RRSP vs TFSA: Which Should Canadians Use to Save for a House?

When saving for a down payment in Canada, you have three primary tax-advantaged accounts to choose from: The RRSP, the TFSA, and the new FHSA. While the FHSA is the undisputed king of down payment savings, many Canadians still have to choose between their RRSP and TFSA for the bulk of their funds. Here is how to decide.

The RRSP Home Buyers' Plan (HBP)

The Registered Retirement Savings Plan (RRSP) allows you to deduct your contributions from your taxable income. This means if you earn $80,000 and put $10,000 into an RRSP, you only pay income tax on $70,000, usually resulting in a massive tax refund.

Through the Home Buyers' Plan (HBP), the government allows you to withdraw up to $35,000 from your RRSP tax-free to buy your first home.

The Catch: It is not a gift; it is a loan to yourself. You have 15 years to repay the $35,000 back into your RRSP. If you miss a yearly repayment, that amount is added to your taxable income for the year, and you lose the RRSP contribution room forever.

The TFSA Strategy

The Tax-Free Savings Account (TFSA) works the opposite way. You put after-tax money in, but all investment growth and withdrawals are 100% tax-free.

Unlike the RRSP, there are no complicated repayment schedules. If you withdraw $30,000 for a down payment, that money is yours, no strings attached. Even better, you get that $30,000 of contribution room back the following calendar year.

The Verdict

Use the RRSP if: You are in a very high tax bracket. The tax refund you get from contributing can be re-invested to artificially inflate your down payment faster than you could save normally.

Use the TFSA if: You expect your income to rise significantly in the future, or you hate the idea of having an extra "bill" (the HBP repayment) hanging over your head while you are also trying to pay a new mortgage.

To see how your savings might compound in either account, use our Compound Interest Calculator.