FHSA vs. TFSA vs. HBP (RRSP) The Best Strategy to Purchase a Home in Canada
This article looks to break down the differences between the First Home Savings Account (FHSA), Tax-Free Savings Account (TFSA), and the Home Buyers Plan (HBP) available through your Registered Retirement Savings Plan (RRSP) with the purpose of helping you purchase a house in Canada. The FHSA, TFSA, and HBP (RRSP) can be used individually or as a combination to perfect your savings strategy and help you achieve homeownership in Canada.
When should you use the FHSA?
Primary Goal of FHSA: Help save for a down payment on the purchase of a house
The primary goal of the FHSA is to help Canadians save to make a down payment on the purchase of a house in Canada. Since this registered account is specifically set up to help first time home buyers, the benefits it provides with the goal of saving towards the purchase of a house combine the benefits of the TFSA and RRSP. When contributions are made into the FHSA, they are tax-deductible much like when you contribute to an RRSP. Contributions in your FHSA are then able to grow tax-free and be withdrawn tax-free similar to a TFSA for the purchase of a home.
- First-time homebuyers should look to take advantage of the FHSA as the first step of their primary savings strategy. The FHSA has deductible contributions which provide you with more money you can use to help save for the house you want to purchase.
- Money can be transferred from your TFSA to your FHSA. When it is transferred you will be eligible to receive a tax-deduction for the contribution made.
- Money can be transferred from your RRSP to your FHSA. This allows you to withdraw the money from the FHSA tax-free without having to recontribute over the next 15 years like you would with the HBP (RRSP)
When should you use the TFSA?
Primary Goal of TFSA: Short and Long-term savings, such as purchasing a home
A TFSA is a very flexible investing account that can be used for both short-term and long-term saving goals. The ability to earn and withdrawal interest and contributions tax-free makes the TFSA a great way to save while providing access to your money at any time. This is a great account to use if you expect to use your savings for a purchase such as a home. Any withdrawals made from your TFSA for the purchase of a new home do not need to be contributed. However, you will regain access to the withdrawn contribution room in the next calendar year.
- If you have initially been saving money in your TFSA and your FHSA is not yet maxed out. You can transfer money from your TFSA into your FHSA to receive a tax deduction for the amount transferred.
- Your TFSA is a good option to use for saving up a down payment as any withdrawals made are tax-free and do not need to be re-contributed in the future.
When should you use the HBP (RRSP)?
Primary Goal of RRSP: Save for retirement; HBP: Help to purchase a home
To be able to use the HBP, you must have first contributed money to your RRSP that you are able to withdraw through the HBP. Since the RRSP allows you to receive tax-deductions when you initially contribute, it is beneficial to contribute when your income is higher, and withdraw the money when your income is lower. If you expect that your income will increase in future years, which will increase your marginal tax rate, withdrawing from your RRSP through the HBP will not be a good idea.
Example: The impact on your HBP when your income is increasing from $75,000 to $125,000
Let’s look at this example from the perspective of an Ontario Resident who wants to use the $35,000 HBP withdrawal limit. If your income is initially $75,000 and you are contributing to an RRSP, your marginal tax rate will be 29.55% (provincial tax rate of 9.15% plus federal rate of 20.5%). This is the rate at which your contributions would be eligible for taxable deductions. If you contributed $8,750 to your RRSP annually for 4 years, you would have a total of $35,000 in your HBP, while receiving taxable deductions of $10,342.50.
If you withdrew the full $35,000 from the HBP, you will have to repay that amount over the next 15 years. If your income increased to the $125,000 you would be paying a marginal tax rate of 37.16% (provincial tax of 11.16% plus federal tax of 26%). This means that you will be losing out on a taxable deduction of 7.61% or $2,663.50 on the contributions you are making to replace the amount withdrawn for the HBP.
- You should look to contribute to your FHSA before the HBP
- Money from your RRSP can be transferred to your FHSA, which would enable you to take advantage of the tax-free withdrawal of the money when they are used for the purpose of purchasing a house. Additionally, these funds do not have to be repaid, which they would have under the HBP in the RRSP.
- If you have been investing in your RRSP for a long time it makes sense to use the HBP to withdraw money from your RRSP for a down payment. The HBP allows you to make a tax-free withdrawal from your RRSP for the purpose of purchasing a house. However, these withdrawals will need to be repaid.
FHSA vs. TFSA vs. HBP quick reference chart
This chart outlines the main differences between these three accounts.
| FHSA | TFSA | HBP (RRSP) | |
|---|---|---|---|
| Primary Goal | Home savings account | Short or long-term savings account | Retirement savings account |
| Eligibility | (1) Between the ages of 18 and 71 (19 in some provinces) (2) Resident of Canada (3) Be a first-time home buyer | (1) Be at least 18 years old (19 in some provinces) (2) Resident of Canada | (1) 71 years or younger (2) Have a SIN (3) Have income earned in Canada (4) Be a first-time home buyer |
| Contributions | $8,000 per calendar year – maximum of $40,000 | $7,000 for 2024 calendar year + previous contribution room | Income based contribution limit – maximum RRSP limit set by CRA |
| Contributions tax deductible? | Yes - Contributions are tax-deductible | No - Contributions are not tax-deductible | Yes - Contributions are tax-deductible when made to RRSP |
| Tax-free withdrawls? | Yes - Withdrawls made for the purchase of your first home are not taxed. | Yes - Withdrawals from a TFSA can be made for any purpose tax free | Yes - Withdrawls for the purchase of your first home can be tax free |
Let’s take a look at an example of how these accounts can be used to construct a good savings plan.
- The goal is to purchase a house in the next four years
- It is believed that a house would cost $750,000
- A down payment of 5% or $37,500 ($750,000 * 5%) would be ideal
- Current income is expected to increase over the next 10 years substantially
- Current marginal tax rate is 29.55%
- $10,000 a year can be saved toward the goal of homeownership
- Your RRSP is expect to have $8,000 in four years from a employer matched contribution plan
How we can use the FHSA?
Since the goal is homeownership – it is wise to take full advantage of the FHSA. This account will provide a tax deduction when contributions are made and will allow for tax-free withdrawals to be made. This account should take priority in the saving strategy.
How we can use the RRSP?
The primary goal of an RRSP is to save for retirement – however, it can be used to help the goal of homeownership through withdrawing money from the HBP. It is wise to contribute when you are at your highest earning potential, which is not the case as income is expected to increase over the next 10 years.
In this example it is not recommended to make contributions for the purpose of using the HBP. However, there will be contributions from taking advantage of an employer contribution matching plan. These funds should be transferred over from the RRSP to the FHSA to take advantage of the tax-free withdrawals without having to recontribute them.
How we can use the TFSA?
Since the TFSA works as a great account for short and long-term savings, we can contribute additional funds that are not able to be contributed to the FHSA to our TFSA. This will allow us to make tax-free withdrawals when the funds are needed.
Since we are able to save more each year than can be contributed to the FHSA, the additional funds should be contributed to the tax-free savings account. Additionally, the tax-deduction benefit that we receive from making contributions to the FHSA should be put into the TFSA to help us save towards our goal.