RRSP for downpayment

So I was under the impression that I could use my RRSPs as a condo downpayment (while deferring my taxes lol), so I've been maxing out the contribution limit for the last 3 years. Now I'm reading that the home buyers plan only allows me to withdraw $25K per year from it for my first home. Yet the TD mortgage calculator adds whatever amount I enter under RRSP to the downpayment calculation. When the condo market tanks, I expect to plop $100K on a downpayment with most of it coming from my RRSPs, is that still possible?

^^Yes, that's that I read, real helpful lol. So should I stop putting funds into my rrsps to keep more liquid cash? I'm more interested in getting in the market asap than saving up, as I have a 50 year career ahead of me lol.

gentlepuppies said:

So I was under the impression that I could use my RRSPs as a condo downpayment (while deferring my taxes lol), so I've been maxing out the contribution limit for the last 3 years. Now I'm reading that the home buyers plan only allows me to withdraw $25K per year from it for my first home. Yet the TD mortgage calculator adds whatever amount I enter under RRSP to the downpayment calculation. When the condo market tanks, I expect to plop $100K on a downpayment with most of it coming from my RRSPs, is that still possible?

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no, as a first time home buyer the maximum amount you are able to withdraw is $25,000. So, it's not a yearly amount you're able to withdraw.. It's the TOTAL amount. And once you withdraw from the HBP you're unable to again unless you don't live and own a principle residence for a set number of years.

if you purchase property with another first time homebuyer, then you both can put towards a maximum $50,000 (25k from you, 25k from him/her) towards the property.

Oh crap. Time to stop the RRSP payments... I'm way over $25K already. I'm quite annoyed that the guy at the bank never told me this, as I told him that the sole purpose of my RRSP at this time is to defer taxes to get the biggest downpayment possible in the shortest amount of time.

Dont forget though, if you take money out of your RRSP for a down payment you have to put it back.

gentlepuppies said:

Oh crap. Time to stop the RRSP payments... I'm way over $25K already. I'm quite annoyed that the guy at the bank never told me this, as I told him that the sole purpose of my RRSP at this time is to defer taxes to get the biggest downpayment possible in the shortest amount of time.

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To be clear, you can take more money out of your RRSP if you like, you just have to pay income tax on it. You can withdraw any or all money you deposit to an RSP at any time you choose, but when you take money out the bank will withhold taxes. The taxes are at various rates depending how much you take out. The final tax rate is determined when you file a tax return the following year, and may be higher, or lower than what the bank withheld and sent to CRA on the date of your withdrawal.

For example, a non-HBP withdrawal of $5,000 will incur a 10% withholding tax, so you net $4,500. Then, after the end of the year of the withdrawal, you will get a tax slip noting that 10% tax was paid on that income. If you are employed full-time, you will likely have to pay additional taxes, but, again, not until you actually file your tax return, which is due April 30.

As an example, let's say you take $5,000 out of an RRSP today, and net $4,500 after withholding taxes. Also, let's say your marginal tax rate is 20%. This means you will owe the CRA an additional $500 in taxes. However you won't have to declare and pay that tax until April 2016.

I don't get why people use RRSP's for down-payments. It defeats the purpose of it. The purpose of an RRSP is to defer taxes payable and allow tax-free growth of liquid assets so that when you do take it out, you are in a lower tax than when you put the money in. For all other scenarios, RRSP is a loss or even's out. Investing in RRSP for a down-payment means that most likely you are sticking that money into a low paying GIC or worse keeping it in cash (low risk). When you with-draw you need to pay that amount back over 15 years. If you are taking it out in your 20's, that means it's very likely your income level will be rising over the this time. Means that stuffing RRSP now wont generate the largest tax deferred benefit since most people start in a lower bracket in their early career. I read a recent article that something like 80% of people who borrow from their RRSP using HBP do NOT repay the amounts over the 15 years because they are house poor and as a result, they have to declare that money as extra income each year. Meaning more taxes are paid since most likely the income level is higher.

In my view, if you want to save for a down-payment, open an unregistered high interest savings account with Tangerine or Oaken Financial or a TFSA and use that for your down-payment. For un-registered accounts, the amount of tax you pay on the growth is minimal since interest rates are low so growth will not be much. If you invest in Canadian dividends you get a tax break, and if you invest in stocks/funds, capital gains are taxed at 50% of your marginal rate. To me, the RRSP should be kept long-term until you retire, so that when you with-draw, you pay less than you would have paid when you put money into the RRSP. Maxing our your RRSP limit in your 20's is not ideal, since you are not likely to be in the high tax bracket. It's best to max out RRSP when you are in the top tax brackets, and then withdraw when income is low due to retirement, or a leave of absence, maternity/paternity leave. That way you maximize the tax savings.

Jonny5 said:

To be clear, you can take more money out of your RRSP if you like, you just have to pay income tax on it. You can withdraw any or all money you deposit to an RSP at any time you choose, but when you take money out the bank will withhold taxes. The taxes are at various rates depending how much you take out. The final tax rate is determined when you file a tax return the following year, and may be higher, or lower than what the bank withheld and sent to CRA on the date of your withdrawal.

For example, a non-HBP withdrawal of $5,000 will incur a 10% withholding tax, so you net $4,500. Then, after the end of the year of the withdrawal, you will get a tax slip noting that 10% tax was paid on that income. If you are employed full-time, you will likely have to pay additional taxes, but, again, not until you actually file your tax return, which is due April 30.

As an example, let's say you take $5,000 out of an RRSP today, and net $4,500 after withholding taxes. Also, let's say your marginal tax rate is 20%. This means you will owe the CRA an additional $500 in taxes. However you won't have to declare and pay that tax until April 2016.

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^^Everything you say makes sense, but when I run the numbers, it doesn't seem to add up (am I doing something wrong?):

Option 1: always max out RRSP
Option 2: no RRSP until year 5-8

Year 1
Option 1: $65K - RRSP $11700 = $53300 = $9722 tax
Option 2: $65K = $13367 tax ($3645 more)

Year 2
Option 1: $70K - RRSP $12600 = $57400 = $10999 tax
Option 2: $70K = $14924 tax ($3925more)

Year 3
Option 1: $80K - RRSP $14400 = $65600 = $13554 tax
Option 2: $80K = $18210 tax ($4656 more)

Year 4
Option 1: $90K - RRSP $16200 = $73800 = $16116 tax
Option 2: $90K = $22099 tax ($5983 more)

Year 5
Option 1: $100K - RRSP $18000 = $82000 = $18912 tax
Option 2: $100K - $18000 - $16200 = $65800 = $13616 tax ($5296 LESS)

Year 6
Option 1: $100K - RRSP $18000 = $82000 = $18912 tax
Option 2: $100K - $18000 - $14400 = $67600 = $14117 tax ($4795 LESS)

Year 7
Option 1: $100K - RRSP $18000 = $82000 = $18912 tax
Option 2: $100K - $18000 - $12600 = $69400 = $14737 tax ($4175 LESS)

Year 8
Option 1: $100K - RRSP $18000 = $82000 = $18912 tax
Option 2: $100K - $18000 - $11700 = $70300 = $15018 tax ($3894 LESS)

Option 1 total tax = $126039
Option 2 total tax = $126088

**tax based on http://incometax.calculatorscanada.ca/ontario

Granted, I'll be earning interest earlier with Option 1, but why didn't I save on taxes (in fact paid slightly more) with Option 2??

Your calculation is not framed correctly. You are comparing whether it makes sense to max out every year for 8 years vs no investment until 5-8 years and then max out. The savings with option 2 are only evident when you take out the RRSP when you are earning a lower income. Plus, you are not taking into account the extra room you build years 1-4. During years 5-8 you would have ability to invest more than you are stating due to carry over room. So if you recalculate, option 2 will come out ahead. Also, why does your income growth stop after year 5? If it kept rising then your RRSP would be of a better benefit since you would be in hier tax bracket.

Taking out the RRSP when I have a lower income applies to both options, and like I said, yes I'm aware of the interest gained from the first 4 years. What I don't get is why I'm not also saving on tax by contributing RRSPS only when my tax rate would otherwise be highest ($100K is already a few brackets higher than $65K). Is the tax calculator messed up?