Account Options when Saving for a House
Saving money for the purchase of your first house can be an exciting time. Setting a goal and putting a plan together can have a positive impact but, at the same time, it can be a scary time with numerous choices on how to tuck your money away. There are three types of saving vehicles available, and each account has advantages and disadvantages. There is not a ‘one size fits all’ product – what will be best for you depends on your personal situation.
Registered Retirement Savings Plans (RRSP)
They have been around for a while and is most people start out with, especially when entering the workforce. Investing in an RRSP has the added benefit of giving you a tax-break on your income as well as saving for the future. The RRSP can also help with saving for a house with the first time home buyers program (HBP). This program allows you to withdraw up to $20,000 tax-free that is put towards the down payment on a house, with repayment starting the second year after withdrawal and 15 equal payments over 15 years. Repayment is something many people overlook, so make sure to plan for it in your household budget.
Tax-Free Savings Account (TFSA)
This relatively new option was introduced in 2009 and is available to all Canadians. The TFSA allows you to invest $5,500 annually plus any unused contribution room. The TFSA is an investment account, where you can select funds of various risk levels. Any deposits and withdrawals are tax-free, meaning you can withdraw the money at any time without worrying about tax implications. Any withdrawal is not tied to the HBP, so there is no repayment schedule to worry about.
High-Interest Savings Account (HISA)
This option is similar to a basic savings account but gives you a higher annual rate of return. Do keep in mind that any interest earned is taxable and there can be fees associated with high-interest savings accounts, so be sure to shop around for what suits your needs. The advantage of this type of account is the guaranteed annual rate of return and the ability to access the money whenever you need it.
Regardless of which option you choose, the key factors to remember are:
- Timeframe – is there a repayment schedule, how quickly do you need to access the funds?
- Risk tolerance – what is your comfort with investing and your risk tolerance level?
- Monthly contributions – any interest earned should be considered icing on the cake, not a necessity to reach your goals.