*Column and limits updated February 2016
Let’s take a 23 year old, who has finished their education, and started a job in the workforce. They probably don’t have any savings to date, and will likely have a low income in the early years as their career gets started. They are probably looking to start saving for a home. Most of us probably know someone in this situation. What advice would you give them? What’s their best way to save a down payment for a home? I would argue that a TFSA (Tax Free Savings Account) is an ideal fit for this scenario.
Many young people gravitate to an RSP for their early savings and towards the HBP (Home Buyers Plan) for a down payment, but the since TFSA’s entered the financial scene in 2009, we have reason to look in another direction.
If you have never opened a TFSA and you were at least 18 in 2009, you now have $46,500 of cumulative room in your TFSA. ($5,000 per year from 2009-2012, $5,500 per year for 2013-2014, $10,000 in 2015 plus $5,500 in 2016 and going forward until changed again in the Federal Budget)
The young individual in the scenario above has $46,500 of available TFSA room, which has surpassed the withdrawal limit in the HBP and comes with far fewer strings attached. The HBP, if you are unfamiliar with it, is a program to withdraw RSP funds to purchase your first home and then re-deposit the funds back into your RSP over a 15 year period.
Over the years, the HBP has found its way into the financial plans of many young people, and though it has worked for many people, it comes with a series of rules, qualification criteria, payback schedules, and possible tax implications for failing to meet the 15 year minimum repayment schedule.
Admittedly, I have never been a fan of the HBP for a variety of reasons and in my experience, I have probably steered more young people away from it than towards it. And now, with a few years under its belt, and cumulative contribution room on the rise, the TFSA emerges as a more flexible solution for the first time home buyer.
A few TFSA considerations for a young home buyer saving for their down payment are:
- The TFSA offers flexibility not available in the HBP because of the HBP rules around withdrawal limitations and payback rules. With the TFSA there are no payback requirements and no limit on the amount you withdraw from your TFSA.
- There are no rules to be deemed an eligible “first time homebuyer” for a TFSA. In practice, you can withdraw the TFSA at any time, for any purpose tax free.
- There are no tax deductions for TFSA contributions however, many young people are in a low tax bracket. A low income means your RSP contribution results in a lower tax refund. Similarly, a high income means your RSP contribution results in a higher refund. Why not save your refund for a few years when you could benefit from a higher tax break?
Everyone’s personal situation is unique so it is important to consider your own variables before you make any firm financial decisions, but for young people looking to save a down payment for their first home, I would certainly urge you to consider the benefits of saving inside a TFSA.
*Column and limits have been updated February 2016
Stephanie Farrow, B.A., CFP., Stephanie has over 20 years experience in the financial services industry, a diploma in Financial Planning from the Canadian Institute of Financial Planning, and Certified Financial Planner designation. Stephanie has been writing a financial planning column for the local business magazine Elgin This Month since 2010. Stephanie and her husband Ken Farrow own Farrow Financial Services Inc., Our Farrow Financial Services Team.