The Costly Mistake Young Homebuyers Make with RRSPs and HBP

Don’t make this RRSP mistake! Even many top advisors are getting this wrong!

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 Hey, I admit this advice won’t help a high percentage of you but it’s very important to share with anyone you know who may benefit from it because I have seen this mistake several times in the last year and in most cases the financial advisor involved didn’t stop it from happening. And these advisors out of fairness, I should say, I could tell from looking at their plans were both competent

and honest. They’re solid overall plans but for some reason, though, a lot of people aren’t thinking this through. What is it? Some young homebuyers who have borrowed a portion of their down payment from their RRSP using the Home Buyers’ Plan are making the mistake of paying back the loan more quickly than they have to. Don’t! When you use the HBP and “borrow” money from your RRSP, the rules require you to pay it back starting two calendar years after the withdrawal. You must pay it back within 15 years and you must pay at least 1/15 of the withdrawn amount back each year.

So let’s say you took out $30,000, you have to put $2,000 a year back in. Stick with that minimum amount. If you find yourself in the lucky position of having extra savings, put it in your TFSA or contribute it, a standard contribution and therefore deductible, do not repay it to your RRSP early. Remember, when you repay the HBP money to your RRSP, you do not get a tax deduction.

Only fair, as you’ve already received a tax deduction on that money when you first put it in before you borrowed it. That little fact changes all the math. This all sounds a bit confusing, but it’s not. Let’s do a basic comparison to drive it home on, say, $2,000 in extra savings that you have available. Put the $2,000 into an RRSP against your HBP balance and… no deduction, tax-deferred growth, fully taxable at withdrawal.

Orrr put it in a TFSA… still no deduction, still tax-deferred growth, but no tax at withdrawal. Even my sister, a math murderer, can figure out which of those two options are better. When I’ve explained this to a couple of advisors who were getting it wrong, they’ve said, “Yeah, you know what? That’s actually pretty obvious.”

So, why are many people, even smart people, sometimes getting this wrong? Because we’ve all been trained, our minds have all been trained to get money back into tax-deferred environments as quickly as possible. I get it. But… do not pay your Home Buyers’ Plan loan back early. There are better options. Stick to the 1/15/year.

Oh, by the way, the better options do not include spending the extra savings! Again, share this video with young homebuyers.