Personal Finance

Clear out RRSP Home Buyer Plan (HBP) early?

  • Last Updated:
  • Feb 20th, 2018 1:45 pm
[OP]
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Jan 6, 2002
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Toronto

Clear out RRSP Home Buyer Plan (HBP) early?

In 2017, I quit my job in August and took the rest of the year off, so only had 8 months of income for the year, so at a lower income bracket/marginal tax rate than I have in 2018-2019 with my new job.

I have three years 2017-2018-2018 of RRSP HBP "pay down" left, around $5G. I have also contributed enough to RRSP in 2017, that I could designate the full remaining amount to HBP instead.

Is my thinking correct, that it is to my advantage to fully eliminate the HBP in 2017, at my lower 2017 marginal tax rate, and avoid having to forego the tax benefit of my RRSP contributions in 2018 and 2019 that would need to be assigned to HPB instead of reducing my taxable income?

The net benefit is only the difference in marginal tax rates (34% vs 46%, so %12 percent of 2/15*$20,000, ie $320) so not huge. But still big enough to think it out.

But is my math right? Is my understanding of how HBP works right? I ask, because most of the things I find online say there's never any reason to pay down HBP early...
As someone long prepared for the occasion, in full command of every plan you wrecked---
Do not choose a coward's explanation, that hides behind the cause and the effect...
10 replies
Deal Fanatic
Nov 24, 2013
6214 posts
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Kingston, ON
Though HBP plays into it, I think your question essentially amounts to should you defer deducting your RRSP contribution in a low income year to a high income year, and I think the answer is yes.

In round numbers, you’d defer a 34% refund on $2,667 ($907) to get a 46% refund ($1,227). Even considering opportunity cost, that’s really good; a ~33% one year return.
Deal Fanatic
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Nov 19, 2004
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Cambridge, ON
I agree to pay it down during a low income year. That way your contributions later in a higher income year go towards a rrsp deduction.
Member
Oct 22, 2012
434 posts
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What you're reading online is correct. There is no advantage to paying down HBP or LLP early. That's because you are paying back money that you had already contributed to your RRSP and you "loaned" to yourself. There is no tax deduction associated with paying back your HBP, and it does not affect the maximum that you can contribute (and receive a tax break on) in a given taxation year.

On the other hand, if you were choosing NOT to pay it back, then you would incur taxes at your top marginal rate. In this scenario, it would be to your advantage to do so in a low income year.

Therefore, the answer to your question is that you should contribute only the designated minimum to HBP each year, unless your available funds for contributions are limited. If this is the case, then not paying pack HBP in a low-income year and designating that year's amount as income generates a lower tax bill than the higher RRSP deduction saves you in a higher income year. (Since you state that you are ahead of the game, this latter scenario probably isn't the case.)
Deal Addict
Feb 22, 2007
1979 posts
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Mississauga
i would never pay it back at once ....actually i never advise anybody to pay it back at all...

in most scenarios, you take out $25k tax free, and then if you don't pay it back you only have to include $25k/15 years $1,667 back into your income each year...and if you're income is low, it shouldn't amount to much tax.

i would DEF not pay back your full HBP this year since you are in a lower bracket, I probably would just opt out paying any back this year.
[OP]
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Jan 6, 2002
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Toronto
Mike15 wrote: Though HBP plays into it, I think your question essentially amounts to should you defer deducting your RRSP contribution in a low income year to a high income year, and I think the answer is yes.
I guess that's a better way of putting it. So I would restate:

Since I would defer my RRSP contribution to a future year at a higher tax bracket anyway, is there any benefit or downside to just putting it into the HBP paydown now, instead of deferring it, since that's basically the same thing as deferring to future (since the corresponding HBP paydown would be in the future and against the same contributions I deferred.)
As someone long prepared for the occasion, in full command of every plan you wrecked---
Do not choose a coward's explanation, that hides behind the cause and the effect...
Deal Addict
Mar 10, 2010
1443 posts
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Benefit would be longer tax free growth and compounding, downside would be ???
hoob wrote: I guess that's a better way of putting it. So I would restate:

Since I would defer my RRSP contribution to a future year at a higher tax bracket anyway, is there any benefit or downside to just putting it into the HBP paydown now, instead of deferring it, since that's basically the same thing as deferring to future (since the corresponding HBP paydown would be in the future and against the same contributions I deferred.)
Deal Fanatic
Nov 24, 2013
6214 posts
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Kingston, ON
pardnme wrote: i would never pay it back at once ....actually i never advise anybody to pay it back at all...

in most scenarios, you take out $25k tax free, and then if you don't pay it back you only have to include $25k/15 years $1,667 back into your income each year...and if you're income is low, it shouldn't amount to much tax.

i would DEF not pay back your full HBP this year since you are in a lower bracket, I probably would just opt out paying any back this year.
hoob wrote: I guess that's a better way of putting it. So I would restate:

Since I would defer my RRSP contribution to a future year at a higher tax bracket anyway, is there any benefit or downside to just putting it into the HBP paydown now, instead of deferring it, since that's basically the same thing as deferring to future (since the corresponding HBP paydown would be in the future and against the same contributions I deferred.)
I’m pretty sure it effectively works the same either way. Designate $2667 more to HBP repayment versus carrying over $2667 of undeducted contributions results in the same current year tax bill. If you defer, those undeducted contributions can be designated as HBP repayment next year and the year after.

I’m struggling to find any material difference. Doing either in your context accomplishes the goal of deferring RRSP deduction from a low income year to a higher one.
Deal Addict
Feb 22, 2007
1979 posts
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Mississauga
you cannot defer the repayment...

if you have $1,667 due each year, that is what you should be allocating as a repayment

if this year you don't allocate it...you include it in your income and pay tax on it...the following year you still have to allocate a minimum of $1,667. You cannot allocate in restrospect, but you could put down more....

but again, if you know you will have a company pension, CPP, OAS, plus other money in RRSP....taking out $25k tax free and only paying tax on $1,667 per year is an awesome way to get money out and not put it back.
Deal Fanatic
Nov 24, 2013
6214 posts
2966 upvotes
Kingston, ON
pardnme wrote: you cannot defer the repayment...

if you have $1,667 due each year, that is what you should be allocating as a repayment

if this year you don't allocate it...you include it in your income and pay tax on it...the following year you still have to allocate a minimum of $1,667. You cannot allocate in restrospect, but you could put down more....

but again, if you know you will have a company pension, CPP, OAS, plus other money in RRSP....taking out $25k tax free and only paying tax on $1,667 per year is an awesome way to get money out and not put it back.
Based on the OP's info, their required repayment for 2017 is ~$1,334, but they've made >$5,000 of RRSP contributions. OP designating the required amount is a given, they're just wondering about whether or not to designate the rest of the contributions as repayment as well to wipe out the HBP amount remaining.
Deal Addict
Feb 22, 2007
1979 posts
237 upvotes
Mississauga
$1,334 ....I was working off the assumption that it was a $25k withdrawal....missed that part of the post that he only took out 20k.

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