Newbie looking for advice - RRSP/TFSA

Home buyer's plan is for people that already have funds in RRSP that they want to access to buy a home. No point in putting money into an RRSP that you plan on withdrawing soon.

RRSP vs. TFSA: If you expect your tax rate to be lower when you withdraw the funds then RRSP is better. If you expect your tax rate to be higher when you withdraw the funds then TFSA is better. It the tax rate is the same when the funds are withdrawn then it is a wash. The tax refund you get for RRSP contributions must be re-invested to have the future value equivalent to a non-RRSP tax-free or taxable savings vehicle.

Note if you take money from a TFSA you cannot recontribute it this year; re-contributing in the same year will result in overcontribution penalties.

If you can redeem the GICs at no penalty and invest in a HISA or new redeemable GIC that pays more that makes sense. For the $4k why not put it into a HISA TFSA, that way you will not pay tax on the interest received.

Since your plan is to purchase a home at some unspecified time in the near future, don't lock the money in, and don't buy equities.

Deepwater wrote: ↑Note if you take money from a TFSA you cannot recontribute it this year; re-contributing in the same year will result in overcontribution penalties.

To clarify, that's only if you've maxed or nearly maxed your TFSA contributions.. You can put and later remove $6,000 from your TFSA 8 times in a year if you never used up any of your contribution room, haha.

koolplay wrote: ↑to preface, i am not very knowledge and fairly new to these things.

Then I recommend you read "The Wealthy Barber Returns" by David Chilton, for an excellent introduction into personal finance. It's easy to read, has great advice on a variety of topics, and is probably available at your local library or bookstore. "Millionaire Teacher" is another good intro book, with more focus on long-term investing. Both books are strong advocates of couch-potato index investing, but don't really explain in much detail how you would actually go about acquiring such investments. "The Value of Simple" is an e-book by John Robertson that will give you step-by-step instructions on implementing a solid long-term DIY investment plan with minimal costs, and provides strategies to help you avoid the major pitfalls of a DIY approach.

currently my gic's are earning ~1% and i am thinking i should take them out and put them to good use. I am not sure if there are penalties involved if i do so.

There are almost always going to be penalties for withdrawing GICs before they mature. You'll have to check with your financial institution to determine what these are, but unless you just bought them in the past few months, it's likely going to be enough of a loss that you won't benefit from cashing them in early and re-investing in a 2% HISA.

Since i also plan to purchase my first home in the near future at some point, i was wondering if i should buy rrsp's to utilize the home buyers plan. if i do this, i think i can save on some income tax upfront? and be able to use my rrsp for buying my first home, and then invest my rrsp into...?

Yes, saving inside an RRSP and using the HBP means you can get that income tax deduction and be able to use that extra money to add to your house savings. But it's not exactly free money - you will have to pay that income tax eventually. During the 15-year re-contribution period you will be re-paying the amount you withdrew, and you don't get a second tax deduction on those repayments. Someday, when you retire and start withdrawing the RRSP funds, you will then pay income tax on it - maybe even at a higher rate than you're paying now (depends how your current income compares to your expected retirement income). It's better to look at the HBP as an interest-free loan, rather than free money. The loan amount is equivalent to the amount of tax refund you get that results from the RRSP contributions. The main benefit of such a loan is that you can increase your down-payment on the house, which means you might be able to hit the 10%, 15%, or 20% down-payment ratio cut-offs and thus pay less (or zero in the case of 20%) CMHC insurance, saving you thousands of dollars. Unfortunately, many people just use the extra down-payment to justify buying a bigger house, and thus don't get any reduction in CMHC - not to mention ending up with bigger mortgage payments that they struggle to pay. This is further compounded by the fact that if you use the HBP to withdraw from your RRSP, you MUST PAY BACK AT LEAST 1/15th OF THE WITHDRAWN AMOUNT EVERY YEAR. Thus someone who borrowed the full $25,000 from their RRSP would have to repay $139 per month for the next 15 years! Add that to a mortgage that you can barely afford to pay, and you end up descending into a nasty spiral of debt.

So while the HBP is a great program and can potentially save you thousands, just be careful you don't use the extra to justify a bigger house. And always calculate your house affordability based on what you can afford in terms of the projected mortgage payments (with a healthy margin to account for increasing interest rates). The banks will always approve you for a lot more than you should actually buy, so even if they say "sure, we'll lend you $500,000", that doesn't mean you can actually afford that much!

even though i know i have to pay it back within 15 years, i can just start paying it back 10 years down the line right?

Nope. As mentioned above, you have to repay at least 1/15th of it every year for 15 years, beginning in the year after the house purchase. Failure to repay the minimum amount will result in income tax being charged on the amount that was due to be repaid - as if you had withdrawn from the RRSP. And if this happens, you don't get the RRSP room back again, it's gone forever (not a big deal if you will never max it out). Going back to the loan analogy, it's like the bank calling the loan early if you're unable to make your regular payments.

my question is, whats my best option? save my money in rrsp's to reduce income taxes, or save my money in tfsa's since i dont even have near enough money to max it out atm. or is there something else?

If the HBP sounds like a good option for you, then save in an RRSP, but make sure it's a guaranteed investment, like a savings account or short-term GIC. You don't want to risk your house savings in the stock markets for such a short investment timeframe. AcceleRate Financial offers a RSP savings account with a rate of 1.8%, which while not quite as high as the 2% TFSA you can get with People's Trust, the tax deferral benefit you get from using the HBP will probably be worth more than that 0.2% difference.

I suggest you take it one step at a time. december is a good time for withdrawing from your tfsa, as you will learn. If you have redeemable gics from rbc, the fist step is to check the details & conditions. If you post them here, you will get some advice. For now, forget about RRSP & HBP. You have until the end of February in any case, to make any decisions on those.

Check the other forums here (or perhaps someone will chime in) about who is offering bonuses for new online accounts, payroll deposits, etc. Those bonuses are worth more than an increase on your savings rate. Then in the future, you will be able to move money efficiently.

Deepwater wrote: ↑Home buyer's plan is for people that already have funds in RRSP that they want to access to buy a home. No point in putting money into an RRSP that you plan on withdrawing soon.

What? There's a very big reason why you would put money into an RRSP that you plan on withdrawing immediately* - the massive tax break you get from making an RRSP contribution.

A $25,000 RRSP contribution would personally net me about $8,000 back come tax time. That's a pretty big reason to use it. If it can help you push to a 20% down payment, you can avoid CMHC fees too!




*By withdraw immediately, I'm assuming you're leaving the money in your RRSP for at least the minimum 90 days required by the HBP.

Deepwater wrote: ↑Home buyer's plan is for people that already have funds in RRSP that they want to access to buy a home. No point in putting money into an RRSP that you plan on withdrawing soon.

why would you give this advice?

put money in rrsp now > save income tax on that money = get a [bigger] tax refund by reducing his overall taxable income
use HBP to pull out up to $25k down the road
in the end, he would gain the tax refund money which he could use/invest however he wants

ELiTE KiLLaH wrote: ↑why would you give this advice?

put money in rrsp now > save income tax on that money = get a [bigger] tax refund by reducing his overall taxable income
use HBP to pull out up to $25k down the road
in the end, he would gain the tax refund money which he could use/invest however he wants

Technically it's not a "gain," just a timing shift. For the following figures, I'm just going to use a rounded 30% marginal tax rate:

1. Contribute $25k in "2015" (includes first 60 days of 2016)
2. Get $7,500 marginal refund when tax return is filed.
3. You have $25k in RRSP and $7.5k cash
4. Wait 90 days
5. Withdraw $25k for HBP, use $32.5k for down payment
6a. Recontribute the $25k over 15 years
7a. Eventually pay the marginal tax rate on the $25k (plus any growth) when you eventually take out the RRSP (the $7,500 plus inflation, unless brackets change like'16 or you end up in a different one)
or
6b. Pay 1/15th x $25k x your marginal rate each year as tax for 15 years. Again, unless your rate changes, this equals the $7,500

Mind you $7,500 today is very useful to a first time homebuyer, even if it has to be paid back eventually. That alone can save over a thousand in CMHC fees if you're, say, borderline to 10%, 15%, or 20% down (as the premium is tiered). There's ongoing interest savings from the higher down too. So those are potential "gains" right there, on top of the potential gain from contributing at, say, 31.15% refund and paying back at 29.65% marginal.

There's very few situations where taking what amounts to an interest-free loan from yourself against your RRSP isn't to your benefit; mainly if you're going to be in a higher bracket before you can pay it all back.

thanks for all the info guys.

im not making 80k/yr or whatever nor do i have significant savings, im just basically starting but have some short term goals i want to reach first. its unlikely ill be purchasing any home over $400k; probably in the 250-300k range - i dont live in toronto lol.

i kind of understand the idea behind the rrsp in that i will have to pay it back later; im basically getting my money upfront - which is what im aiming for, as i think i will be more comfortable paying it all back later on. this way itll be better in making my first house purchase. so ill contribute to a savings/short term rrsp; another question is, if i contribute $25k to an rrsp at a certain financial institution, and then i take it out for my HBP, when i recontribute, does it have to be at the same institution? or is it as long as i am contributing 1/15 per year to any rrsp, anywhere?

koolplay wrote: ↑thanks for all the info guys.

im not making 80k/yr or whatever nor do i have significant savings, im just basically starting but have some short term goals i want to reach first. its unlikely ill be purchasing any home over $400k; probably in the 250-300k range - i dont live in toronto lol.

i kind of understand the idea behind the rrsp in that i will have to pay it back later; im basically getting my money upfront - which is what im aiming for, as i think i will be more comfortable paying it all back later on. this way itll be better in making my first house purchase. so ill contribute to a savings/short term rrsp; another question is, if i contribute $25k to an rrsp at a certain financial institution, and then i take it out for my HBP, when i recontribute, does it have to be at the same institution? or is it as long as i am contributing 1/15 per year to any rrsp, anywhere?

your HBP is based on your RRSP account. Where you choose to host that account, is your choice.

of note, most places have a fee to transfer the account to another place ($100-150 i think)

Can we use home buyer plan to withdraw money from company's RRSP plan that includes both my and my employers contribution?

saadt1988 wrote: ↑Can we use home buyer plan to withdraw money from company's RRSP plan that includes both my and my employers contribution?

Yes. Legally anything in your RRSP is your money, even if the employer originally contributed part of what's in there. Other plans like DPSP and DCPP are what a company has to use if they want to truly lock it in and restrict access.

koolplay wrote: ↑to preface, i am not very knowledge and fairly new to these things.

in my current situation, i have about $6000 in my TFSA in rather low interest redeemable gic's with RBC as i have some plan to use them within the next year or two. I also have about $4000 just sitting my bank atm and not sure what to do with it. I have recently obtained a new job and am starting to actually make money and just starting to save and want to know how best to use/save my money. I am planning to get married/get our own place to live within the next year or two so want to save the best i can.

currently my gic's are earning ~1% and i am thinking i should take them out and put them to good use. I am not sure if there are penalties involved if i do so. I have seen 2% TFSA high interest savings accounts. since i also plan to purchase my first home in the near future at some point, i was wondering if i should buy rrsp's to utilize the home buyers plan. if i do this, i think i can save on some income tax upfront? and be able to use my rrsp for buying my first home, and then invest my rrsp into...?
even though i know i have to pay it back within 15 years, i can just start paying it back 10 years down the line right?

my question is, whats my best option? save my money in rrsp's to reduce income taxes, or save my money in tfsa's since i dont even have near enough money to max it out atm. or is there something else?

Stick it into the TFSA since you aren't paying tax on what you take out. Any 'free' money' you get from an RRSP is just your own money being refunded to you, not fresh money.