While many ruminate on the cardinal sin of dipping into an RRSP before retirement age, the glowing allure of home ownership keeps proving to be a dangling carrot that just cannot be ignored.
Entering its 22nd year of existence, the Home Buyers' Plan has helped more than 2.5 million Canadians borrow from their retirement savings to take their first tentative step onto the property ladder, although the $25,000 maximum that can be withdrawn per person doesn't provide quite the down payment that it used to.
"Real estate in Canada, and especially real estate in the Toronto area, is just soaring and so getting involved in that asset class can be very difficult, so that's where the RRSP comes in," says Scott Plaskett, chief executive officer of Ironshield Financial Planning in Caledon, Ont., adding: "$25,000 that you can take out of the plan, without having to pay any taxes, is a good thing."
The rationale behind the plan is fairly straightforward. As a first-time home buyer (or anyone who hasn't owned his or her primary residence in the past five years), you can take up to $25,000 from your RRSP without penalty as long as you pay it back over 15 years, beginning two years after you make the withdrawal. That amount can be doubled to $50,000 if you are buying with your spouse or common-law partner, making it more attainable to reach the 20-per-cent down payment minimum that is required to avoid paying mortgage insurance.
However, the money must be in your RRSP for a minimum of 90 days before withdrawal, so you can't just make a sudden $25,000 contribution and then withdraw it within a few weeks. But that still allows buyers the opportunity to enjoy a decent tax benefit, one that can be reinvested into your RRSP.
Mr. Plaskett details a scenario in which a prospective home-buying couple have been working for a few years and has accumulated RRSP contribution room. But in trying to get ahead, the pair may not even have started an RRSP in favour of trying to save for a down payment on a property instead.
"So one of the things we'll do is we'll say, 'Listen, why don't we flow the first $25,000 through your RRSP, and then take it right back out 91 days later,'" he says. "That will give you a $25,000 RRSP contribution receipt that you can then start to deduct against any future years taxes that you need to give you some tax breaks, but it's not going to impede your ability to use the money for a home purchase."
Other experts will champion the use of the tax-free savings account, instituted in 2009, to help prospective home owners buy their first property, owing to its greater flexibility and ability to leave your retirement savings untouched, but Mr. Plaskett disagrees with this strategy because it lacks the tax deductions of the Home Buyers' Plan, and he's not alone.
"Typically with the clients that I've worked with the savings over a short term, and we're talking one to three years with that tax-free savings account, the amount of taxes you're going to save is not significant because we're looking at ideas that have very little risk and therefore not a lot of growth potential because we don't want to take on that risk," says Andrew Sherbin, a financial adviser with Edward Jones in Toronto.
"We need that money to be there within one to three years, so absolutely the tax-free savings account is one other vehicle to save, but it depends on that individual and their ability to save and the goals that they've set to pay for this down payment for a new home."
The risk with the Home Buyers' Plan is that it may it impinge on your ability to make your regular RRSP contributions, with your cash already committed to repay the $25,000 loan. On top of that, failure to meet the yearly repayments on the withdrawal will add that amount on to your taxable income for that year, negating its tax-free status for that 12-month period, but depending on the tax bracket that you're in, it's not necessarily a negative.
Again, Mr. Plaskett describes a scenario where a couple uses the Home Buyers' Plan to buy a house while the pair are still working, and two years later, when the first of the 15 repayments is due, two has become three, with the mother staying home to raise the child.
"Well, if in the year that you're required to make the repayment, you take a look and see that your income for that year is very low, or almost non-existent, why put the money back in?" he says. "Just have that included in your income for that year, you probably won't pay very much tax on it and so you've now flowed that portion of your RRSP money through the RRSP, taken a deduction in the year that you put it in, and not have to pay tax on it when you took it out."
Obviously, withdrawing $25,000 from your RRSP is never ideal from a saving-for-retirement standpoint, but doing it to take advantage of home ownership isn't a backward step. As Mr. Plaskett explains, "Everybody should include home ownership in their plan if they can. It's one of the few tax-free growth assets that we can include in our financial planning because any profits we make on our primary residence are tax-free."
It must be noted that every case is different though, and weighing up home ownership versus saving for retirement is obviously an important conversation, one that is best had with a qualified financial planner. But utilizing the Home Buyers' Plan to invest in a primary property can certainly be part of a well-rounded retirement strategy.
"A lot of people, again from a long-term planning perspective, see it as an additional possibility for their long-term financial plans," Mr. Sherbin says, "whether it be down the road, selling up and using that for retirement, or perhaps passing it along intergenerationally to their kids or relatives."