With sky-high prices in Toronto and Vancouver, saving up to buy a house is already tough enough for many Canadians. But stashing those savings into an RRSP can make your first home purchase even harder.
Canadians are justified in thinking of RRSPs as a way to save up for a down payment. There is, after all, something called the RRSP Home Buyer’s Plan (HBP), which allows first-time homebuyers to withdraw $25,000 from their RRSP, tax free.
The thing is, there are a few drawbacks to the HBP.
First, $25,000 isn’t a lot of money when you’re buying a house
The HPB cap is outdated, argues Ted Rechtshaffen, president of wealth advisory firm TriDelta Financial.
“$25,000 is kind of like a memory of when a can of Coke was 10 cents,” Rechtshaffen told Global News.
When you’re facing average home prices closing in on $1 million, as many B.C. and Ontario residents do, the maximum HBP withdrawal can feel like a drop in the bucket, even if you join forces with a spouse, partner or friend for a combined $50,000 contribution.
And if you decide to take out money in excess of the HBP cap, you’ll have to pay tax on it, warned Rechtshaffen.
WATCH: Last minute tips before the RRSP deadline
Second, you will need to repay that money
The HBP is a loan: You can take money out today to buy a house, but you will have to eventually pay back all of it to avoid penalties.
Admittedly, the government is pretty generous with its repayment schedule: You have 15 years.
And yet, a growing number of Canadians are defaulting on their HBP loans.
Failure to make RRSP repayments under the HBP program were the driver behind Statistics Canada recording a 30 per cent increase in early RRSP withdrawals between 2000 and 2013.
Taking money out of your RRSP for an HBP loan doesn’t count as an early withdrawal if you repay the funds. If you default, however, you will have to pay tax on whatever portion of the loan you didn’t pay back, just like a regular pre-retirement RRSP withdrawal.
Third, paying back your HBP loan isn’t straightforward
In order for money put into your RRSP to count as a repayment of an HBP loan, you have to designate it as such. Otherwise, the Canada Revenue Agency will consider it a regular contribution.
Many Canadians appear to be unaware of the rule, Statistics Canada noted in a recent research paper, as some individuals made RRSP contributions the same year they defaulted on their HBP loans.
If your RRSP contribution happens to be equal or greater than the HBP repayment, there are no tax consequences, as the tax refund you receive offsets the tax applied to your missed repayment. But defaulting on your HBP has always the effect of lowering your RRSP contribution room.
What to do then?
For many first-time homebuyers, a TFSA can be a better savings vehicle, said Rechtshaffen.
Sure, there isn’t a lot of room to save in a TFSA, especially after the Liberal government lowered the maximum contribution room from $10,000 to $5,500 in 2016. It will take some time to build up your savings.
Still, just like in an RRSP, if you invest your TFSA funds, your investments will grow tax free.
And once you do reach your down payment target, you’ll be able to take the money out all at once with no tax consequences and no string attached.
WATCH: Differences between RRSPs and TFSAs