RRSPs: A Potential Debt Reduction Strategy

A U.S. study has found that 58% of millennials are actively saving for retirement.* That’s impressive and important because in Canada, Statistics Canada tells us that 42% of senior families are in debt, with 14% still holding mortgages, and those with consumer debt standing at 37%.* Millennials have a few important defensive tools at their disposal to help them prepare for a financially healthy retirement . One of them is to manage mortgage debt with retirement savings through new features in an RRSP under the Home Buyers Plan (HBP).

For those who are actively saving in their RRSP, this could be a great means of reducing their mortgage amount and, in turn, their debt, while building up capital. Here’s the facts on eligibility, withdrawal, and repayment:

Eligibility:

1. Be a first-time homebuyer. If you’ve never owned a home before, you are a first-time homebuyer and can make use of your RRSP savings tax-free.

2. If it has been four years since either you, your spouse, or your common-law partner have owned and inhabited a home, you may qualify as a first-time homebuyer again.

3. Persons with a disability who require a home to better suit their needs can also be eligible to use their RRSP savings.

4. And, an individual helping a person with a disability with the purchase of a property if they require a home to better suit their needs. To qualify, this person must be related by blood, marriage, common-law partnership or adoption.

5. After 2019, those who experience a breakdown of a marriage or common-law partnership may be eligible to utilize the Home Buyers Plan.

Withdrawal:

1. Until March 19, 2019 the maximum withdrawal was $25,000. After March 19, 2019 the maximum withdrawal is increased to $35,000.

2. The individual must be a resident of Canada at the time of the withdrawal.

3. Funds cannot normally be drawn from a locked-in RRSP or a group RRSP

4. RRSP contributions must remain in the RRSP for at least 90 days before they can be withdrawn under the Home Buyers Plan.

5. You must use the funds to purchase or build a qualifying home before October 1st of the following year. For example, if you were to withdrawn funds in January 2020, you must purchase or build a home by October 1st, 2021.

Repayment:

1. Money must be reinvested into the RRSP within 15 years.

2. There is a minimum amount that must be reinvested each year.

3. If the minimum amount is not reinvested, the outstanding amount must be added to taxable income.

4. You can reinvest more than the required amount in a year, you will still have to make payments yearly until the balance is zero, but the required amount will be reduced in subsequent years.

5. There is no RRSP contribution deduction for repayment. It is reported as a repayment.

Unfortunately, if someone were to make use of the HBP, they cannot make use of tax deductions from RRSP contributions until the amount withdrawn is repaid. So it’s important to talk to your client about their goals and to get a full picture of their debt, tax, and savings situation. Ensure that they are able to handle the minimum payments incurred by withdrawing from their RRSP for the HBP, and talk to them about how it affects their taxes today and their retirement savings tomorrow.

* Investment Executive report

* Statistics Canada

Printable Resource: Click HERE for a printable pdf of Knowledge Bureau’s Home Buyers Plan Fact Sheet

Additional Educational Resources: Debt and Cash Flow Management can be taken as part of a MFA™ – Retirement Services Specialist Designation or as a certificate course. Learn how to advise clients on what debt is and how to use it properly to manage debt and cash flow to accumulate wealth for the future. Enrol or take a Free Trial today.

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