FHSA vs. RRSP: Which One Should You Use for a Downpayment on a Home?

For many Canadians dreaming of homeownership, saving for a downpayment can be a daunting hurdle. Fortunately, two key registered accounts—First Home Savings Account (FHSA) and Registered Retirement Savings Plan (RRSP)—offer valuable, tax-advantaged ways to help you reach that goal. But which one should you use?

Let’s break down both accounts and compare them to help you decide what works best for your unique situation.

Understanding the Basics FHSA (First Home Savings Account)

• Introduced in 2023, the FHSA is designed specifically to help first-time homebuyers.
• You can contribute up to $8,000 annually, with a lifetime limit of $40,000.
• Contributions are tax-deductible, and withdrawals (including growth) are tax-free if used to purchase a qualifying first home.

Key Advantages

1. Tax-Free Growth & Withdrawal: Contributions are tax-deductible, and if used for a first home, all withdrawals—including investment gains—are tax-free.
2. No Repayment Required: Unlike the HBP, you don’t need to repay the withdrawn amount.
3. Combines Benefits of TFSA and RRSP: You get the deduction upfront like an RRSP and the tax-free withdrawal like a TFSA.
4. Can Be Combined with HBP: You can use both accounts for a downpayment, potentially unlocking up to $100,000 tax-advantaged dollars per individual.

Drawbacks

1. Eligibility Restrictions: You must be a first-time homebuyer (i.e., not owned a home in the past four years).
2. Time Horizon: If you don’t purchase a home within 15 years, the FHSA must be closed—but the funds can be transferred into an RRSP without tax consequences.
3. Limited Contribution Room: Annual and lifetime caps mean it's not suitable for very large downpayments on its own.

RRSP (Registered Retirement Savings Plan) – Home Buyers’ Plan

• Long used for homeownership via the Home Buyers’ Plan (HBP).
• You can withdraw up to $60,000 from your RRSP tax-free, but it’s a loan to yourself you must repay it over 15 years, or the unpaid portion is added to your taxable income.\

Key Advantages

1. High Limit: Withdraw up to $60,000 (or $120,000 per couple) for a downpayment.
2. Established Track Record: RRSPs have been a cornerstone of financial planning for decades; many already have funds in them.
3. Repurposing Retirement Savings: For individuals with no immediate retirement needs, the HBP provides temporary access to funds for a home.

Drawbacks

1. Repayment Obligation: Repay 1/15 of the withdrawn amount each year, or it’s counted as taxable income.
2. Lost Growth: While withdrawn, the money isn't compounding for retirement.
3. Taxable If Not Repaid: Missed repayments add to your taxable income, potentially pushing you into a higher tax bracket.

So, Which One Should You Use?

Let’s consider a few scenarios:

Scenario 1: Starting From Scratch

If you're early in your career and don't yet have significant RRSP savings, the FHSA is a no-brainer. It’s flexible, powerful, and purpose-built for home buying.

Scenario 2: You Already Have RRSP Savings

Using the HBP can give you access to significant funds right away. However, it's smart to open an FHSA anyway and contribute to it annually, moving forward. Even if you buy a home before the 15-year deadline, those tax-free withdrawals are hard to beat.

Scenario 3: You Can Use Both

This is the ideal situation. Combining the FHSA and HBP offers the best of both worlds—maximizing your tax deductions and withdrawal power. A couple could potentially access up to $200,000 ($40K x 2 from FHSA + $60K x 2 from HBP).

Strategic Considerations

• Time Until Purchase: The more time you have, the more powerful the FHSA becomes due to compound growth.
• Tax Bracket: If you're in a higher tax bracket, both FHSA and RRSP contributions can yield significant tax refunds, but the FHSA wins with no repayment requirement.
• Future Retirement Needs: Avoid jeopardizing your retirement by over-relying on RRSPs unless you have a plan to catch up on contributions.

‍

Final Thoughts

The FHSA is a game-changer and, for most first-time homebuyers, should be the first option to consider. That said, RRSPs still play a vital role, especially if you’re further along in your career or already have savings. Used wisely, these accounts can significantly ease the financial burden of a downpayment—possibly accelerating your path to homeownership.

But remember, financial tools are only as good as the plan that guides them. If you’re unsure which combination works best for you, sit down with a financial advisor. Your home is more than a purchase—it’s a foundation for your future. Make sure you build it wisely.Ready to take the first step? Let’s talk about how you can make the most of your FHSA, RRSP, and other options. Book a complimentary consultation with our team today and start building a financial plan that brings your dream home within reach.

‍

This information has been prepared by Jai Gandhi who is a  Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this post  comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors.

iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Canadian Investment Regulatory Organization. iA Private Wealth is a trademark and a business name under which iA Private Wealth Inc. operates.

‍

‍