Tag Archives: savings

Should You Save For Your First Home in your TFSA or your RRSP?

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As my faithful reader (Hi, Dad!) knows, I’ve been working my way through Gordon Pape’s How TFSAs Can Make You Rich. In it, he tries to deal with many of the most common questions about Tax Free Savings Plans, one of which is whether it’s better to save your down payment for your first home in your TFSA or in your RRSP.

Forget Where You Need to Save: Where Do You Need to Buy your First Home?

A close relative lives in a small town in northern Ontario where you can buy a house for about $17,500. The paper mill has closed. The mines closed long ago. There are not a lot of new people coming to town looking to buy.

Another relative, though, lives in the Vancouver area. I believe the monthly payment on her condo mortgage and fees is close to $1,750 given that most single family homes in her area cost about $750,000 now. So she’s spending about $17,500 each year for her home.

Obviously where you have to buy is going to affect how much you have to save.

Let’s Get Realistic: You Need to Save for your First Home in BOTH your TFSA and your RRSP

If you live in one of the real estate war zones you will need a fortune to buy a home. You can try to buy with less but if you do, you will probably end up very stressed and money will be tight. The Globe and Mail wrote about this recently in The rise of the miserable Canadian homeowner.

The most you can take out of your RRSP under the Home Buyer’s Plan is $25,000. If the home you want to buy costs $400,000, that’s only 6.25% of the price.

If you’re 23 or older, then the most you could have saved in your TFSA to the end of 2013 before growth is $25,500. That’s another 6.375%.

Don’t forget on a $400,000 home you may be expected to pay about $10,000 in closing costs. That’s another 2.5% you need to find somewhere.

Closing costs include provincial land transfer taxes, and if you’re in Toronto: municipal land transfer taxes. They also include lawyer’s fees, bank and mortgage fees, title fees, paying back any pre-paid property taxes, paying to start new accounts with utilities, etc.

You do know that you are probably going to have to pay $4000 a year or so each and every year in property taxes, right? Will you have the money for next year’s taxes sitting in the bank after you’ve paid for your home?

I think you need to save for your first home in both your TFSA and your RRSP.

A Purely Numerical Reason to Save for your Home in your RRSP

In his book, Gordon Pape runs some numbers to see if there is a simple financial advantage to saving for your first home in your RRSP or your TFSA. Based on contributing $3500 a year in before-tax income, it works out that you can save the $25,000 for your home in 6 years using a RRSP and in 8 years using a TFSA. (The actual math is a bit complex: check the book if you want the details. And remember he’s assuming you take advantage of the higher rate of contribution to the RRSP because you can use “before tax” money. )

So if your goal is to get a down payment accumulated faster, using the RRSP is the winner.

And if you have to buy in a ghost town in northern Ontario, your RRSP is the perfect place to save the entire purchase price.

For many of the rest of us, though, as I’ve said at least twice before: I think you’ll need to save in both.

Did We Save in Our TFSA or Our RRSP?

We’re ancient. There were no TFSAs when we were saving for our first home. We did, however, save both in our RRSPs and in our regular bank accounts.

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Join In
Are you saving for your first home? What strategies are you using to try to get there sooner? Please share your views with a comment.

Why an Ontario Pension Might be a Good Thing

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Recently, the Ontario government has been rumbling about creating a second mandatory pension plan. I flatly refuse to call it the OPP, however! Those letters have been in use for years and immediately bring to mind the image of a we-had-to-buy-it non-aerodynamic car with a strange paint job and multicoloured lights flashing on top. So the first thing the government would have to do is come up with a name that has an available acronym. I was trying to make something from “OPEN” but couldn’t. Maybe OPUS? Ontario Pension Universal Security? Ontario Pension United Savings? Hmmm. I’ll have to work on that. Any way, here’s why I think an Ontario Pension might be a good idea.

CPP of $12,000 Equals Poverty

OK, maybe it doesn’t if you have a fully-paid-off home and some other sources of income. But in general, the CPP is not going to provide enough income for many Canadians to live on with a decent standard of living.

And, even more unnerving, most Canadians are not going to be eligible for the maximum CPP. Right now, the average CPP payment is 60% of the maximum. In July 2013 that meant an **annual** CPP payment of $7234. And yes, that’s taxable income.

I very highly doubt that most average Ontarians know just how little they will get from CPP.

Voluntary Retirement Saving Doesn’t Work

I know the government wants us to be grown-ups and save money ourselves for retirement. That’s why they created RRSPs and perhaps part of why they created TFSAs. They also have talked about another voluntary plan called a Pooled Registered Pension Plan.

[Really. They expect Canadians to feel good investing their own money is something called PRPP. PRPP is a sound a baby makes. It does not inspire confidence. Ontario take note and choose something with a GOOD solid secure sounding acronym!]

Despite having access to RRSPs for decades and TFSAs for years, many Canadians don’t have them maxed out. Yet a maxed out RRSP only reflects a saving of about 18% of a person’s gross earned income per year. For an Ontarian in the 46% tax bracket that means they are only setting aside less than 10% of their net income (if they spend their tax refund.)

Although some of us do max our RRSPs and TFSAs we all know plenty of friends and family who don’t. Voluntary saving becomes optional saving when roofs leak, cars break down, children need braces and wedding bells ring.

We Need Forced Retirement Saving

I’m sure there are many people who will literally scream if they are forced to save for retirement by a mandatory deduction taken off the top of their pay cheques.

Tough.

Why should I (who have saved for retirement since the day I graduated) have to pay welfare to keep those who didn’t from starving? (Note that I said didn’t not couldn’t. People who are unable to work would not have to contribute to an Ontario pension if it is a payroll deduction.)

If someone wants to argue that the forced savings amount could be obtained by taking it from the taxes we already pay, presumably by reducing the number of tax dollars the Ontario government wastes, I would not argue with that. After all, a billion dollars to cancel a few electricity plants would have topped up quite a few retirement accounts!

Employers Should NOT Have to Contribute

I know the Ontario government hasn’t announced any details yet but I’d like to suggest they do not make employers contribute to this new pension scheme. Payroll taxes and the cost of complying with them are already onerous. Leave this one squarely on the individual. It will also avoid penalizing workers on contract who usually have to pay both the employee and the employer shares of programs like pensions.

What Do You Think?
I imagine the idea of an Ontario Pension program will have both strong supporters and sturdy opposition. Which side do you fall on? Please share your views with a comment.

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