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Household Finances A better strategy for the federal Home Buyers’ Plan? Kill it

The recent federal budget paved the way for people to increase the amount they withdraw from registered retirement savings plans to buy a first home from $25,000 to $35,000. A better strategy for the federal Home Buyers’ Plan? Kill it dead.

Some research presented on RateSpy.com explains why. People are taking money out of their RRSPs to buy homes and not paying it back. The default repayment schedule has HBP users repaying one-fifteenth of what they removed from their RRSPs every year for 15 years. If you don’t follow through, the amount of your payment is added to your income for the year, and you’ll pay tax on it.

RateSpy quotes CRA data for the 2015 tax year showing that 42 per cent of the 91,000 people who withdrew money from the RRSPs under the HBP did not report an RRSP repayment. This suggests the money that should have gone back into their retirement savings instead got added to their income.

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Even if you repay your RRSP money on schedule, the HBP damages your retirement savings. You get less value from the tax-sheltered, long-term compounding available with RRSPs if you remove a chunk of money and then repay it gradually in small amounts. Not repaying the money at all is worse.

Recent weakness in the housing market reminds us that basing your personal net worth on real estate alone is risky. Own a house, but make sure you save aggressively for retirement as well. As for saving to build a home down-payment, tax-free savings accounts are the way to go.

Tell us your story

Are you a homeowner who is concerned about rising interest rates? The Globe is looking at household debt in the suburbs. We are looking for people in the following areas to tell their stories: Brampton, Richmond Hill, Vaughan, Ont.; Richmond and Surrey, B.C., and Edmonton. Contact Rachelle Younglai at ryoungai@globeandmail.com.

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Rob’s personal finance reading list…

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Seven great personal-finance habits

I’m always looking for something original in lists like this. Check out suggestion No. 5 – keep your car properly maintained. Saves on repairs.

Best bank accounts for foreign travel

A comparison of fees and exchange rates at the Big Five banks for withdrawing cash from an ATM while travelling internationally.

A cheap and useful kitchen gadget

A podcaster and writer about cooking likes this inexpensive jar-opening gadget, which would be particularly useful for seniors and people with arthritis or a hand injury. I checked – it’s available to Canadians via Amazon.ca.

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Ten questions about annuities

Not a lot of people are open to annuities, often because they don’t understand how these retirement-income vehicles work. Here’s some information for both doubters and those who are open to an annuity as a way to generate worry-free retirement income for life.

Today’s financial tool

PolicyAdvisor is a new online insurance hub where you can get multiple quotes for life and critical-illness insurance. This website is paid a commission when users buy a policy.

Ask Rob

Q: Is it more cost-effective in the long run to own and invest periodically in one balanced ETF, such as the Vanguard Balanced ETF Portfolio (VBAL), or to own some of the underlying holdings individually?

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A: Balanced ETFs hold a portfolio of underlying stock and bond ETFs designed for a particular type of investor – conservative, balanced, aggressive and so forth. I think these are awesome products because they simply the investing process and make it more cost-effective. You pay one brokerage commission to buy the balanced ETF rather than several commissions to buy the underlying funds. Also, the balanced ETF maintains its balance of stocks and bonds. You don’t have to do your own rebalancing every so often, thereby incurring more commissions. There may be a small premium built into the fees of balanced ETFs compared to owning the underlying funds separately. I’ll have to look into how much of a drag on returns this extra cost works out to over the long term. I’m pretty sure it’s not enough to offset the savings on brokerage commissions for investors who plan to make regular purchases of balanced ETFs.

Do you have a question for me? Send it my way. Sorry I can’t answer every one personally. Questions and answers are edited for length and clarity.

What I’ve been writing about

  • 100-square-foot apartments and 5-foot-10 ceilings: Harrowing tales of millennials renting in Toronto
  • ‘Price matters’: New online bank hopes to attract cost-conscious customers
  • What’s a good way to invest $5,000 to start an RESP for a toddler? (for Globe Unlimited subscribers)

More Carrick and money coverage

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