Cashing In Your RRSP

By Judy Hazan

To cash in or not to cash in? That is the question most first-time purchasers will ask of their Registered Retirement Savings Plan (RRSP) when the time is right to buy.

Since the Canada Customs and Revenue Agency designed the Home Buyers' Plan (HBP) in 1992, 1.3 million Canadians have withdrawn over $13 billion from their RRSPs without tax penalty. The HBP allows individuals to withdraw up to $20,000 from their RRSP to purchase a first home. If a couple is purchasing and both are eligible, both can withdraw, giving them $40,000 to put down on a home.

These withdrawals must be repaid through a series of annual payments equal to 1/15 of the amount withdrawn over a maximum period of 15 years to escape adding the repayment amount to taxable income.

According to the Canada Mortgage and Housing Corporation (CMHC), the HBP results in a net financial gain even if homeowners have to borrow to repay the RRSP or don't repay the RRSP and receive a tax penalty. In allowing households to make a tax-free withdrawal on an amount that gives them a tax credit when it is contributed, governments are implicitly granting these households an interest-free loan equal to the amount of tax to which the withdrawal should normally be subject.

As with any financial step, take an extremely close look at your own financial situation?take into account the mortgage interest rates versus the expected return of the RRSP, your age and the length of time of the mortgage or RRSP, and your income and whether you are self-employed and/or have a company pension plan.

Using funds from your RRSP through the first-time Home Buyers' Plan can be a good choice, provided you do not have any other savings available to make your down payment, says Nick Spencer, manager of wealth management for Altamira Financial Services Ltd.

"Using your RRSP can be a great way to save for your first home if you are unable to save more than your maximum RRSP contribution and buying a home is a primary financial goal of yours," he says, "the benefit being the taxes you save by making the contributions to your RRSP. This refund can be used to further help you achieve your goal of buying a home and you also get the maximum value out of your earnings, as no tax is paid on the amounts contributed to your RRSP."

However, Alice Vinkour of Simon L. Jackson Insurance Broker, believes that using RRSP funds for the purchase of a home can have its drawbacks.

"An RRSP is your retirement fund, and if for any reason you can't afford to pay the mortgage or do not have any income for a while and are forced to sell the house, you may lose the down payment which was your retirement money," she says.

According to Kurt Rosentreter, senior financial advisor with Berkshire Securities in Toronto, the Home Buyers' Plan is great for those eager to get into the housing market, but perhaps it should be a last resort rather than an automatic option for the new homebuyer.

"You are better to save money for a home deposit. Removing $20,000 from the RRSP devastates your retirement savings plan at a young age when growth is most important. If you don't repay the HBP until the full 15-year permitted limit, it can leave your retirement savings far behind your goals."

Keep in mind that using RRSP funds to purchase a home in markets where real estate values consistently increase can be a sensible decision. Experts agree that owning a home is a very important financial investment?a home can be de facto RRSP?so the consensus is yes, it is wise to use RRSP funds to finance a new home purchase if other money is not available. However, people are urged to learn the facts and repercussions of using this sheltered money to buy a house.

"I urge people to stretch a little when buying a home because it is likely to appreciate over time," says Daniel Stronach, president of Stronach Financial Group. "Unlike a car, which all too often people will stretch to finance or lease with no financial benefit down the road."

And as David D. Seemugal from Key Base Financial Group explains, with all the demands of living today, an RRSP might be the only savings that many people have.

"The Home Buyers' Plan really is a boon to people who might not otherwise be able to purchase a home," says Seemugal. "But it can be a two-edged sword.While it allows them to access their savings on a tax-free basis to buy that dream home, it is a loan, and Canada Revenue Agency is the collection agent. If that repayment of 1/15 is missed in any year, it will be added to their income and taxed in that year."

"Also, an often overlooked downside of using the HBP is that they give up the potential growth of their RRSP while it remains unpaid. That's why I encourage my clients to repay in excess of the minimum each year."

So if in the long run owning a home seems a good investment and if it takes tapping into RRSP savings to buy a home, seriously consider what the HBP can do for you. However, be aware of the pros and the cons and, as with any important financial decision, talk to an expert about your particular situation before making a choice that could compromise your financial future.