RRSP / First time home buyer

[pheoxs]

Looking for some advice if anyone has gone through this before

**Note: I will actually go discuss this with the bank / an accountant when I go to actually buy a house, just looking for some info before then**

If my understanding of the first time buyer program is correct I can pull out max 25k worth of RRSP to buy a house and have to repay them within 15 years (~65$ a paycheck) so long as the funds have be in there for 90 days.

So if I sell my car and use a portion of my regular savings, can I just dump 25k into RRSP, claim it on my income tax for next year, receive ~8k back in tax benefits, then throw it along with the rest of my savings in a house together turning 25k into 33k plus the rest of my savings?

Is this normal? Am I missing something? Any other advice or programs I can take advantage of for my first house?

[ercchry]

do you have $25k worth of contribution room?

[ExtraSlow]

You can totally do that, drop in a lump sum, leave it in for 90 days (iirc) and then pull it out and still get the tax refund.

[Manhattan]

Might a bit late in your scenario but you can also save money tax free in a TFSA account and use it to pay for your house. You will be able to contribute whatever you took out in a future year. There's no obiligation to put it back in like the RRSP but if you have savings there's no reason not to put it back.

[pheoxs]

Originally posted by ercchry
do you have $25k worth of contribution room?

Due to school I haven't contributed anything so I believe I have 5 or 6 years worth of contribution room. Each year is 22k anyways so I definitely have enough for 25k.

Originally posted by ExtraSlow
You can totally do that, drop in a lump sum, leave it in for 90 days (iirc) and then pull it out and still get the tax refund.

Good to hear, I'm assuming this program is basically for this reason to help buyers out but just wanted to make sure i wasn't missing anything.

Know of any other similar programs? I see there is another one HBTC tax credit of 5k for a first time house buyer as well to a max refund of 750$. Curious how many things can be stacked

Originally posted by Manhattan
Might a bit late in your scenario but you can also save money tax free in a TFSA account and use it to pay for your house. You will be able to contribute whatever you took out in a future year. There's no obiligation to put it back in like the RRSP but if you have savings there's no reason not to put it back.

I do have my TFSA about half full, but just trying to maximize as much tax benefits as I can. Unfortunately with the TFSA I don't get any tax benefits for putting money into it, just that I don't pay taxes on gains from it.

[bspot]

With the RRSP, weigh where you are in your carreer.

You're going to take the writeoff on that money now, what is the marginal rate of tax savings on that?

If you get $20K in raises in the next 10 years would you have been better off getting the tax savings on your repayments in the future instead of in the near term?

Way back when I bought my first place I used this program to the max, at the time it was $20K. I was making ~$50,000 at the time. It was kind of dumb, because I would have saved a lot more on taxes had I been getting the return years later by contributing to my RRSP instead of repaying what I already contributed and took out.

[pheoxs]

Originally posted by bspot
With the RRSP, weigh where you are in your carreer.

You're going to take the writeoff on that money now, what is the marginal rate of tax savings on that?

If you get $20K in raises in the next 10 years would you have been better off getting the tax savings on your repayments in the future instead of in the near term?

Way back when I bought my first place I used this program to the max, at the time it was $20K. I was making ~$50,000 at the time. It was kind of dumb, because I would have saved a lot more on taxes had I been getting the return years later by contributing to my RRSP instead of repaying what I already contributed and took out.

Alberta uses a fixed 10% so it doesn't matter for income. Canada uses

15% on the first $43,561 of taxable income, +
22% on the next $43,562 of taxable income (on the portion of taxable income over $43,561 up to $87,123), +
26% on the next $47,931 of taxable income (on the portion of taxable income over $87,123 up to $135,054), +
29% of taxable income over $135,054.

Which would reduce my income in the 26% bracket by 25k so even if I were to use those 25k benefits at a later date I'd save more money in mortgage interest now I believe.

Unless I'm thinking of things wrong I thinking less mortgage interest wins in the long run wouldn't it?

[skandalouz_08]

OP - you are completely correct in everything you said and makes sense financially considering you are making over $100K and probably near the highest tax bracket already (based on your tax credit calculations and available RSP contribution room).

Other than the tax credit for First Time Home Buyers that's about it for saving money. If you've got any more questions feel free to PM me as I'm an advisor and deal with clients looking to take advantage of the Home Buyers Plan all the time.

[BrknFngrs]

Originally posted by pheoxs
Due to school I haven't contributed anything so I believe I have 5 or 6 years worth of contribution room. Each year is 22k anyways so I definitely have enough for 25k.

Keep in mind RRSP contribution room doesn't accumulate on a flat basis like that unless you're a high income earner in each of those years; it's based on your "earned income" but capped at the annual max (what you're quoting)

[Feruk]

You're not getting free money, you're just accelerating when you'd get that free money. In the first year you'll get $25K taken off your taxable income, but repayments over the next 15 years of that $25K do NOT lower your taxable income. So you pay less tax this year, and more in future years!

To answer the question of whether this is a good idea depends 100% on your salary, your expected salary raises over the next 15 years, and the amount you plan to put away each of the next 15 years. If we make the assumption that you will make more every year, because of different tax rates in different tax brackets, there is a good chance that you will actually pay MORE taxes in that 15 year period by using the HBP.

Link: http://www.cra-arc.gc.ca/E/pub/tg/rc...tml#P318_31342

[J.M.]

Hypothetically, if I have an RRSP worth $5k through a work plan as well as a personal RRSP worth $5k, I could deposit another $15k into my personal RRSP then wait 90 days before withdrawing the entire amount ($25k) for my first home purchase? Or does it have to be all in one single RRSP account?

[pheoxs]

Originally posted by skandalouz_08
OP - you are completely correct in everything you said and makes sense financially considering you are making over $100K and probably near the highest tax bracket already (based on your tax credit calculations and available RSP contribution room).

Other than the tax credit for First Time Home Buyers that's about it for saving money. If you've got any more questions feel free to PM me as I'm an advisor and deal with clients looking to take advantage of the Home Buyers Plan all the time.

Thanks! I'm still just doing basic research but if any questions come up I'll make sure to bug yeah for some info.

Originally posted by BrknFngrs


Keep in mind RRSP contribution room doesn't accumulate on a flat basis like that unless you're a high income earner in each of those years; it's based on your "earned income" but capped at the annual max (what you're quoting)

Much appreciated, didn't realize that I'll have to dig out my papers from last spring and see how much room I have.

Originally posted by Feruk
You're not getting free money, you're just accelerating when you'd get that free money. In the first year you'll get $25K taken off your taxable income, but repayments over the next 15 years of that $25K do NOT lower your taxable income. So you pay less tax this year, and more in future years!

To answer the question of whether this is a good idea depends 100% on your salary, your expected salary raises over the next 15 years, and the amount you plan to put away each of the next 15 years. If we make the assumption that you will make more every year, because of different tax rates in different tax brackets, there is a good chance that you will actually pay MORE taxes in that 15 year period by using the HBP.

Link: http://www.cra-arc.gc.ca/E/pub/tg/rc...tml#P318_31342

Thanks for the info / link.

I'm sure I'll end up paying more taxes in the long run using it but I'm pretty sure that the amount of interest saved by putting the money into a down payment would make up for that over the course of the mortgage.

[tpurcell4]

Originally posted by J.M.
Hypothetically, if I have an RRSP worth $5k through a work plan as well as a personal RRSP worth $5k, I could deposit another $15k into my personal RRSP then wait 90 days before withdrawing the entire amount ($25k) for my first home purchase? Or does it have to be all in one single RRSP account?

It can be in multiple accounts. Money just has to be in accounts for 90 days and you are capped at the $25,000 total from all your accounts.

[BrknFngrs]

Originally posted by J.M.
Hypothetically, if I have an RRSP worth $5k through a work plan as well as a personal RRSP worth $5k, I could deposit another $15k into my personal RRSP then wait 90 days before withdrawing the entire amount ($25k) for my first home purchase? Or does it have to be all in one single RRSP account?

You have to be a bit careful because employer RSPs are often locked-in and won't be eligible for HBP use.

[lint]

Originally posted by Feruk
You're not getting free money, you're just accelerating when you'd get that free money. In the first year you'll get $25K taken off your taxable income, but repayments over the next 15 years of that $25K do NOT lower your taxable income. So you pay less tax this year, and more in future years!

To answer the question of whether this is a good idea depends 100% on your salary, your expected salary raises over the next 15 years, and the amount you plan to put away each of the next 15 years. If we make the assumption that you will make more every year, because of different tax rates in different tax brackets, there is a good chance that you will actually pay MORE taxes in that 15 year period by using the HBP.

Link: http://www.cra-arc.gc.ca/E/pub/tg/rc...tml#P318_31342

Follow the 15yr schedule to repay the $25K for the HBP, don't accelerate it. Anything over and above, use it to make new RRSP contributions to realize the tax benefits.

[sabad66]

Originally posted by lint


Follow the 15yr schedule to repay the $25K for the HBP, don't accelerate it. Anything over and above, use it to make new RRSP contributions to realize the tax benefits.

Yep. Pay the bare minimum to pay yourself back (i.e. 25,000/15yrs) yearly, then any extra savings I would go:
1. TFSA, then if contribution room is maxed
2. New RRSP Contributions, then if contribution room is maxed
3. Pay yourself back in your RRSP for the HBP

[lint]

why TFSA (post tax dollars) before RRSP (pre tax dollars)?

[BrknFngrs]

I don't think it's a one size fits all "pay yourself back over the longest period possible" situation. The same arguments for maintaining your RRSP deduction room for future years when you're in a higher bracket could apply.

[sabad66]

Originally posted by lint
why TFSA (post tax dollars) before RRSP (pre tax dollars)?

Not the same for everyone, but 3 reasons for me:
1. I want the flexibility to use my savings instead of having to wait until i retire. Easy to do with a TFSA.
2. I have a pension plan through work so an RRSP is less crucial for me
3. I figure I will be at the highest tax bracket eventually so i would rather wait until then to start maxing out RRSP.

[avishal26]

Originally posted by ExtraSlow
You can totally do that, drop in a lump sum, leave it in for 90 days (iirc) and then pull it out and still get the tax refund.

Originally posted by BrknFngrs


You have to be a bit careful because employer RSPs are often locked-in and won't be eligible for HBP use.

Both posts above are what my replies were going to be... I just went through this exact same scenario last year. For me, I just transferred the cash I had anyway into an RRSP and then held it for 90 days - lucky for me I found out about HBP and this option 110 days before I was to take possession (and pay the downpayment in full) of my house.

Also, my work RRSP was locked in an could only be broken if I left the company or was in dire financial need (which is hard to prove when buying a new house). Most work RRSP's are not eligible for HBP.

The interest money saved (and possibly CMHC insurance payments if your downpayment adds up to over 20% with your HBP contribution) is well worth it and will outweigh any tax benefits of the approx $1670 per year you would be paying back into the RRSP, especially since you seem to be in one of the higher tax brackets already. But if you want to get into the nitty gritty details, you can use some of the online mortgage calculators (or make your own in Excel like I did) to see how much the interest paid over your ammortization term changes depending on varying downpayment values (and also extra occasional payments)

Also, you don't have to repay anything back into your RRSP in the first year.