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TFSA – Tax-Free Savings Accounts

TSFA Today's federal budget was somewhat anti-climactic.  Many expected the Tories to start letting investors defer tax on capital gains. That didn't happen.

What did happen was a nice little perk for savers and home buyers: the new Tax-Free Savings Account (TFSA). 

When the TFSA takes effect in 2009 it will offer a brand new way to save (including saving for a down payment). It works like this.  You fund the TFSA with after-tax money.  Thereafter your money grows, and can be withdrawn, tax-free.  In addition, if you take money out of the TFSA you can add it back later without penalty.

From a home buying perspective, this new program raises one question right off the bat:  How does it compare to the existing RRSP Home Buyers Plan (HBP)? 

Here's a basic overview of each.

  RRSP Home Buyers Plan Tax-free Savings Account
Availability First-time buyers Everyone
Money Taxed Upon withdrawal from RRSP* Before depositing into TFSA
Withdrawals Must be paid back No Need to Repay
Tax Deductible Deposits Yes No
Maximum Annual Deposit (for 2008) $20,000 (max. 19% of your income) $5,000
Maximum Withdrawal $20,000 Unlimited


*  Money withdrawn under the Home Buyers Plan is tax free if repaid in 15 equal yearly installments. Money withdrawn from an RRSP for most other purposes is taxable at that time.

If you're a first-time homebuyer saving for a down payment, you might be better off contributing to your RRSP first.  The upfront tax deduction is usually far more beneficial.

Of course you can also use the TFSA.  In four years, by using both vehicles, you could theoretically save up to $40,000+ for a down payment, and avoid some taxes to boot. 

(The TFSA is a brand new program and we're still getting information on it.  If anyone has addition thoughts or viewpoints please let us know in the comments.  Also make sure to speak to a licensed financial/tax advisor to confirm all of the above.)