RRSP's to HBP

[return to the red]

So I just purchased a lot here in Lethbridge and had a question for any of those accountants or revenue canada types out there.

I don't pretend to know anything about this but what are the benefits/disadvantages of transferring money from RRSP's into HBP or can you even do this?

that being said as well, if I am going to withdraw from my RRSP's what kind of tax implications can I be looking at?

[calf]

I'm not any expert (but I'm trying!!) -

Basically, the HBP is the government allowing you to 'borrow' from your RRSP's to purchase your first home instead of saving it for retirement like they're intended. This must be for the first home you buy & you must be living there.

I'm assuming you know that with RRSP's, your contributions are deductible when you make them, and you get taxed on what you draw when you retire.

Under the HBP, you can withdraw up to $20,000 from your RRSP's without tax being withheld/payable, and have 15 years to pay it back.

The biggest advantage, imo, is you're getting the deduction from your taxes, and you're using that to your advantage to buy a home (ie, you make the contribution to your RRSP's, get a refund, then you can use that money you contributed towards your home).

You are, however, missing out on any growth of your RRSP's, however, with the way housing prices are skyrocketing, it might not be a bad idea.

This link, and your friendly neighborhood accountant, can give you all the information you need: http://www.cra-arc.gc.ca/tax/individ...bp/menu-e.html

[sparky69]

im pretty shere that there is no tax implications if your using you RSP for THE HBP. I know i used my RSP for the LLP plan and there was no tax on it. i think you can only do the HBP once in a lifetime. but not really shere

[Mr.Coffee]

I think I can definitely help you out. All that calf said is absolutely true.

I just recently took a class that focused on personal finance including the home buyers plan and explained how it was in fact a disadvantage to those who are younger.

Here's some things that may help..straight out of my old textbooks.

-'neither you nor your spouse (common law relationships included) may have owned a home for 4 years previous to your withdrawal'.

-'HBP allows an individual to borrow up to 20,000 from their RRSP without tax consequences'.

-'remember that the 20,000 limit is PER INDIVIDUAL, meaning if two of you are going to buy the home, you can take out 40,000 (combined)'.

- 'you cant use the HBP if your currently married (including a common law relationship) and your current spouse owned a home that was your principal place of residence during the marriage'.

- 'HBP is not 1 time per life, rather when you qualify' (so after every 4 years after owning a home.. meaning you can withdraw in yr 5.

- transaction for the purchase of your qualifying home must close BEFORE October 1 of the year FOLLOWING the withdrawal. (they dont want you taking the money and using it elsewhere...its strictly for homes).

-you must intend to use the home as your principal place of residence

-you must repay your loan in equal installments over 15 years. Repayments start within 60 days of the end of the 2nd year following your 1st withdrawal.

However if you get anything out of this post...

My professor was of the very strong winded opinion that if you're "young and have 30 or more years until retirement, the opportunity cost (lost compound interest, tax deferred savings of RRSP) of the 20,000 is pretty severe.

The concept is that the closer you are to retirement, the less severe opportunity cost, however also the less likely you are to be a 1st time home buyer..

the concept generally works for younger people without any money to put down on a home. But consider that for example, at 6% P/A compounded annually:

If your age 20:
-Amount in your RRSP at age 69 after you repay 15 years of HBP = 200,278

-Amount in your RRSP at age 69 given you didnt withdraw that 20,000..= 347,550
meaning the amount lost in terms of opportunity cost at age 69 by using HBP = 147,272

At age 25 the loss is still 110,000...

hopefully this helps somewhat make a choice.

[Bobblehead]

Just to fill in a small piece of missing info.

If you don't repay the minimum amount into your RRSP when required those amounts become deemed income and you pay taxes on it.

[Buff]

I only had ~ $2000 in RRSP so I didn't have much to take out when I bought my house. I still had to put a minimum yearly payment back into my RRSP though. However I quit my job about 6 months after I bought my house and I received *huge* amounts of monies from the companies profit sharing plan, so I just put that into my RRSP and I didn't have to worry about paying the RRSP back ever again.

[Bobblehead]

Originally Posted by Buff

I only had ~ $2000 in RRSP so I didn't have much to take out when I bought my house. I still had to put a minimum yearly payment back into my RRSP though. However I quit my job about 6 months after I bought my house and I received *huge* amounts of monies from the companies profit sharing plan, so I just put that into my RRSP and I didn't have to worry about paying the RRSP back ever again.

As long as you designated the proper amount as the repayment on your tax return. RRSP contributions are not automatically assumed to apply against the HBP.

Unless you have maxed your RRSP contributions, only designate the minimum amount of repayment to your HBP.

[Bill Bumface]

I did this for 20K and regretted it soon after. I got a significant pay raise soon after. Now this year if I put 10K in my RRSP a portion has to go to my repayment, which I get no tax benefit for. The tax benefit I stood to have now is much greater than when I was making less money. Oh well, you live you learn.

[Mccree]

Originally Posted by hulkrogan

I did this for 20K and regretted it soon after. I got a significant pay raise soon after. Now this year if I put 10K in my RRSP a portion has to go to my repayment, which I get no tax benefit for. The tax benefit I stood to have now is much greater than when I was making less money. Oh well, you live you learn.

You do get a free year. So if you took the money out in 2005 no repayment is needed until 2007. But you are right you do lose a portion of your tax benefit. However if that 20,000 got you into the house market earlier then I believe you are better off. Houses went up like crazy and you cannot save that kind of money in a year.

[Bobblehead]

Originally Posted by hulkrogan

I did this for 20K and regretted it soon after. I got a significant pay raise soon after. Now this year if I put 10K in my RRSP a portion has to go to my repayment, which I get no tax benefit for. The tax benefit I stood to have now is much greater than when I was making less money. Oh well, you live you learn.

Nothing wrong with that - you have to get the down payment somewhere. And as long as you have the RRSP Unused room, you may as well put you $ into the RRSP then pull it to buy your home. There is no law that says you have to claim the RRSP deduction when you buy it. If you know your income is about to jump into another bracket, carry an unclaimed amount forward until you need it.

Before I bought, I would put most of my savings into RRSP. As a result the only way I could come up with the down payment was the HBP.

If you have the money for the downpayment outside your RRSP and you can't put any more into your RRSP then you probably shouldn't use the HBP.

[ken0042]

Originally Posted by Mr.Coffee

the concept generally works for younger people without any money to put down on a home. But consider that for example, at 6% P/A compounded annually:

If your age 20:
-Amount in your RRSP at age 69 after you repay 15 years of HBP = 200,278

-Amount in your RRSP at age 69 given you didnt withdraw that 20,000..= 347,550
meaning the amount lost in terms of opportunity cost at age 69 by using HBP = 147,272

At age 25 the loss is still 110,000...

hopefully this helps somewhat make a choice.

The thing of it is, I bought a house 18 months ago. Had I waited those 18 months I would have had to fork over an additional $140K in 2006 money. Assuming I was 25 years old, then the loss of $110K would be in 2044 money.

Even with Hulkrogan's bump in income, how much did he save by buying the home when he did vs. buying it later on after the raise came into effect?

[Sylvanfan]

Yeah, the other thing assumption being made is that people are withdrawing $20,000 to buy a house. Really for a lot of people it could be like $5000 or less. My brother needed like $13500 for a down payment and since my dad is a realtor and was going to write the deal and give him his share of the commission he only needed like $7000. So if he had any type of RRSP savings it would have likely been worth it for him to get it from there. He would get into a house and still have 30+ years to save for his RRSP. As we know when it comes to houses, the prices are growing a lot faster than most peoples ability to save. I might suggest that saving the money for your downpayment within an RRSP is actually not a bad move. A lot of people under the age of 30 aren't making enough money to max up an RRSP and save for a house plus pay all the other expenses they have. When you make an RRSP contribution you get tax savings. When you use the money for the HBP, you still get those savings so long as you pay it back on schedule and you get tax free growth on the money while it's in the RRSP. Outside the RRSP, no tax break, and you pay interest on what you save. So unless you're luckey enough to have a $100,000 a year job or better an RRSP is a good savings vehichle for a house payment. Also doesn't hurt that it is hard to access that money while you are saving it and will act as a safeguard against an impulse to spend it on a trip to Mexico or something like that.

[guzzy]

You have a two year (tax year - not 730 days - don't get caught by that)grace period before you have to start paying. As long as you pay back at least 1/15th of borrowed amount back into a different RSP per year you won't be taxed. If you don't you pay tax only on the portion of the 1/15 th you missed.

[V]

The HBP worked perfectly for me and my wife. We used 5000 of her RRSPs plus 3000 of our personal savings to get into our house. If we had waited to use only personal funds to get into the housing market we probably wouldn't have gotten in until this year, if then.

Now I'm the only person that works, so my wife doesn't pay back into her RRSPs and takes the 300 bucks per year income for not paying her HBP money back. Completely insignificant hit on our finances, since her overall income is 300 bucks a year. Meanwhile I have a house that's increased in value by 150K in the last 18 months and I keep pouring in RRSP money under my name with full tax sheltering.

I personally think that the only time saving up for a downpayment without RRSPs is a good idea is if the housing market is projected to stay stagnant or dip pver the next 2-5 years.

If your age 20:
-Amount in your RRSP at age 69 after you repay 15 years of HBP = 200,278

-Amount in your RRSP at age 69 given you didnt withdraw that 20,000..= 347,550
meaning the amount lost in terms of opportunity cost at age 69 by using HBP = 147,272

At age 25 the loss is still 110,000...

hopefully this helps somewhat make a choice.

This really helps convince me I made the right choice. I only used 5K when I was 24 and now three years later I have over 170K in equity. So I've already made up for the loss you've drawn up above (3 or 4 times over), and it's only been 3 years. And I experience zero tax implications for my wife not paying back the RRSPs. Good deal.

-Edit- Any reason the guy used age 69 in his example?? Guaranteed, I'll be withdrawing RRSPs by then. There's no way I'm working full time until I'm 70. I'm shooting for retirement at 50.

[Mr.Coffee]

Originally Posted by Dominicwasalreadytaken

-Edit- Any reason the guy used age 69 in his example?? Guaranteed, I'll be withdrawing RRSPs by then. There's no way I'm working full time until I'm 70. I'm shooting for retirement at 50.

Yes actually. Age 69 is when your RRSP automatically collapses, so he's assuming that this is the absolute latest year your average Canadian would retire at. This is despite the fact that most people retire at 65.

You raise some great points by the way. Obviously Calgary is a backwards example to what I was getting at because of its housing boom.

If you were say somewhere else in Canada though..

and good luck with that age 50 retirement thing... I think its quite a bit tougher to do then we all would like it to be. Part of this class involved a personal financial plan (big project). At the beginning of the semester, almost everybody had below age 60 retirement projections, tied in with lifestyles fit for royalty! At the end of the semester we handed in the final projects, and the professor found it amusing how pretty much everybody had altered their retirement ages to be a little bit more realistic.

Unless your, ya know, in the NHL making $7 mill/yr

[V]

Cool, I didn't know that. What do you mean by collapses, though? If you were still working at 70 years old you wouldn't be able to contribute to your RRSP? If I understand your term of 'collapses' properly, does that mean that it automatically becomes some kind of savings account, and you immediately get taxed on the entire amount in your RRSPs? Sorry for the ignorance, I've never heard of this before.

[Bobblehead]

Originally Posted by Dominicwasalreadytaken

-Edit- Any reason the guy used age 69 in his example?? Guaranteed, I'll be withdrawing RRSPs by then. There's no way I'm working full time until I'm 70. I'm shooting for retirement at 50.

The year in which you turn 69 is the last year you can contribute to an RRSP, and you must remove all money from the RRSP by the last day in the year in which you turn 69 (usually by buying annuities, or rolling it to a RRIF).

Editing to answer you followup:
You cannot own an RRSP after the final day in the year in which you turn 69. Most people roll the money into an Annuity, or a RRIF. You can just withdraw it, but then it is all considered income at that moment. By 'rolling' it, you get it paid out piecemeal and only declare the income as it is paid out.

[Mr.Coffee]

Originally Posted by Dominicwasalreadytaken

Cool, I didn't know that. What do you mean by collapses, though? If you were still working at 70 years old you wouldn't be able to contribute to your RRSP? If I understand your term of 'collapses' properly, does that mean that it automatically becomes some kind of savings account, and you immediately get taxed on the entire amount in your RRSPs? Sorry for the ignorance, I've never heard of this before.

Yep that's pretty much exactly how it works. That's why the RRSP is a tax DEFERRED vehicle instead of a tax SAVINGS vehicle. It's the element of time that saves you tax dollars. When you turn 70, all must come out, and you are taxed on it.

Edit; or as others have said, roll it into another opportunity such as an RRIF.

[albertGQ]

Originally Posted by Dominicwasalreadytaken

Cool, I didn't know that. What do you mean by collapses, though? If you were still working at 70 years old you wouldn't be able to contribute to your RRSP? If I understand your term of 'collapses' properly, does that mean that it automatically becomes some kind of savings account, and you immediately get taxed on the entire amount in your RRSPs? Sorry for the ignorance, I've never heard of this before.

You do have to collapse your RRSP. The best way taxwise is to convert it into a RRIF. If you just take the cash, you will pay a HUGE tax bill since your RRSPs will be worth at least a couple hundred thousand by than and probably millions

[return to the red]

well I have the money for the downpayment I was just concidering putting more money down and lowering the amount I am mortgaging. Personally I can afford the mortgage but I like having that extra money and push to pay stuff off quicker

Thanks for all the advice and personal input