The Home Buyers’ Plan (HBP) and the Lifelong Learning Plan (LLP) are two advantages of investing in a registered retirement savings plan (RRSP), as they allow Canadians to pull funds from their RRSPs – interest- and tax-free – to buy a home or get educated, then pay it back over 15 years for the HBP or 10 years for the LLP.
But there also are some downsides to the HBP and LLP, including the potential of missing out on tax-sheltered growth in an RRSP, some financial advisors say. And investors need to consider their ability to pay back the amounts borrowed from their RRSPs. If they don’t, the annual payment amount due is added to their income for that year – and they’ll have to pay taxes on it.
Both programs make sense if they help Canadians move closer to their goals of owning a home or getting a degree, says Rona Birenbaum, founder and certified financial planner at Caring for Clients, a fee-for-service financial-planning firm in Toronto.
“As long as there’s a plan to replace those funds and continue to build toward retirement, then it can work,” she says.
The advisor’s role is to ensure these withdrawals don’t undermine other goals, such as funding retirement, “because extracting money early on from an RRSP minimizes the long-term compounding potential,” Ms. Birenbaum says.
Last year, the federal government increased the amount Canadians can withdraw from an RRSP to buy a home under the HBP to $35,000 from $25,000. Couples can also each access that amount and put $70,000 toward a down payment. In addition to first-time home buyers, Canadians who recently experienced a breakdown in their marriage or common-law relationship can now access the HBP as well. Withdrawals and repayments don’t affect RRSP contribution room.
Ms. Birenbaum says the HBP is a good option for a person or couple with some RRSP savings and looking to get into the housing market.
“If home ownership is a client’s primary goal, then using up to $35,000 from an RRSP – or twice that if it’s a couple – can accelerate when they can reach that goal, or it can help them buy a property at a higher price than they otherwise could,” she says.
Ryan Burns, senior financial planner at TD Wealth Financial Planning in Mississauga, says the money withdrawn through the HBP can help home buyers avoid paying mortgage insurance, which is required if the down payment is less than 20 per cent of the cost of the home.
“If you can avoid that fee and get the conventional mortgage … tapping into your RRSP to come up with that gap will definitely save you some money,” Mr. Burns says.
But Canadians who use the assets in their RRSPs for the HBP need to start repaying the loan in the second year after they complete the withdrawal. The payment is one-fifteenth of what they removed from their RRSPs every year for 15 years.
Some people pay the money back on schedule each year, while some pay it sooner and some skip annual payments, which advisors say can be a strategy if they’re strapped for cash in a particular year.
“There are some years when it can actually make sense not to make your annual repayment, such as a year when you have little or no income,” Ms. Birenbaum says. “You’re losing out on the compounding [growth in the RRSP], but if money is tight … you can probably skip repayment that one year.”
Scott Plaskett, senior financial planner and chief executive officer at Ironshield Financial Planning in Toronto, says another option is to skip a payment in a year when someone isn’t working. For example, if they’re on parental leave and their income is much lower.
“The sole purpose of putting money into an RRSP is to take it back out at some point in the future [when you’re in] a lower tax bracket than when you put it in,” Mr. Plaskett says. “There are ways you can play with it to make it work when you are aware of the options [that] exist.”
That said, he doesn’t recommend people use the HBP if they don’t have enough savings and no plans to pay it back.
“Taking money from a liquid asset and putting it into an illiquid asset doesn’t help retirement planning,” he says. “The biggest challenge Canadians have is creating enough liquidity so they can retire comfortably. It’s the whole idea of being equity rich and cash poor. You can’t pay for dinner with a doorknob.”
For people paying on schedule, Mr. Burns recommends setting a bit of money aside from every paycheque.
“Pay yourself first as you’re getting paid, versus waiting until the end of the year. If you wait, you may not have that cash sitting around,” he says.
HBP users can also pay the loan off quicker, which Mr. Burns recommends if they get a bonus, a salary increase or maybe some money as a gift or from an inheritance. There’s no penalty for paying it back sooner.
“Sometimes, paying it back more quickly gives people peace of mind,” he says, even if it means foregoing an RRSP contribution that year. “It depends on their comfort level, cash flow and tax bracket."
Ms. Birenbaum often advises against accelerating repayments beyond the required annual minimum if people have unused RRSP contribution room, “because you want to take advantage of that before [repaying] your Home Buyers’ Plan.”
She notes that RRSP contributions are tax-deductible, whereas HBP repayments aren’t. “That’s why, generally speaking, we recommend paying only the minimum back each year, and treating as much of your savings as possible as a new RRSP contribution.”
Paying back the HBP sooner than required makes the most sense for people who have maximized the contribution room in their RRSPs and tax-free savings accounts (TFSA), and who are debt-free.
“The sooner the money is growing on a tax-sheltered basis, the better,” she says.
The advice for withdrawing and repaying the LLP is similar to the HBP. That said, advisors are more bullish on this type of loan, as it can be used to help clients advance their careers.
“It’s moving money from one productive asset to what I think is the most productive asset – you,” Mr. Plaskett says. “Anything you can do to reinvest in yourself in a productive way is the number one investment you can ever make."