrawals.
You haven't yet maximized your RRSP contributions or want to keep your RRSP savings intact for retirement.
For many people, a combination of both might be the best approach, maximizing your savings and taking advantage of all the available tax benefits. If you’re in a position to do so, contributing to both accounts could help you reach your home-buying goal faster.
