Saving for education, paying off student loans or buying a home often have higher priorities for younger people than contributing to an RRSP.
But the Home Buyers Plan can provide options for anyone saving for retirement but in need of investing in more immediate priorities - especially with the increasing price of real estate.
With the Home Buyers Plan, younger people who begin contributing to an RRSP may not even own a house yet. Does it make sense to contribute to an RRSP if you think you will need to keep funds liquid to buy a home?
In some cases the answer is yes, especially if a person is earning good income.
The HBP allows participants to withdraw up to $20,000 in a calendar year from an RRSP to buy or build a qualifying home. Couples may each utilize the HBP (combined maximum of $40,000). The plan may be suitable for any first-time home buyers who are buying a home and may need additional funds to pay for a down payment or reduce financing costs. A larger down payment may eliminate the costs to insure the mortgage.
The Home Buyers plan is open only to first-time buyers.
You may not be considered a first-time home buyer if, at any time during the period beginning January 1 of the fourth year before the year of withdrawal and ending 31 days before the withdrawal, you or your spouse or common-law partner owned a home that you occupied as your principal place of residence.
Participants in these plans should understand that withdrawals need to be repaid or have the amount included as taxable income.
The first repayment is due the second year following the year in which a withdrawal is made. Each year, Canada Revenue Agency will send you a Notice of Assessment with a statement include including: amount repaid (including any additional payments), HBP balance, and the amount of the next repayment to make.
Participants have up to 15 years to repay the amount that is withdrawn.
Generally, each year the repayment amount is approximately 1/15 of the total amount withdrawn until the full amount is repaid to your RRSPs. For example, if Bill withdrew $15,000 from his RRSP in September 2007, he must pay at least 1/15th (or $1,000) of the withdrawal in 2009 (or the first 60 days of 2010).
Withdrawals from an RRSP account are generally considered taxable income.
Financial institutions are required to withhold the following tax on RRSP withdrawals: 10 per cent on the first $5,000, 20 per cent between $5,001 and $15,000, and 30 per cent on amounts greater than $15,000.
Exceptions to this rule are if you give the financial institution a signed form T1036 (HBP) or RC96 (LLP).
These forms allow a financial institution to release the full amount of funds to you without withholding tax.
Both plans require participants to file a completed Schedule 7 with their income tax return to designate the contributions as either a LLP or HBP repayment.
Failure to complete this schedule may result in CRA including the required repayment as income and assessing your tax return accordingly. The repayment may be done to an existing RRSP account or to a new one. The RRSP issuer should give the participant an official receipt for the contribution.
Liquidity is a very important component to consider if you are looking at participating in one these plans. Cash has to be available within the RRSP account.
Some investments that may be purchased within an RRSP are illiquid or require fees for selling early.
Before you pay your tuition or buy a home you may want to consider all of your funding options.
Care should be taken to understand all important dates and exceptions that are specific to both plans.
Prior to considering these plans you should read the CRA guides RC4135 (HBP) and RC4112 (LLP) available in both printed versions and online.
-- Keith Greenard CIM FCSI and Kevin Greenard CA FMA CFP are members of The Greenard Group at ScotiaMcLeod in Victoria.
Victoria Times Colonist
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