It’s not easy to save for a home when you’re already paying for everyday expenses and taxes. With housing prices rising quickly, it can feel like a rat race trying to save enough to purchase your first home. Fortunately, there are a few tax strategies that will help you get there – the same type of strategies the rich use to save money, buy property fast, and create investment portfolios that build wealth quickly.
There are strategic ways to use the RRSP- registered retirement savings plan – to pay less tax today and help you build wealth faster. Here are just a few ways it can be done:
Pay less tax and save more money
Your RRSP can help you keep more money to put toward your down payment.
Taxes in Canada can put a serious dent in your earnings. In Ontario, all income that is earned under $44,000 is taxed around 20 percent, and the highest tax bracket starts at $220,000 and is taxed at 53 percent. Fortunately, you can reduce your taxable income and keep more of your money by making an RRSP contribution.
For example, If you were to earn $60,000 in income and put $10,000 into your RRSP you would only pay taxes on the $50,000 for that year. The $10,000 would be tax-sheltered in the RRSP and you would not pay income tax on that money until you take it out of the registered retirement plan.
You would also receive a tax refund which directly equates to the tax bracket you are in.
Every $100 contributed to an RRSP by someone who earned less than $44,000 would bring in a tax refund of about $20, and every $100 contributed on income over $220,000 would reap a refund of $53.
This is an excellent way for those who are in a higher tax bracket to pay less tax each year until they are in a lower tax bracket in retirement. You can further maximize this strategy by moving any money you have saved for your down payment into your RRSP so that you can generate a refund and utilize the HBP to put towards your downpayment on your first home. We’ll explain this in more detail next.
Fuel your down payment with the HBP and refund
One way to buy a home sooner is to use your RRSP contributions and refunds.
Let’s say that you want to buy a property that costs $500,000 and the minimum down payment is $25,000. With anticipated closing costs of approximately $5,000, you’d need a total of $30,000 to buy the property. The problem is you only have $20,000 saved for a down payment. Coming up with that extra $10,000 to purchase the property seems like it would be next to impossible – or is it?
If you moved the $20,000 you have already saved into an RRSP account, and, assuming you are in the 50% marginal tax bracket, you will receive an income tax refund of $10,000 once your tax return has been filed. Provided the purchase date is 90 days after the RRSP contribution has been made, you can use the $20,000 in your RRSP towards your downpayment by utilizing the Home Buyers Plan – HBP. You can also add the $10,000 from your refund to buy the property. In other words, you can buy the property now!
How does this work?
The HBP – Home Buyers Plan allows first-time homebuyers who qualify to use up to $35,000 of their RRSP towards the down payment of the home. By using your RRSP, you would be required to pay it back over a 15-year period by making installments starting on the second year from when you pulled the money.
When you make a contribution to your RRSP, you also are eligible for a tax refund which directly equates to the tax bracket you are in. So for every $100 contributed to an RRSP by someone who earned less than $44,000 would obtain a tax refund of about $20, and every $100 contributed on income over $220,000 would reap a refund of $53.
Combine the HBP allowance with the refund you receive and you’ll be on your way to homeownership sooner than you think.
Maximize RRSP contributions to avoid mortgage default insurance
Use an RRSP strategy to avoid paying the mortgage default insurance that increases your monthly payments.
If you have less than a 20% down payment saved, you will be required to insure the property and pay the mortgage default insurance – adding tens of thousands of dollars to your monthly mortgage payments. In some cases, saving up the extra amount to avoid insurance can be beneficial, it all depends on the interest rate and term. Fortunately, you have a mortgage agent who can run the numbers to determine if it’s better to save up the extra amount or pay for the insurance. And if you’re close to the 20% mark and need an extra boost, you can use the RRSP strategy mentioned above to combine the HBP with a refund to get you there.
Ready to explore your options? Now’s the time to start working on your RRSP strategy so that you will have time to make any contributions to add to your down payment before the contribution deadline for 2021. We always recommend speaking with a professional accountant regarding your taxes, but you can always talk to me about utilizing your RRSP to fuel your down payment. Contact me today!