Help Me, Canadian Mustachians! RRSP or TFSA - Aiming for Downpayment

[MoneyMouse]

Hello, Canadian Mustachians!

I'm a 27-year-old gal wanting to save up enough to put a 5% down on a home sometime before I turn 35 with the aim of House Hacking it.
I currently have about $10k stashed between an RRSP (6.1k) and a TFSA (4k).

I'm confused as to what I should be prioritizing, the RRSP or the TFSA?
I've received some conflicting advice.

I currently make $50k before tax, so I've been told it would be a good idea for me to prioritize the TFSA at my tax bracket as I am taxed less right now.

That said, I know I can borrow against my RRSP for a down payment when it comes to it.

Which should I focus on?

[plainjane]

I lean towards the TFSA because you don't get penalized for putting the money back in later. With the RRSP, you'll pay the money back in, but you'll only get the tax refund once at your current level, which is likely lower than it will be in a few years.

[MoneyMouse]

Thanks, plainjane.

That makes sense. :)

[SunnyDays]

On the other hand, a TFSA only saves you the tax you earn on the interest, which is pretty paltry right now.  The RRSP effectively decreases your taxable income.  So why not do both?  Put as much as you can into an RRSP first, then use your tax savings on that to put into your TFSA.  You would have to do the math, but getting money into an account that will allow you to buy faster and therefore save on rent and earn income (if that's what you're planning) might make more sense.  Interest rates are on the rise, so the faster you can lock into a mortgage the better.  Any chance of being gifted part or all the down payment, and then paying that back if you need to?

[GuitarStv]

You can take 50 grand out of your RRSPs with no tax penalty using the first time HBP, so it makes much more sense to put money there first (at least until you've got 50 grand saved in your RRSPs).  You get to withdraw the money with no tax hit, and you get the income tax refund.

[MoneyMouse]

On the other hand, a TFSA only saves you the tax you earn on the interest, which is pretty paltry right now.  The RRSP effectively decreases your taxable income.  So why not do both?  Put as much as you can into an RRSP first, then use your tax savings on that to put into your TFSA.  You would have to do the math, but getting money into an account that will allow you to buy faster and therefore save on rent and earn income (if that's what you're planning) might make more sense.  Interest rates are on the rise, so the faster you can lock into a mortgage the better.  Any chance of being gifted part or all the down payment, and then paying that back if you need to?

Hey, thank you!

You're right about the reduction in taxable income the RRSP contributions would net me. And I am a bit embarrassed to admit I hadn't thought of putting my tax return into my TFSA. I did think about putting about 2/3 of my monthly savings into the TFSA and 1/3 into the RRSP, but I think I'll reverse those and put the tax return into the TFSA as you suggest.

As for the downpayment, unfortunately no. My parents are way past their eyeballs in debt, though they do want to support me. That said, I have had only horrible experiences with lending them money in the past and their track record with money is enough to make me never want to have my name on the same document as them. My mother, at least, would very eagerly screw me out of money if she had the chance - it's just how she is.

You can take 50 grand out of your RRSPs with no tax penalty using the first time HBP, so it makes much more sense to put money there first (at least until you've got 50 grand saved in your RRSPs).  You get to withdraw the money with no tax hit, and you get the income tax refund.

Thank you! That's definitely what I had in mind, to use the first time home buyer's program (is that the P in that?).
I'll do some more research on that.

[GuitarStv]

Yep, P = program.  It's a great thing to take advantage of if you're buying a home!

[damyst]

On the other hand, a TFSA only saves you the tax you earn on the interest, which is pretty paltry right now.

I think you're assuming that the savings will be invested in "safe" fixed income assets, like GICs or such. Maybe that's indeed what the OP is doing, but she didn't say so.

Vanguard VUN, which is my go-to diversified-stock-index-fund-for-Canadians, went up 20% in the past year. It went up more than 2x in the past 5 years, and that's not even including dividends. Sure you take a risk of the value of your savings decreasing when you invest in equities, but personally I find the risk of losing out on equity gains to be just as unpalatable - even when saving up for a home purchase.

[MoneyMouse]

On the other hand, a TFSA only saves you the tax you earn on the interest, which is pretty paltry right now.

I think you're assuming that the savings will be invested in "safe" fixed income assets, like GICs or such. Maybe that's indeed what the OP is doing, but she didn't say so.

Vanguard VUN, which is my go-to diversified-stock-index-fund-for-Canadians, went up 20% in the past year. It went up more than 2x in the past 5 years, and that's not even including dividends. Sure you take a risk of the value of your savings decreasing when you invest in equities, but personally I find the risk of losing out on equity gains to be just as unpalatable - even when saving up for a home purchase.

Thanks, you're very right. I have my RRSP with Tangerine right now and it's invested in their most aggressive portfolio. I plan to switch over to Vanguard when I have a little more saved up.

On that note - admittedly I haven't done any research on it myself past looking at their options - how does one get an RRSP invested in Vanguard? Would I go through Questrade for that?

[damyst]

You would need an account with an online broker, yes. I've been pretty happy with Questrade and can recommend them.
All the big banks are operating in this space too, so that's another option if you prefer to stay with your bank.

[MoneyMouse]

In all honesty, I'd rather go with Questrade. Banks make enough money without me contributing, ha ha!

Thank you for the recommendation on Questrade. I looked into them a bit, but it was when I was looking into all my options and I settled on RRSP with Tangerine and TFSA with WealthSimple.

I do plan to pull both into Questrade when I reach 20k net worth.

Do you know how they might work if I were to use the First Time Home Buyer's Program on an RRSP with them, by chance?

[damyst]

They'll just charge you a flat deregistration fee. See https://www.questrade.com/pricing/managed-investing/administrative-fees

In general, if you have questions for Questrade, just ask them. They're pretty responsive.

ETA: the link above is for managed accounts, not self-directed. I can't find a specific reference to HBP with a self-directed account, but I bet it'll be pretty much the same.

[MoneyMouse]

Oh, wow, that's only $25 if it's linked to a home buyer's plan. That's not much at all.

Plus electronic fund transfers up to $25,000 are free. That's my yearly living cost. Seems meant to be, ha ha!

Would you recommend that I wait until I have more capital to invest, or is it worth putting my $10k over into Vanguard funds right away? I had $25k set aside as my target number to jump in just based on Canadian Couch Potato, but if I'm losing out on potential gains I'd rather move it over right away.

[PoutineLover]

I had initially planned on waiting til I had more money to start doing Questrade, but if you buy ETFs there's no longer a $9.95 fee so I think it's worthwhile to do it with less, I actually just switched over my TFSA. My new MER is 10 times lower than it used to be! I wish I had done it sooner.
Shameless plug here, if you open an account and use my code 316228078418455, you get 25 if you deposit 1,000 and 50 if you deposit 10,000.

[damyst]

but if I'm losing out on potential gains I'd rather move it over right away.

That's a dangerous way to think about it. There's absolutely no urgency. Maybe you're losing out on gains, maybe you're "losing out" on losses. Who knows?
If you're already following Canadian Couch Potato, keep doing that. Minimize your fees. Figure out your asset allocation and risk tolerance. Educate yourself about tax implications. This will be more impactful over time. Switch to DIY investing whenever you feel ready.

[MoneyMouse]

I had initially planned on waiting til I had more money to start doing Questrade, but if you buy ETFs there's no longer a $9.95 fee so I think it's worthwhile to do it with less, I actually just switched over my TFSA. My new MER is 10 times lower than it used to be! I wish I had done it sooner.
Shameless plug here, if you open an account and use my code 316228078418455, you get 25 if you deposit 1,000 and 50 if you deposit 10,000.

That's true - and I should take a look at the Vanguard MERs versus Tangerine's. I don't think WS has any for now but in a year my free time will run out, so perhaps then I'll switch to Vanguard for the TFSA as well.

What do you get when I use your referral code?

but if I'm losing out on potential gains I'd rather move it over right away.

That's a dangerous way to think about it. There's absolutely no urgency. Maybe you're losing out on gains, maybe you're "losing out" on losses. Who knows?
If you're already following Canadian Couch Potato, keep doing that. Minimize your fees. Figure out your asset allocation and risk tolerance. Educate yourself about tax implications. This will be more impactful over time. Switch to DIY investing whenever you feel ready.

That true. Thank you for the reassurance. I think yesterday I was feeling more uncertain than I am today - we had a big meeting that morning which has solidified my idea that HR is not at all the career I should be in, so I was feeling particularly vulnerable.

Tax implications are what I will struggle with the most. I'm bad for understanding those. Do you know of any good articles or bloggers I can read on who can help me understand it in plain English? If not, all good, I should learn in anycase, but I figure if there's someone out there who's done it, I could use all the help I can get, ha ha!

Thanks, damyst. I appreciate your help and feedback a lot!

[Lews Therin]

https://www.questrade.com/promotions/refer_a_friend

[PoutineLover]

The link Ben posted sums up the referral benefit, thanks.
For some plain writing on RRSP vs TFSA, I like Bridget at money after graduation. Here's one article, she has a few more where she specifically talks about the home buyers plan too. http://www.moneyaftergraduation.com/2016/08/18/tfsa-vs-rrsp/

[MoneyMouse]

https://www.questrade.com/promotions/refer_a_friend

The link Ben posted sums up the referral benefit, thanks.
For some plain writing on RRSP vs TFSA, I like Bridget at money after graduation. Here's one article, she has a few more where she specifically talks about the home buyers plan too. http://www.moneyaftergraduation.com/2016/08/18/tfsa-vs-rrsp/

Thanks, Ben and PoutineLover!
I appreciate your patience and willingness to teach me about this. :D

I'll have to see if I can talk any of my friends and family into opening some, ha ha! I know my parents could stand to invest more smartly.

Thank you for the link on the TFSA vs RRSP as well! That's a handy table breakdown of it.
I think alongside my net worth goal, I want to try to reach the point where I max out both the RRSP and TFSA yearly contributions. I might be able to get there within a few years!

[damyst]

I think yesterday I was feeling more uncertain than I am today - we had a big meeting that morning which has solidified my idea that HR is not at all the career I should be in, so I was feeling particularly vulnerable.

I totally feel you. I started coming here because I felt trapped in my career and was looking for an escape hatch. But I was a decade older than you, and quite a bit richer, when I first got to that state.
If I were you, unless I had a clear path to much higher income and better job satisfaction, I'd spend my mental energy optimizing my career, not my portfolio. Sounds like you're already thinking along those lines with the house hacking. No amount of tinkering with the stash would speed up your FI journey like a 2x income boost would, and IMHO you're too early in that journey to just grit your teeth and bear it.

Tax implications are what I will struggle with the most. I'm bad for understanding those. Do you know of any good articles or bloggers I can read on who can help me understand it in plain English? If not, all good, I should learn in anycase, but I figure if there's someone out there who's done it, I could use all the help I can get, ha ha!

Thanks, damyst. I appreciate your help and feedback a lot!

Much obliged! Also, this article and the links from it are a good write-up on tax-efficient index investing:
https://canadiancouchpotato.com/2012/01/23/dividends-not-as-tax-friendly-as-you-may-think/

[MoneyMouse]

I totally feel you. I started coming here because I felt trapped in my career and was looking for an escape hatch. But I was a decade older than you, and quite a bit richer, when I first got to that state.
If I were you, unless I had a clear path to much higher income and better job satisfaction, I'd spend my mental energy optimizing my career, not my portfolio. Sounds like you're already thinking along those lines with the house hacking. No amount of tinkering with the stash would speed up your FI journey like a 2x income boost would, and IMHO you're too early in that journey to just grit your teeth and bear it.

Aw, thank you. I know 30 isn't old, but I... I dunno, I feel like I'm "behind". Not even sure who I'm behind of, just that I'm behind. But I can say that I've safely exhausted my attempts at HR and I'm more than ready for a career change.

I do have my eyes set on becoming a Business Analyst for now. One, my experience could probably land me at $70k (which is beyond my current top-end if I were to stay in HR) and the ceiling looks to be in the low $100ks. Not to mention it opens doors to many more varied positions.

I feel like my time spent in the bad fit of HR has convinced me that I'm just "meant" to grin and bear it, but I appreciate you telling me I'm too early for that. I honestly feel like the job's aged me.

Much obliged! Also, this article and the links from it are a good write-up on tax-efficient index investing:
https://canadiancouchpotato.com/2012/01/23/dividends-not-as-tax-friendly-as-you-may-think/

Oh, thank you! I'll give that a read today. :D