We wish to thank all who wrote and called in regarding RRSP loans and using the RRSP for the down payment on your home.
Outlined below is an overview of a strategy that combines both the RRSP loan and down payment for your home.
As an example let us use a couple, Asha and Christopher, who wish to buy their home sometime this summer in 2012, say in June or July. Both are working with average pay scales of say $ $52,000 each, which puts them in the 31.15% tax bracket. Asha has RRSPs worth $5,000 and Christopher has RRSPs worth $4,000 for a total of $9,000, but between the two they still have contribution rooms of $50,000.
They wish to buy a home worth $400,000 and the bank or mortgage agent has already given them the pre-approval, whereby they will have to pay about $1450 for 30 years. They also wish to pay only 5% down or $20,000. As noted, they have $9,000 in RRSPs from past years but do not have the requisite amount of $11,000 to put into an RRSP now so that they can withdraw it 90 days later to use as down payment.
However, what they can do is take an RRSP loan for $11,000 and choose to pay it over a period of ten years. The monthly payment for this is approximately $120 or $60 per person. This is a very affordable monthly payment for a person making $52,000 per year. By paying such a low sum for the RRSP loan, they will also have ample money to cover their mortgage.
At this stage of the game, where the couple is looking to buy a home using the RRSP as down payment within the next few months, it is best to invest the $11,000 they have obtained through a loan into money market funds or a 90 day GIC so as to preserve the capital. Once the obligatory period of 90 days is over (say by sometime in May if they take the loan now in February), the couple can withdraw this $11,000 (even if the loan has not been paid off) from their RRSP and add it to the $9,000 they already have for a total of $20,000 down payment on their home! All this money is available to both Christopher and Asha tax and interest free.
Another extremely important added benefit to this strategy is that Christopher and Asha can deduct this $11,000 from their income and get 31.15% back in tax returns when they file their taxes in April. This is a total of $3,426.50 dollars which they will get back from the government in May that can be used towards the closing costs of their home, when they move in June or July(or later, as the case may be).
This is an extremely lucrative strategy, which not only helps Christopher and Asha to get extra money for their down payment, but also generates a tax refund that they can use towards their closing costs or to buy furniture or whatever else they may choose to do with it.
Please note that the above is an overview of the strategy. To customize this strategy to suit your personal situation, please contact Lachman Balani at 416-902-3580 or [email protected]
Congratulations to James Rodrigues for winning 2 golf caps and a set of golf balls for correctly answering last week’s question.
Q.What is the maximum amount each individual can withdraw from his/ her RRSP for a down payment on his/her home without penalty, interest nor tax.
This week’s question is a general one. Contest only open for Ontario residents.
Q. what is the current prime rate in Canada?
Please send in your answers to [email protected] for a chance to win a leather bound binder with writing pad and pen – a very useful item.
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