RRSP: To contribute or not to contribute?

The RRSP contribution deadline is looming and I’ve gotten quite a few calls and emails over the last couple of days from people scrambling to make a last minute decision on whether or not to max out their RRSP, because they expect to be buying a home soon.  As I’ve outlined in other posts, the Home Buyers’ Plan can be a boon to first-time homebuyers who have money sitting in an RRSP.

There are lots of benefits to contributing to your RRSP.  The most important of these, from a first-time homebuyer perspective:

RRSP and First-time Homebuyer Benefit # 1:

Contributing enables you to reduce your tax payable and potentially receive a nice tax refund. Any refund can be added to your down payment savings, or you can pay down debt to enable you to more comfortably qualify for your mortgage.

Benefit # 2:

You increase your down payment.  If both you and your spouse are first-time homebuyers (under the HBP, that’s anyone who hasn’t owned a home in the last 5 years), then you can each withdraw up to $60,000 out of your RRSPs to use toward your down payment.  That $120,000 can make a big difference to your homebuying picture.

What if only one partner has contributed to the RRSP?

What if your significant other doesn’t have enough money in their RRSP to withdraw the entire $60,000?   If one of you makes substantially more income than the other, and you expect this to continue for the foreseeable future, consider a spousal RRSP contribution.  The person contributing to the RRSP gets the tax deduction, but the person who will eventually benefit from the RRSP – the spouse – is the one who can withdraw it.  What this means to you is that you can withdraw $60,000 from your own RRSP and your spouse can withdraw $60,000 from the spousal RRSP.  Talk to a good financial planner to see if this would be a smart strategy for you.

Already have more than $60,000 in your RRSP?

If you and your spouse already have more than $60,000 in each of your RRSPs, you may want to consider skipping your RRSP contribution this year.  Putting your down payment funds into a First Home Savings Account, Tax Free Savings account, GICs, or just a regular bank account, may make more sense, because once the money is in your RRSP, you can’t take more than $60,000 out for your home purchase without being taxed on that excess amount. Instead, your unused RRSP contribution room will build up and you’ll be able to to catch up on contributions in future years.

Keep an eye on your timing

Just a reminder that if you’re planning to buy in the next three months, you have to time any RRSP withdrawal carefully.  The money needs to have been sitting in your RRSP for at least 90 days in order for you to be able to use it for the Home Buyer Plan.

Want to learn more?

For more details on how the Home Buyer Plan works, jump over to my post here.

To get the details on how spousal RRSPs work, check out the official link here.

To see my post on other government programs available to first-time homebuyers, click here.

And to see my latest posts related to down payment tips and ideas, get the list here.

Of course, I’m always happy to hear from you as well, if you’d like to discuss your plans.

Image credit: [c] Decha Huayyai for vecteezy.com