How much I should put the moeny into RRSP

[testtest123]

Does it always we should max RRSP?

[bodzan]

Currently, I am putting $100 a month ...

[15-20_God]

does it sometimes but maybe not should who you are.

[pitz]

Study this thread (http://www.redflagdeals.com/forums/showthread.php?t=379668) carefully, and then decide if you fall into the traps associated with RRSPs or not.

Seriously, without knowing all of your details, its fairly difficult to make a concise recommendation. If buying a first home is in your future, I would definitely suggest building a $20k RRSP for the purpose of the HBP and/or the LLP.

Over and above that, it all depends on what you predict for your lifetime income profile, current levels of savings, and your predicted life expectancy.

[netriones]

If have bad spending habit, one should put as much into rrsp as possible.

If you're planning to have lots of income when retire, then RRSP is useless.

If you think you'll have no income when retire then put as much as possible.

[15-20_God]

If have bad spending habit, one should put as much into rrsp as possible.

how so? if you have a bad spending habit you spend regardless of where your money is or how little of it you have.

If you're planning to have lots of income when retire, then RRSP is useless.

how does one plan for sure in having lots of income when you retire? i would like to know myself.

If you think you'll have no income when retire then put as much as possible.

again, how do i know for sure?

[don242]

Seriously, without knowing all of your details, its fairly difficult to make a concise recommendation. If buying a first home is in your future, I would definitely suggest building a $20k RRSP for the purpose of the HBP and/or the LLP.



Pitz, I would like to hear more about your thoughts on this one as well. I realize each person has a different situation but I am not so sure adding money to your RRSP for the purpose of the Home Buyer's Plan is a good idea.

In my experience borrowing from your RRSP for the HBP does not seem sensible. Instead that money should have been saved initially outside the RRSP and put towards the home. I could be wrong here.

Generally, if you use the HBP, you must pay it back over the next 15 years. During those 15 years, your income has increased from the initial day of buying your home. Instead of contributing to your RRSP when your income is higher (and therefore getting a bigger tax refund), you are instead putting that money into paying back your HBP.

As usual, your viewpoint is appreciated.

[TrevorK]

Pitz, I would like to hear more about your thoughts on this one as well. I realize each person has a different situation but I am not so sure adding money to your RRSP for the purpose of the Home Buyer's Plan is a good idea.

In my experience borrowing from your RRSP for the HBP does not seem sensible. Instead that money should have been saved initially outside the RRSP and put towards the home. I could be wrong here.

Generally, if you use the HBP, you must pay it back over the next 15 years. During those 15 years, your income has increased from the initial day of buying your home. Instead of contributing to your RRSP when your income is higher (and therefore getting a bigger tax refund), you are instead putting that money into paying back your HBP.

As usual, your viewpoint is appreciated.

I would assume it has to do with investing into the RRSP, and investing your return into the RRSP.

For instance, if over three years I invest $15,000 it is possible for me to receive $5000 in tax refunds (To then apply into the RRSP) for this income.

Reasons why this may help:
- He may need the $5000 now to qualify for the home purchase
- The $5000 extra may save some CMHC fees (Move him to a different bracket of fees)
- Once you add up the future tax savings of $5000 it may be more worthwhile to put the $5000 down onto the mortgage, and pay less interest because of it.


For tax efficiency you're partially right. If later on the person makes enough to jump into a different bracket then it may be worthwhile to wait. However, if the person will be in the same bracket after home ownership that they are now (36K -> 72K most likely), then there is really no tax savings.

[don242]

For tax efficiency you're partially right. If later on the person makes enough to jump into a different bracket then it may be worthwhile to wait. However, if the person will be in the same bracket after home ownership that they are now (36K -> 72K most likely), then there is really no tax savings.

This is what I was getting at. I am just thinking back to my situation where I used the HBP (though minimally). I see myself in a higher income bracket now where the repayments would have been better served as actual contributions. It would have made more sense at the time to use my money to save outside of the RRSP and put the money towards the home purchase and make my future RRSP contributions actually be used towards reducing my income as opposed to repayments.

Either case, it is still a good option to consider when trying to buy your first home, as it is a difficult step in one's life.

[anom]

I was also interested in this topic.

I am currently saving for a house (to be purchased in 8-9 months), my current income is unlikely to exceed the 72k bracket for some time still (approx. 5 years), so would it make sense to put money into an RRSP now and the use the HBP to take it out in 8-9 months time or to just save outside of the RRSPs since the RRSP contribution room will always be there for future use??

[anom]

I was also interested in this topic.

I am currently saving for a house (to be purchased in 8-9 months), my current income is unlikely to exceed the 72k bracket for some time still (approx. 5 years), so would it make sense to put money into an RRSP now and the use the HBP to take it out in 8-9 months time or to just save outside of the RRSPs since the RRSP contribution room will always be there for future use??

any opinions?

[Justin C]

What % will your downpayment be? Will the tax refund generated by investing in RRSPs increase that % significantly? If so, it may be worthwhile to use the HBP in order to generate that tax refund which could save you on CMHC fees (as mentioned earlier).

[anom]

What % will your downpayment be? Will the tax refund generated by investing in RRSPs increase that % significantly? If so, it may be worthwhile to use the HBP in order to generate that tax refund which could save you on CMHC fees (as mentioned earlier).

well in that case, it doesn't seem as if it would be worth it. My downpayment will already be over 25%, the tax refund won't really be that much of a benefit. thanks!

[pitz]

Pitz, I would like to hear more about your thoughts on this one as well. I realize each person has a different situation but I am not so sure adding money to your RRSP for the purpose of the Home Buyer's Plan is a good idea.

In my experience borrowing from your RRSP for the HBP does not seem sensible. Instead that money should have been saved initially outside the RRSP and put towards the home. I could be wrong here.

Generally, if you use the HBP, you must pay it back over the next 15 years. During those 15 years, your income has increased from the initial day of buying your home. Instead of contributing to your RRSP when your income is higher (and therefore getting a bigger tax refund), you are instead putting that money into paying back your HBP.


Sure, very valid points. However, here's a scenario to chew on:

Homebuyer uses the $20k from the HBP to top-up a 25% downpayment. The mortgage balance is $20k less than it ordinarily would be. $20k is then reborrowed from a 2nd mortgage or attached secured line of credit ('matrix mortgage'), and invested into long-term tax efficient dividend-paying equities (or ETFs).

The growing dividends from the equities are used to repay required HBP amounts. And the effective after-tax mortgage rate, on the $20k that is 're-borrowed' serves as an additional tax deduction, reducing the overall after-tax expenditure on mortgage interest, while still accumulating investments.

In both scenarios, you have overall debt that is equivilant. In both scenarios, you have received the up-front RRSP 'tax deduction'. But the long-term overall cost of mortgage capital under the scenario with the HBP and re-borrowing is less, which means a higher overall rate of long-term wealth accumulation than possible under the RRSP + mortgage scenario.

In both scenarios, you have a $20k investment portfolio as well, which benefits from tax efficient growth.

So, used strategically, the HBP can help turn non-deductible debt into deductible debt, without increasing overall balance sheet leverage, or damaging long-term after tax investment returns.

[don242]

Sure, very valid points. However, here's a scenario to chew on:

Homebuyer uses the $20k from the HBP to top-up a 25% downpayment. The mortgage balance is $20k less than it ordinarily would be. $20k is then reborrowed from a 2nd mortgage or attached secured line of credit ('matrix mortgage'), and invested into long-term tax efficient dividend-paying equities (or ETFs).

The growing dividends from the equities are used to repay required HBP amounts. And the effective after-tax mortgage rate, on the $20k that is 're-borrowed' serves as an additional tax deduction, reducing the overall after-tax expenditure on mortgage interest, while still accumulating investments.

In both scenarios, you have overall debt that is equivilant. In both scenarios, you have received the up-front RRSP 'tax deduction'. But the long-term overall cost of mortgage capital under the scenario with the HBP and re-borrowing is less, which means a higher overall rate of long-term wealth accumulation than possible under the RRSP + mortgage scenario.

In both scenarios, you have a $20k investment portfolio as well, which benefits from tax efficient growth.

So, used strategically, the HBP can help turn non-deductible debt into deductible debt, without increasing overall balance sheet leverage, or damaging long-term after tax investment returns.

Thanks again, pitz. Again it seems I was thinking too simplistic.

All of your suggestions involve re-borrowing the money. I guess it is time I begin looking into avenues to do this as it seems to be the answer to make the most of your money. I need to learn to take advantage of the assets I already have and use them to work for me as well.

I think I need a good book to get all the information straight and then a good talk with some experts.

[blexann]

does it sometimes but maybe not should who you are.

that's hilarious:cheesygri

[pitz]

Thanks again, pitz. Again it seems I was thinking too simplistic.


Its not an intuitive result, but if you superimpose all of your assets and liabilities on a unified balance sheet and income/cashflow statement, you will see that there are immense benefits associated with reducing one's cost of capital.

When it comes to investment, any kind of investment, profitibility (and thus growth and value creation) only occurs when cost of capital < return on capital.


All of your suggestions involve re-borrowing the money. I guess it is time I begin looking into avenues to do this as it seems to be the answer to make the most of your money. I need to learn to take advantage of the assets I already have and use them to work for me as well.


The CIBC/Firstline "Matrix Mortgage" seems to be a fairly decent product overall for the purpose. But if you are expecting any windfalls/inheritances, then it has its limitations. Then there's Manulife's product, which, IMHO, is nicely structured, but fairly expensive (@ prime).

I personally recommend that you also gain a low-cost borrowing facility in US dollars (and ideally, in Yen and Euros -- although the Japanese Yen is the most expensive currency on earth to borrow right now) as well. The Canadian markets simply are not diversified enough to concentrate the entirety of your investment domestically.


I think I need a good book to get all the information straight and then a good talk with some experts.

Definitely. Print some of my posts if you want.

[don242]

Its not an intuitive result, but if you superimpose all of your assets and liabilities on a unified balance sheet and income/cashflow statement, you will see that there are immense benefits associated with reducing one's cost of capital.

When it comes to investment, any kind of investment, profitibility (and thus growth and value creation) only occurs when cost of capital < return on capital.




I guess the average person does not consider their principal residence as capital but as a basic necessity of life and just a simple part of the cost of living. Those who can see past that can use it to their advantage but that is where the difficulty lies.

[TrevorK]

All of your suggestions involve re-borrowing the money. I guess it is time I begin looking into avenues to do this as it seems to be the answer to make the most of your money. I need to learn to take advantage of the assets I already have and use them to work for me as well.


Please make sure that you realize all the risks of borrowing against your principle residence, as for some people it is an extremely poor idea.

Make sure you make an educated choice, one that you feel comfortable with.