The Money Mustache Community
Around the World => Canada Discussion => Topic started by: Sdrarcher on June 24, 2018, 08:10:11 PM
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Just grabbed a bite with friends that were encouraged to put a sizeable amount of cash in to an RRSP for 90 days so they could generate a return at tax time and then with draw it through the home buyers plan to pay their down payment , this was suggested by their financial planner. Here is where I think the idea goes south. They are both young and in their low tax bracket years, with potential to climb the brackets over the next few years. In addition, she will be off work with a baby for half the year, and thus on a reduced annual income.
In doing what this planner suggested, are they not just using up RRSP contribution room at a low return rate? They have to repay the RRSP, so would they have not been better off to leave the money as cash and taken a gr after rebate once they reach a higher tax bracket? What am I missing? This seems like a boneheaded scheme but I would really like to understand how it makes sense.
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It's actually a great idea...for the financial planner. They get commission on whatever is put into the RRSP. :(
In all seriousness, I'd have to agree with your analysis.
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I agree. A mediocre way to get a slightly higher downpayment in the moment because they are using before-tax money.
Sounds like they are getting pretty common advice though. Maybe a good financial planner would just tell them to save more and defer their home purchase. In general, people don't like to hear that kind of advice.
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I'll be the contrarian and point out what you're missing. Time Effect on Money. If you could receive a 20% rebate now or a 40% rebate in 10 years, which is better? Using a 7% return, the refund reinvested will match a 40% rebate later on...Many people put far too much stock into delaying RRSP contibutions, sometimes its a wash.
If they have multiple children and one becomes a SAHP, the RRSP room can't be used at all (RRSP room can only be used if you're working). This is a level of detail that is hard to guage, only the couple really know their plans. That one requires knowledge of future years, impossible to predict but its safe to say they have the potential of multiple children.
You are also neglecting the CCB rebate by doing an RRSP when pregnant. Its tiny but amounts to a special bonus refund on RRSP when you have a child. RRSP actually generates higher refunds, via the CCB, then otherwise expected.
Its hard to do a complete analysis without knowing a persons details. Hopefully this gives additional food for thought.
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I see nothing wrong with this strategy. They get a tax break and also help build a down payment (especially if they use the tax refund to further fund things). They aren't losing room in their RRSP. This is a no lose situation as far as I'm concerned.
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I see nothing wrong with this strategy. They get a tax break and also help build a down payment (especially if they use the tax refund to further fund things). They aren't losing room in their RRSP. This is a no lose situation as far as I'm concerned.
The problem, from a pure mathematical perspective is that it sounds like they are using RRSP room during low income years for a pitiful tax refund. Yes it slightly increases their downpayment HBP withdrawal, but the gain isn't that high.
They would be better off to save the money in a TFSA or non registered account, wait until they earn more, and contribute to their RRSP at that time for a much larger tax refund.
However, that means they will need to save more to get an equal downpayment on their house.