I borrowed $25,000 from my RRSP to buy a house
There are generally three ways to deal with paying back the Home Buyer’s Plan.
Last year, I made the decision to use the Home Buyer’s Plan to withdraw money from my Registered Retirement Savings Plan (RRSP) for a down payment on my home in Vancouver. Now comes the difficult task of deciding what strategy to use to repay the money.
With the Home Buyer’s Plan, you can borrow up to $25,000 from your RRSP without paying tax on the withdrawal. In the second year after the withdrawal, you start paying the money back over 15 years in 15 equal annual sums.
I took out the maximum $25,000 and originally planned to pay back the money as soon as possible. But after weighing the pros and cons, I’ve decided to stick with minimum payments over the 15-year life of the loan.
There are generally three ways to deal with repaying the Home Buyer’s Plan:
1. Pay the minimum
The advantage here is that less after tax income goes into the repayment and you can keep contributing new cash each year based on your earnings. The downside is that the longer you take to repay the loan, the slower the RRSP rebuilds and and earns money tax-free.
2. Repay as fast as possible
Since you're repaying quickly, this gives you a more money to grow in the tax shelter and so over time the compounding power is greater. As well, if you pay more than the minimum in a given year, future payments will be reduced based on the remaining amount owing and the number of years left on the loan.
3. Don’t repay the loan
If you choose not to, or are unable to pay back the minimum required each year, that one-fifteenth payment will be taxed at your marginal rate for that year.
This could be an option for those who find themselves in a lower tax bracket for any number of reasons, including becoming unemployed, taking maternity leave, or returning to school. The reason being is that people in a lower tax bracket will take less of a hit when the unpaid 1/15 amount is taxed as income. Then, when their income increases, they can start making their annual minimum payments again.
There is no advantage for me to repay quickly. By repaying the minimum, I’m still receiving the tax benefit that comes with contributing to my RRSP and maintaining a balance that allows me to manage all my financial needs a little better.
What strategy would you use to pay back the Home Buyer’s Plan?
Contributor/Guest Blogger: Krystal Yee lives in Vancouver and blogs at Give Me Back My Five Bucks and Frugal Wanderer. You can reach her on Twitter (@krystalatwork)
With the Home Buyer’s Plan, you can borrow up to $25,000 from your RRSP without paying tax on the withdrawal. In the second year after the withdrawal, you start paying the money back over 15 years in 15 equal annual sums.
I took out the maximum $25,000 and originally planned to pay back the money as soon as possible. But after weighing the pros and cons, I’ve decided to stick with minimum payments over the 15-year life of the loan.
There are generally three ways to deal with repaying the Home Buyer’s Plan:
1. Pay the minimum
The advantage here is that less after tax income goes into the repayment and you can keep contributing new cash each year based on your earnings. The downside is that the longer you take to repay the loan, the slower the RRSP rebuilds and and earns money tax-free.
2. Repay as fast as possible
Since you're repaying quickly, this gives you a more money to grow in the tax shelter and so over time the compounding power is greater. As well, if you pay more than the minimum in a given year, future payments will be reduced based on the remaining amount owing and the number of years left on the loan.
3. Don’t repay the loan
If you choose not to, or are unable to pay back the minimum required each year, that one-fifteenth payment will be taxed at your marginal rate for that year.
This could be an option for those who find themselves in a lower tax bracket for any number of reasons, including becoming unemployed, taking maternity leave, or returning to school. The reason being is that people in a lower tax bracket will take less of a hit when the unpaid 1/15 amount is taxed as income. Then, when their income increases, they can start making their annual minimum payments again.
There is no advantage for me to repay quickly. By repaying the minimum, I’m still receiving the tax benefit that comes with contributing to my RRSP and maintaining a balance that allows me to manage all my financial needs a little better.
What strategy would you use to pay back the Home Buyer’s Plan?
Contributor/Guest Blogger: Krystal Yee lives in Vancouver and blogs at Give Me Back My Five Bucks and Frugal Wanderer. You can reach her on Twitter (@krystalatwork)
