Save Your TFSA, Use Your RRSP To Buy A House

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*Note: this post was written in 2015. The TFSA contribution limit has increased in subsequent years and is now higher than the limit listed here. 

Well, it’s official: the TFSA contribution limit is now $10,000 for 2015. This brings your total TFSA contribution since 2009 to $41,000. This is a huge sum, and makes the TFSA the best retirement savings vehicle available to Canadians of all ages. The catch is, of course, that Canadians start using their TFSA for retirement rather than weddings, cars, and vacations.

Because you’re allowed to make withdrawals from the TFSA before retirement, many people use the account as a planned spending catch-all, rather than the powerful investment vehicle it is. This is a waste of the TFSA’s power and potential, and will hurt your wealth-accumulation in the long run. You don’t need to earn tax-free returns on your vacation fund, but tax-free returns compounded over decades of your lifetime will make you a millionaire.

If you manage to max out your TFSA to $41,000 by the end of 2015, and contribute $10,000 for every year thereafter, you’ll have over $1.1 million if you earn at least a 5% return over the next 35 years. 

Because of the new savings power of the TFSA, the RRSP vs. TFSA debate has changed. The TFSA is now hands-down the best place to put your money, until it is maxed out. The RRSP can still be useful to high-earners looking to minimize taxes, but for the average Canadian, it’s no longer worth using. If your income is greater than $70,000, you may be interested in contributing to an RRSP throughout the year, claiming your contributions at tax time to get an income tax refund, and then using that refund to bolster up your TFSA. If your income is under $50,000, I would suggest you ignore the RRSP entirely and focus solely on your TFSA. Most low and middle income earners will struggle to maximize the TFSA at its new contribution room, and will not be able to touch, let alone maximize, their RRSP room, but it’s still worth getting as much money as you can in there.

For someone saving 15% of their net income, they will need to gross approximately $90,000 a year to max out the TFSA at the new contribution limit.

Someone earning less than $90,000 will need to save a higher percentage of their income in order to take full advantage of the TFSA.

Like many Canadians, I’ve strategically split my savings between the TFSA and the RRSP over the past few years. I’ve been trying to catch up on both RRSP and TFSA room, with my ultimate goal to be maxing out both accounts. Because I didn’t start thinking of my TFSA as a retirement savings tool until last year, I used most of it to pay for my MBA and have been slowly replenishing it since I started at my current job. Unsurprisingly, it was a lot easier to spend tens of thousands of dollars in two years than it is to save tens of thousands of dollars in the same time frame, so I have a ways to go.

The RRSP has been frustrating in its own right because I have tens of thousands of unused room, but every year my contribution room increases further as my income continues to go up. I haven’t been able to save 18% of my gross income in my RRSP as I’ve been working, let alone more than that to catch up on lost room. The only reason I managed to get $25,000 in my RRSP before age 30 was because it had a mandatory retirement savings plan through my first employer out of college. I ended up banking over $10,000 in one account in just two years at that job. Outside of that retirement plan, I had started my RRSP when I turned 25, and diligently put a few hundred dollars a month in it. Through bullish stock market years and dividend reinvestment, I ended up with a tidy sum over the past four and a half years.

And now my RRSP just became my house down-payment fund.

I am saving $100,000 to buy my first home, and had been thinking about letting my RRSPs be part of that equation. However, I hated the idea of raiding my retirement accounts to buy my first home… but now that the TFSA is my primary retirement account, I don’t care about obliterating my RRSP for a house.

In Canada, you are allowed to borrow up to $25,000 from your RRSP for a down-payment on your first home. You have to repay this money back to yourself over the course of 15 years, which works out to approximately $140 per month. Not only this is affordable, the $25,000 down-payment can dramatically reduce your monthly mortgage payments by putting a big dent in the cost of the house. Furthermore, the money stays in your pocket the whole way through: the funds become equity in your home, it reduces interest you pay and mortgage insurance fees, and finally you only repay yourself at the end, there’s no middle lender in the equation. At the end of the day, money from your RRSP is far better for a down-payment on a home than that saved in a TFSA.

$25,000 in my TFSA is worth $137,900 at retirement, assuming a 5% annual return and a 35-year investment term. This money is tax-free, so you get the entire amount.

$25,000 in my RRSP, on the other hand, is worth only about $100,000 at retirement, even assuming the same 5% return and 35-year investment term. This is because that income will be taxed at the time of withdrawal. How much tax you pay depends on your income — which in your 20’s is very hard to predict for your 60’s and beyond!

For this reason, it is cheaper for me to remove $25,000 from my RRSP for a house than it is to take it from my TFSA. This was of course still true at the lower TFSA contribution limits, however, it took much longer to save $25,000 in your TFSA when the contribution room was only $5,000 and then $5,500 per year. Now that the limit is much higher and the compounding power is so much greater, making withdrawing from this account even less attractive.

If you’re like me, and have been using both the TFSA and RRSP for the past few years, you might have built up a nice amount of money in your RRSP. You should now focus your retirement savings efforts entirely on your TFSA. If you had earmarked some money in your TFSA for a house down-payment, reconsider using your RRSP instead — your 70 year old self will appreciate paying less taxes!

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About Author

Student debt killer, super saver, and stock market addict. BSc. in Chemistry from the University of Alberta, MBA in Finance from the University of Calgary, and PhD from the school of life in being a badass. Currently residing in Calgary, Alberta, Canada, but hooked on travelling.

32 Comments

  1. Ok I’m officially out of excuses for keeping my retirement savings in my RRSP. It no longer makes sense! I’m going to have to take a good look at where I’ve got my money stashed in the next few weeks.

  2. Great post! I use both because the tax break benefits me hugely but when it comes time to buy a house this is a great way to think about it. Also one I hadn’t ever put much thought into (originally just going to use currently equity plus non-registered savings…)

  3. I’ll try to max out my TFSA before making RRSP contributions. The other nice thing about the TFSA is it’s not income tested to government pensions so there is no claw back from GIS or OAS benefits in retirement, where as any income derived from an RSP or RIF is not only taxed, but also prevents one from earning free retirement money from the feds.

  4. My current savings rate will still going into an RRSP to try to partially offset my taxes, and also because I’d be passing up too much money from my employer otherwise. That said, once my debt is paid off, I will be shifting gears to throw a good chunk in a TFSA for the future to balance out the income streams 30+ years from now. Since I already have a home, and you can’t borrow from a Group RRSP Plan, I’d be out of luck. But it’s definitely interesting to change the definition of what is for what – the $10,000 limit is a game changer for sure.

    • Yeah, when I filed my 2014 taxes I recorded but didn’t claim my RRSP contributions again so they’re building up… I think I’m going to let the RRSP take a back seat while I recover my TFSA, and then if I need/want a tax break, I’ll use my unclaimed contributions.

      $10K TFSA makes everything different. So crazy. Useful to supersavers like the PF community but does little for the average Canadian, sadly.

  5. The effectiveness of an RRSP is highly dependent on your current and future tax bracket. Ideally, you need to be in a higher tax bracket now then when you retire and diligently reinvest your (deferred) tax refund every year as much as possible. Otherwise, the taxes you pay on withdrawal will cancel out any advantages you had by deferring your taxes in the first place. I think a big issue with many people is they believe that dumping money into an RRSP is the best solution without simultaneously considering an exit plan for the future.

    Not to mention your spouse will be screwed if you have a large sum in an RRSP and one person passes away. That surviving spouse would only get whatever is left over after their spouse’s RRSP is fully taxed at the current marginal rate. As you get older, for a lot of people they would be better off maxing out their TFSA and slowly moving money into non-registered accounts to offset the increasing risk of being slammed with high taxes on a large RRSP withdrawal. RRSP can be effective, but it’s not quite so “set it and forget it” as many people think.

  6. I’ve got my RRSP maxed out and originally I wasn’t planning on withdrawing from their for my eventual home purchase but I might actually do it when the time comes.

  7. Wow, a 100k down payment! Are you planning on buying a super expensive house and therefore need a larger deposit, or are you going to buy something modest & you want to pay the bulk of it up front?

    • I think it’s because Bridget lives in Calgary, one of the places where decent homes are expensive. We’re slowly trying to save up 80k (less, but still quite a pill and certainly taking longer than hoped) because of where we live, whereas where my family lives, homes are very affordable and almost everyone is a homeowner.

    • Super expensive house… but not by choice haha. As Louise mentioned, I live in Calgary where the average home costs $460,000 (and the average detached house is $540,000). A $100K downpayment will be about 20% down… not a huge dent, but enough to avoid the extra costs of mortgage insurance.

      • Ahh I see.. I’m not too familiar with Canada’s real estate market. I live in Longview, Washington, and 400k would buy me a palace. There’s a single detached home I drive past on my way to work everyday, 938 sq feet on a 4,792 sq ft lot – and it’s only $39,900. I want to buy it, but my partner won’t let me because it’s quiet unattractive lol.

        • gahhh US real estate is a dream. My parents live in Utah and I can’t believe how affordable homes are there. Unfortunately most of Canada’s house prices, particularly those in Vancouver, Toronto, and Calgary, are ridiculously high. It’s an unstable market and even the Bank of Canada has said houses are as much as 30% overvalued… I’m hoping for a correction but there doesn’t seem to be one in sight.

  8. I tend to favour the TFSA over the RRSP, as long as you’re a disciplined saver. If you’re going to raid your TFSA for purchases you really don’t need, you’re better off with an RRSP. Who knows what income tax rates will be when we retire – that’s why I give the nod to the TFSA. At least you pay the piper now and not down the line.

  9. Aleksandra Sagan on

    I’ve been thinking about this a lot lately as I use both an RRSP and TFSA for savings. I haven’t come close to maxing out either, but with the extra contribution room in TFSA’s now it seems to be making more and more sense to move the bulk of my savings over there and focus on maxing out that contribution room.

    However, one thing that I would point out is the extra amount of willpower it takes to not tap into your TFSA money if you’re using it for retirement savings. An RRSP is very out of sight, out of mind. But a TFSA can be much easier – without immediate financial penalty – to access in a pinch. So, anyone using it as a retirement savings vehicle has to be disciplined enough not to dip into it for any reason other than retirement.

    • Totally agree. The penalties for early withdrawals from RRSPs is a huge reason I’ve been able to accumulate so much for retirement.

      It will be hard to convince people who aren’t that good at saving to begin with not to touch their TFSAs.

  10. While I agree that using RRSP for house down payment is a good idea, I don’t think it’s a good idea to buy a house anywhere in Canada at this point – especially in Toronto or Vancouver. The RE market is so bloated that if you buy now you’ll be shouldering a huge financial risk.

    • I’m with you, Samantha! I think the Canadian real estate market is grossly overvalued.

      I live in Calgary, and we’re FINALLY seeing prices actually decrease (now that oil has fallen and there’s been so many layoffs). Even though it’s relieved a lot of the pressure, I’m still waiting for the right entry point.

  11. I need some clarification on a few things since I’m new to saving and investing, but I have started doing both as much as I could this year. I live in Canada and opened a RRSP & TFSA account. The guy at the bank advised me to invest my RRSPs into mutual funds, but said that type of investment wouldn’t compound. Which type compounds? and which type gives dividends? And which do everyone prefer (within your own opinions because I know they vary). I want a type of investment account that generates me money.

    • ugh. This is why I hate advisors at banks. They’re whole goal is to sell you mutual funds because they get commissions from making the sale.

      Mutual funds are OK but their high fees, so you don’t get to keep all of the returns. They’re good if you’re just starting out, but in a few years you should expect to move to index ETFs.

      “compounding” merely refers to earning interest on interest. You can re-invest mutual fund distributions (money paid to you for owning the mutual fund), and this essentially functions the same as compounding interest.

  12. Great advice. I wish I had your discipline when I was younger. I only managed to sock away about $10000 in my RRSP during my 20s.

    On another note, one alternative use for an RRSP vs TFSA would be if you’re considering taking a career sabbatical to say travel the world, withdrawing from your RRSP may make sense since you will be making much less while you’re travelling and it will allow you to leave your TFSA funds to keep compounding.

    • That’s still not bad! Many people save $0 in their 20s!

      That’s a good point — I’d never thought about using an RRSP for a sabbatical. However, a better option would be to just save that money in a general savings account. If you withdraw from your RRSP, even if taxes are low for you that year, you never get the contribution room back. You don’t want to lose the power of that savings vehicle, so it’s better to save outside of it.

      • Agreed for the most part. As a public servant, I have a defined benefit pension that eats majorly into my RRSP room (not complaining though) so in my case, I’m not sure it’s the most powerful savings vehicle. The increased room in the TFSA sure is though.

  13. The whole discussion around maxing out this, or maxing out that, is a very dangerous discussion for millennials until they first consider putting protection in place. Most young people think they’re invincible, so maxing out their account and dreaming of 10% annual growth is their top priority. But if a critical illness (cancer, heart attack, stroke, ALS, etc) comes along at any point prior to retirement, it could wipe out their savings before they ever hang up their hat. Coupled with the time away from work that may be required for recovery, they could be facing a financial disaster on TOP of their medical disaster. It’s all about balance. Every person (especially young person) needs to balance their savings strategy with a critical illness policy. Only once that is taken care of should anyone ever consider maxing out a TFSA or an RRSP, let alone both.

  14. Cory Papineau on

    I have to say I disagree with this post on a few points but the goal of encouraging people to save in ANY account is a fantastic plan.

    I suggest that using the TFSA as your focal point for savings for your home purchase is a better solution for a number of reasons.
    One, with the RRSP withdrawal you are required to deposit the funds back over a set time period (or count it as income in a tax year you don’t contribute funds to an RRSP. This may not work for if your income or obligations (childcare costs) change over the next few years.
    Benefit of using TFSA: You are not required to replace the dollars within a set time and the TFSA limit resets the next calendar year after withdrawal.
    Two, there is a cap as to how much can be withdrawn under the homebuyers plan. This could cause errors when it comes to withdrawing.
    Benefit of Using a TFSA: With a TFSA you can withdraw all the capital and growth without limit for your downpayment.
    Three, many invest their RRSPs for the long term time horizon that their retirement likely will be. If they take it out of those investments and an inopportune time they could be locking in losses.
    Benefit of using TFSA: Depending how you invest the funds it may be better to keep your TFSA short term until you have an adequate emergency fund and downpayment set aside.

    Finally I disagree that the TFSA will be worth more than the RRSP after 35 years because of one major thing. The funds that are deposited into your RRSP are BEFORE tax dollars and your TFSA is AFTER tax dollars. If you use your RRSP refund for debt repayment, new RRSP contribution or even a TFSA contribution you will come out equal when you do future value calculations.
    Now I will state anyone who earns less than $50000 annually (sweeping generalization here!) will likely be better off in contributing to a TFSA over an RRSP.
    If your income ever increases you can always move TFSA money into your RRSP to generate a tax refund and recontribute to your TFSA!

  15. Thanks for the post! I just have one question- where do you get 5% on a TFSA? I’m currently only getting .9% (I have about $5,000 in it).

  16. Is there a table of your performance over the past 5 years or more of your performance in the stock market?

    For a $379 fee assuming we’re using $5000.00 which you’ve stated is more than enough to start with, we’re giving away 1.5 years returns (at 5% return) before investing anything

    Was hoping to see a table of past performance over the past 5 years before enrolling in the Master Class Money Investing ECourse

    • Hey Taylor!

      There’s not a table of my past performance — I do a lot of options trading myself, which is not outlined in the program (thinking of doing an options course in the future, but not sure if there’s enough demand for it yet!)

      If you like, I’d be happy to chat over the phone or via Skype to see if the Master Class Money program is the right fit for you! I’ll shoot you an email right now =)