Introduction

Saving for a down payment is one of the biggest financial hurdles for aspiring home buyers in Canada. Fortunately, the Canadian government offers tax-sheltered accounts designed to accelerate your savings.

For years, the Registered Retirement Savings Plan (RRSP) and its Home Buyers' Plan (HBP) was the primary option. However, the introduction of the First Home Savings Account (FHSA) has changed the landscape.

If you have limited funds to save, should you put your money into the FHSA or the RRSP first? In this article, we will break down the differences and help you decide which account is best for your down payment strategy. You can also run your own numbers directly with our FHSA vs RRSP Calculator.

What is the First Home Savings Account (FHSA)?

The FHSA is a registered plan launched in 2023 to help first-time home buyers save up to $40,000 for a down payment. It combines the best features of both the RRSP and the Tax-Free Savings Account (TFSA):

• Tax-deductible contributions: Money you contribute reduces your taxable income, giving you a tax refund (just like an RRSP).
• Tax-free growth: Investments inside the account grow tax-free (just like a TFSA).
• Tax-free withdrawals: When you withdraw the money to purchase your first qualifying home, you pay absolutely no tax on the principal or the growth (just like a TFSA).

You can contribute up to **$8,000 per year**, up to a lifetime maximum of$40,000.

What is the Registered Retirement Savings Plan (RRSP)?

The RRSP is primarily designed for retirement savings, but first-time home buyers can use the Home Buyers' Plan (HBP) to borrow money from their RRSP tax-free for a down payment.

• Contribution limits: You can contribute up to 18% of your previous year's earned income (up to a dynamic annual cap).
• HBP Limit: The Home Buyers' Plan allows you to withdraw up to $60,000 tax-free from your RRSP.
• The Catch: Unlike the FHSA, HBP withdrawals from an RRSP are loans that you must pay back into your RRSP over a 15-year period, starting two years after your withdrawal. If you miss a repayment, that amount is added to your taxable income for that year.

Key Differences: FHSA vs RRSP

Why the FHSA Wins for First-Time Buyers

If you can only afford to fund one account, the FHSA should almost always be your first priority. Here is why:

1. No Repayment Required

With the RRSP HBP, you are effectively taking a zero-interest loan from your future self. Having to pay back up to $60,000 over 15 years adds an extra monthly obligation right when you are adjusting to the high costs of homeownership (mortgage, property tax, maintenance). The FHSA withdrawal is 100% yours to keep with zero repayment obligations.

2. Tax-Free Growth is Fully Yours

If you invest wisely and your $40,000 FHSA grows to$60,000, you can withdraw the entire $60,000 tax-free. With the RRSP, you can only withdraw up to the HBP limit ($60,000), and any excess growth must remain in the account and will eventually be taxed upon retirement withdrawal.

3. Transfer Safety Net

If you do not end up buying a home within 15 years of opening your FHSA, you can roll your FHSA funds directly into your RRSP tax-free without affecting your RRSP contribution room. There is zero downside to opening and funding an FHSA.

Combining the FHSA and RRSP

If you have the financial room, you do not have to choose just one. You can combine both accounts to maximize your down payment:

1. Maximize the FHSA first: Put up to $8,000/year here to secure the tax deduction and tax-free withdrawal.
2. Use the RRSP next: Put any additional savings into your RRSP to take advantage of the HBP up to $60,000.
3. Double Up: If buying a home with a partner, both of you can open an FHSA and an RRSP. This means a couple can combine up to $80,000 in FHSA savings** and **$120,000 in RRSP HBP withdrawals for a total of $200,000 tax-free towards a down payment!

Conclusion

When starting your home buying journey in Canada, prioritize your FHSA. It offers the tax-deduction benefit of the RRSP and the tax-free withdrawal benefit of the TFSA, without the burden of future repayments. Once your FHSA is maxed out, use the RRSP HBP to boost your down payment savings even further.

To test how different contributions and tax brackets affect your home savings refund, try our FHSA vs RRSP Calculator today.