RRSP Season – Strategies To Buy A Home By Spring

Did you know that you can use your RRSP to help fuel your down payment?

In this article, we’ll show you how to use your RRSP and tax refund to boost your down payment and the steps you’ll take to purchase a new home this spring. We’ll also provide you with some tips for shaving years off your Home Buyers Plan (HBP) payments and a helpful case study so you can see how an RRSP strategy has helped other clients like yourself buy a home sooner.

Timeline To Buy A Home By Spring

February 2023 – Make Your RRSP Contribution Before The March 1st Deadline

• Talk to your accountant about how much room you have to contribute to your RRSP. (The Home Buyers Plan (HBP) will allow you to use $35,000 of your RRSP)
• Make a contribution to top up your RRSP amount.

Sweet tip: You can apply for a personal loan, deposit those funds into the RRSP, and after 90 days use it for the HBP. You can then use the refund to help pay back the loan or create a repayment strategy that is within your budget.

March/April 2023 – File Your Taxes To Obtain The Return

• Claim the RRSP contribution amount on your tax return to apply for the refund.
• Receive the tax refund and put this directly in your savings account.

May 2023 – Put In An Offer and Apply For The Home Buyers Plan

• Talk to your Pineapple mortgage broker about applying for the HBP
• Get a mortgage pre-approval and rate lock so you can start shopping for homes
• Put in an offer and get your mortgage approved
• After 90 days have passed since your last contribution, withdraw the amount.
• Download this form “Home Buyers Plan – Request to Withdraw Funds from an RRSP” fill out Area 1 and send it to your RRSP issuer. The issuer must fill out Area 2.
• Once the RRSP issuer has withdrawn the money into your bank account, keep this money here and avoid moving it around to different accounts.

Sweet tip: Waiting 90 days ensures you can use all of the money you contributed in February because certain HBP rules limit the deduction of contributions made during the 89-day period before you withdrew and you may not be able to deduct part or all of that contribution made during that period.

June 2023 – Close The Sale

• Download the bank statement with the HBP funds and the remaining savings and upload it to the Pineapple document collection portal
• Finalize the conditions with the mortgage lender, close the sale, and move into your new home.

July 2023 – Start Saving

• Calculate the HBP repayment amount that you will be required to make starting on the second calendar year from the initial withdrawal by dividing the amount you withdrew by 15.
  For example: If you withdrew the full $35,000, you will be required to pay back $2333.33, starting in 2025.

Sweet tip: Get ahead of the game by putting away an extra $200/month starting today. This strategy will help you significantly reduce the HBP payment amount and help you to shave off a number of years.

Repayment Plan That Will Shave Years Off Your Payments

April 2023 – Start Reporting Your Repayments On Your Income Tax Return

• The CRA will send you an annual statement of your HBP account with the remaining balance and annual payment due. You will need to report the repayments on your annual T1 General Income Tax and Benefit Return even if you are not starting your repayment schedule until the second year.
• First-year – fill out Part E of Schedule 7 – this is for new withdrawals from your RRSP under the HBP. Remember to tick the box that corresponds to the “T4RSP” slip you received for the withdrawals.
• Second-year and every year thereafter – fill out Part B of Schedule 7

Sweet tip: It’s up to you to report what portion of your annual RRSP deposits will go to the HBP repayment. Do not include any RRSP contributions designated as an HBP repayment on line 20800 or line 12900 of your income tax and benefit return. 

July 2024 – Start Making RRSP Payments

• If you followed our strategy to put money away each month leading up to the repayment schedule, you’ll now have a lump sum payment of $4800 (the amount you have saved up over the past 2 years). Deposit this amount into the HBP. This amount combined with the monthly payment of $194.44, will reduce the monthly payment you will make to $165.87 in the second year.

Forget To Make A Payment?

If you forget a payment you will take a tax hit on the HBP payment amount you missed. This can result in you having to pay hundreds of more dollars that year in taxes and you still end up owning the payment you missed. To avoid this from happening, set up a prepayment plan in advance.

If you happen to miss a payment, follow these steps:

• Subtract the amount you paid from the amount required. For example, if you only made $1,500 worth of payments and you owed $2,333.33, you would need to claim $833.33
• Report this amount on line 129 of your income tax return. 
• Based on your tax bracket at this time, you will then pay tax on this amount.

Sweet tip: Any HBP repayments are not considered contributions and will not affect your annual contribution room, nor will they be eligible for tax deductions in April. So don’t forget to keep making regular contributions as well.

Case Study – See The Strategy In Action

Olivia was finally ready to buy a condo in her price range of $500,000 and had just saved up enough to put down 5% at $25,000.

But after speaking with her Pineapple Mortgage Broker she realized she was going to short the estimated closing costs of $7,500. Her broker let her know that she could easily make up that extra amount by utilizing her RRSPs before the deadline.

Using HBP And RRSP Refund To Bridge The Gap

Olivia quickly moved $20,000 from her savings into her RRSP account in February, right before the deadline. Because she was in a marginal tax bracket of 43%, she received an income tax refund of $8,600 in April, soon after she filed her taxes in March.

In order to use the full contribution amount of $20,000, she would need to wait 90 days after the contribution date before she could withdraw it. In the meantime, her mortgage broker helped her time the purchase and Olivia put an offer on her dream condo in May, with a closing date in June.

Once the 90 days had passed, she filled out the forms, sent these into her lending institution and then withdrew the $20,000 to be used toward her down payment. Olivia was also able to add the $5,000 remaining in her savings account to her down payment, and had the extra $8,600 from the refund used to cover her closing costs.

Shaving Five Years Off The Repayment Plan!

After Olivia moved in, she immediately started putting away $100 per month to cover the RRSP repayment amounts that would be starting two years later.

The $20,000 HBP contribution would require a payment of $1,333 per year, equating to $111 per month. But because Olivia was already putting $100 away each month, when her first payment date came around, she was able to make a lump sum payment to reduce the $20,000 she owed to $17,600.

Playing it smart helped Olivia reduce her monthly payment in the second year to only $96.83 – a small amount that she would further decline yearly. And after reviewing her current finances, Olivia realized she had an extra $300 each month that she could put towards investments or savings. So Olivia decided to make an additional $100 repayment to her HBP each month and put the remaining $200 into her RRSP as a regular contribution.

Instead of taking 15 years for Olivia to pay back her HBP amount, she did so in just ten years. Plus, she managed to put away $2400 per year into her regular RRSP and reinvest an extra $720 in annual refunds – allowing her to jump-start her retirement.

Ready To Get Started?

A Pineapple Mortgage Broker can help you put an RRSP strategy in place that will get you into homeownership sooner than planned so you can start building up equity and growing your nest egg today.

Let’s get you into the spring market. Contact us today!