Did you know that almost half (48%) of Millennials in Canada would choose TFSA over RRSP? In 2022, the CRA estimates that the value of the average tax-free savings account is just over $32K. So, what kind of savings account(s) are you working with these days?
The biggest benefit of tax-free savings accounts (both TFSAs and FHSAs) is in the name — you don’t pay tax on your earnings and withdrawals! Another benefit, compared to RRSPs, is that they give you more flexibility on how and when your savings are used. So let’s look at these accounts in more detail and what you want to keep in mind with respect to purchasing a home.
Tax-Free Savings Accounts (TFSAs)
TFSAs are savings accounts available to Canadians that provide tax benefits. Investment income (including capital gains and dividends) earned from a TFSA are not taxed in most cases, even when withdrawn. TFSAs are an easily accessible method of low-risk growth so you can have the peace of mind that comes with earning money but not having to pay taxes.
TFSAs are offered and issued by financial institutions, credit unions, and insurance companies. You’ll be required to provide your SIN and date of birth so the issuer can register your TFSA. Without registering, the income earned will have to be accounted for and reported on your income tax and benefit return. Three types of TFSAs are offered:
- Deposits
- Annuity contracts
- Arrangements in trust
Note: You can set up a self-directed TFSA if you prefer to manage your investment portfolio.
Let’s say, you want to make an offer on a new home. Maybe you were planning on drawing from your RRSP(s) for your down payment BUT, since it’s not your first home, you know that you’ll be taxed to the max. Have you considered drawing from your TFSA(s) instead? It’s not just a great savings vehicle, it’s the first place to go for a down payment when you’re not a first-time buyer.
First Home Savings Accounts (FHSAs)
An FHSA combines the features of a Registered Retirement Savings Plan and a Tax-Free Savings Account. Like an RRSP, contributions are tax-deductible and, like a TFSA, qualifying withdrawals used to purchase a first home are non-taxable. The major difference here is that the funds that are withdrawn do not need to be paid back.
The account can stay open for 15 years and the limit on contributions is $40K over the account’s lifetime. The maximum annual contribution limit is $8K and the unused contribution room carries forward to the following year. To be eligible to open an FHSA you must be:
- A Canadian resident
- 18 years or older
- A first-time home buyer
So, maybe you’ve been pre-approved and everything. Since it’s your first home, you’ve been saving and are about to put away a bunch of money into RRSPs which you can then draw from leveraging the Home Buyers’ Plan. The only thing is, RRSP contributions have to sit there for at least 90 days before you can withdraw from them and not be taxed – and you’re in the market to buy now. Perfect case for an FHSA!
Everyone’s saving and investment strategies are different. Contact the Kyle Miller Mortgage Agent team today to have us review your situation!
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