Question from Globe reader Clare: My partner and I want to buy our first home, a two-bedroom condo in Toronto. Ideally, our max is $650,000. Two-bedroom condos we like are going between $650,000 and $730,000; maintenance fees depend on the footage but for a two-bedroom you can expect to pay $700 a month. We’re hoping the condo market will take a hit by spring so we want to be ready to purchase if we find a good deal. Our projected income for 2021 is $145,000.
We have $80,000 in personal savings and an interest-free loan (from a family member), and we think we can save another $15,000 by March. That would leave us with $95,000 in total.
We’re hoping to make the best use of our RRSP but we’re not sure the steps we need to follow. Can you help?
Answer from Shannon Lee Simmons, a financial planner and founder of The New School of Finance in Toronto: Getting ready to buy your first home is a big deal. There’s a lot of good stuff going on here. Whenever anyone is about to purchase their first home, here are seven things to keep in mind when using the RRSP strategically.
As a recap, the First Time Home Buyers' Plan (HBP) is a program that allows you to contribute (aka save) up to $35,000 into your registered retirement savings plan (RRSP) and then borrow back interest free up to $35,000 to put toward the purchase of your first home.
1. Get your timing right. The money earmarked for your down payment needs to be in your RRSP at least 90 days before you take it out. So get that money in there. Ensure that your mortgage broker, realtor and financial institution also know that you’ll be taking advantage of the program.
2. Keep in mind that any savings in the RRSP above $35,000 cannot be withdrawn for the first time Home Buyers' Plan. So, if you already have $50,000 in there, stop any new contributions that are earmarked for the down payment. You can only use $35,000 so the other $15,000 left in there will be for retirement.
3. You can both use the program if you both qualify as first time home buyers. So, that’s $35,000 from your RRSP and $35,000 from your partner’s. Which means you would have $70,000.
4. Use the refund strategically. The best part about the HBP is that the money you put into your RRSPs still counts as a normal contribution and therefore lowers your taxes owing. This could create a massive refund for you. Let’s say that you both have at least $35,000 of contribution room in each of your RRSPs. If we also assume that you don’t have any money in your RRSPs currently and a marginal tax rate of 25 per cent for you both. If you each took $35,000 of the $80,000 you have saved outside of your RRSPs and put it into your RRSP 90 days before you needed it, you would each lower your taxes by approximately $8,750 (25 per cent of $35,000). Which, if you’re both employees who pay taxes on your paycheques, could result in a refund of $8,750 each for a total of $17,500 next spring. Perhaps, just in time for your closing. Who wouldn’t want a $17,500 bonus right when they purchase their first home? This could be used to help with moving costs, closing costs and any other unforeseen costs of buying. In order to do this, you’ll need to put the money into your RRSP before the end of the 2021 RRSP season (the first 60 days of 2021).
5. Check your contribution room with the Canada Revenue Agency. You should both have a CRA My Account for Individuals. This will be helpful in gathering documents for your mortgage preapproval but also will allow you to check your RRSP contribution room to ensure you have the space to proceed.
6. Make sure the money in your RRSP is not invested. Any money that you need within six to 12 months should not be invested. All investments, be it stocks, bonds, mutual funds, exchange-traded funds – whatever, have market volatility. They go up, they go down. That’s normal. For your long-term retirement savings, you don’t need to worry about volatility as much because you have time to let things bounce back and grow. With a six-month time horizon, you don’t have that luxury. You can still keep your down payment in the RRSP but you should consider saving it in a high interest, cash-like product within the account so it has no volatility risk whatsoever. I would hate for your down payment to be in a loss position when you need to sell it to close the deal on your condo.
7. Come up with a plan to pay it back. Once you’ve withdrawn from the program, you’ll get a tax notice that you’ll give to your accountant. It will be submitted on your taxes the year you withdrew the money. From then on, your Notice of Assessment and CRA My Account will track how much you took out, how much you’ve paid back and how much you owe year to year.
You do have to pay back the RRSP over 15 years. Here’s how that works:
Your repayment period starts two years after you withdraw the money. For example, if you withdraw in 2021, then your first repayment will be for 2023. You take the amount you borrowed and divide it by 15 years. $35,000 divided by 15 years equals $2,333 per year will be due. You pay this back by simply putting $2,333 into your RRSP each year. At tax time, you or your tax preparer will specify that the money you put into your RRSP was to repay your HBP.
If you put $5,000 into your RRSP, at tax time, you could specify that only $2,333 is to repay HBP and the rest of your $5,000 contribution ($2,667) is a regular contribution and therefore helps to lower your tax bill.
If you don’t put any money into your RRSP, $2,333 will be added to your income and you’ll pay tax on it in that year. For example, if your income is $70,000, you’ll now pay tax on $72,333. If your tax rate was 25 per cent, you’d owe $583.25 extra at tax time because you didn’t repay the HBP that year.
Hope this helps, good luck.
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