|
< Back
Borrow from the future to buy a house today
But those who need cash for a home or education should think twice before using RRSP program
SUE BOWNESS
After years of diligently putting money into his RRSPs, Bobby Karabatsos decided to take $20,000 out for a down payment on a condo.
Under a government-backed home buying plan, it's a loan he'll be able to repay over 15 years without penalty, provided he makes regular yearly payments.
"It was a choice to continue investing in the RRSP or take out the $20,000 without being taxed," says Mr. Karabatsos, who is a chartered accountant with MDC Partners in Toronto. "Your equity is investing in your home."
The RRSP Home Buyer's Plan allows first-time buyers to borrow as much as $20,000 from their RRSPs, allowing a year's grace before payments must be made at a rate of one-15th per year over 15 years.
A second program, called the Lifelong Learning Plan, allows RRSP contributors to access as much as $20,000 over four years (with a maximum withdrawal of $10,000 per year) for the purposes of post-secondary education, with a repayment plan at a rate of one-10th per year for 10 years.
Repayment must start at the earlier of either the second year after finishing school or the fifth year after first year of withdrawal (to accommodate longer education programs).
Both plans allow each spouse to withdraw from their RRSPs, for a total of $40,000 per couple.
The Home Buyer's Plan requires that you must have purchased your house within the year that you make the withdrawal, and the Lifelong Learning Plan requires that you be enrolled in full time studies (with some exceptions, for example disabled people are permitted to be enrolled part-time).
While the Home Buyer's Plan is positioned for first time home buyers, you can technically use it again as long as five years have passed since your name has been on the title of a house. The Lifelong Learning Plan is not a one-time withdrawal; if you enrolled in another program you could take out money again. You can also withdraw for your spouse's education, but not for your children's.
In both programs, if you miss a payment, that amount is added on to your annual income and taxed.
With a new study by Bank of Nova Scotia showing that almost a quarter of Canadians (23 per cent) have taken money out of their RRSP, the withdrawals are not always for such worthy goals as buying a home or furthering an education.
Hugh Smilestone, a Halifax-based certified financial planner, says that while the Home Buyer's and Lifelong Learning programs are good, he generally advises against taking money out of RRSPs.
"I encourage clients not to withdraw from their RRSPs before they retire. People get panicked about everything from lines of credit to credit cards, and their first reaction is to take money out of their RRSP," he says. "I tell them if you're making $50,000 or better you're only going to see sixty cents on the dollar if you dip into your RRSP. That amount is added to your income, and can raise your tax bracket."
Mr. Smilestone reminds his clients that retirement goals need to be weighed first.
"The 'R' in RRSP stands for retirement," he says. "That's how the program was designed, not as a short-term savings plan so they could put it in one year and take it out the next.
"It's staggering the statistics on how many Canadians dip into their RRSPs just to pay down debt," Mr. Smilestone says.
Potential borrowers should consider other options besides RRSP withdrawals, says Howard Kabot, national director of financial planning at Scotiabank.
"Ideally if someone could finance a house without having to draw on an RRSP, that's better," Mr. Kabot says. "An RRSP is the primary asset to fund a family's retirement, and we know that taking money out can severely impede your success in that regard."
Other options may be available. Students should look into government student loans before turning to their RRSPs, Mr. Smilestone says. v
"The student loan program in Canada is perhaps the most generous in the Western World," he says. "In the G7 nations there's no other country that gives interest free loans to students while they're in school."
In considering both the Home Buyer's and Lifelong Learning plans, potential borrowers should examine interest rates they would otherwise pay for such loans, and also consider how much their money would make if left inside their RRSP during the period that they intend to withdraw it. A financial planner should be able to give projections on these scenarios to help borrowers determine whether making an RRSP withdrawal is really the best option.
While urging caution in RRSP withdrawals, Mr. Kabot says that the two borrowing plans can work out well for people who are in need of funds for either purpose.
"We recognize that clients will sometimes need to draw on these accounts, and in the right situation it makes sense," Mr. Kabot says.
To Mr. Karabatsos, the situation made a lot of sense, since the $20,000 he borrowed allowed him to reach a down payment of more than 25 per cent on his condo, thus avoiding Canada Mortgage and Housing Corp. (CMHC) fees on his purchase. CMHC provides the mortgage loan insurance that is required when a mortgage loan is more than 75 per cent of the purchase price of a dwelling.
Yet there was a drawback: using the program makes him ineligible to do so again. "Right now, if we're looking for a second home, because I dipped into it once, my fiancée can't dip into hers," he said.
While RRSP growth is key to a successful retirement, home ownership and education are also important goals, and that's where these withdrawal plans can come in handy, says Catherine James-Zelney, an Ottawa-based financial planner in investment and financial planning at Royal Bank of Canada Investments.
"If someone is not able to buy a home because they're unable to come up with that down payment, and it's the only way they can buy a home, and if that's an important goal for them, you have to weigh out both the goal of retirement and the goal of home purchase," Ms. James-Zelney says.
She adds that her clients are generally satisfied with what the programs have allowed them to do. "I've never met a client who has regretted doing it, people are always happy to buy a house."
If you do decide to take advantage of either plan, the Canada Customs and Revenue Agency will notify you of the payments due via regular statements.
Mr. Karabatsos warns that making the payments is important. "It's easy to forget that you have to pay it back. If you don't put it back the government will tax you."v
If you don't repay the loan, the consequences are pretty serious in RRSP terms - you'll lose the room in the account, says Abby Kassar, a national senior financial planning consultant with RBC.
"If you don't repay, you lose that opportunity to get those funds back into your RRSP," she says. "If you don't put it back, you've lost that room and you'll never be able to take advantage of those funds going back into a registered plan."
Special to The Globe and Mail
< Back
| 
