You can access your RRSP for buying a home or returning to school, but in an emergency, use your TFSA
TORONTO, Jan. 21, 2016 /CNW/ - CIBC (TSX:CM) (NYSE: CM CIBC) -- Beware of the do's and don'ts around Registered Retirement Savings Plans (RRSPs) if you're planning to make a contribution or an early withdrawal, says Jamie Golombek, Managing Director, Tax & Estate Planning, CIBC Wealth Advisory Services.
"It's tempting to tap your RRSPs for an emergency, but RRSPs should generally be viewed as long-term savings tools," says Mr. Golombek, who recently issued a new report, Ten RRSP Hacks. "Borrowing money from your RRSP can make sense if you use the funds prudently to fund longer term goals that deliver their own return, such as buying a home, which hopefully increases your net worth, or investing in your education, which may help boost your earnings potential."
A Tax-Free Savings Account (TFSA), which allows you to recontribute any amounts withdrawn in a future year, may be a better option if you need more flexibility with your finances, he says.
Using an RRSP to help buy your first home
Under the Home Buyers' Plan (HBP), you can withdraw up to $25,000 from your RRSP to purchase a new home. Your spouse or partner may also be able to withdraw $25,000, for a combined total of $50,000. To take advantage of the HBP, you need to be a "first-time home buyer", which is generally defined as someone who hasn't owned a home in the past five years.
"This is a smart option for first-time home-buyers who are just pulling together their funds," says Mr. Golombek. "It can help you meet your down-payment requirements and save you a lot of money on a mortgage loan insurance you might otherwise need."
Amounts withdrawn under the HBP, however, must be repaid over a maximum of 15 years or the amount not repaid in a year is added to your income and becomes taxable.
Using an RRSP to go back to school
Through the Lifelong Learning Plan (LLP), you can borrow $10,000 a year, up to a total of $20,000, from your RRSP to finance your education. To take advantage of this plan, you must be enrolled or must have received an offer to enroll on a full-time basis in a qualifying Canadian or foreign educational institution. The funds can then be used for any purpose with no proof of expenses required, and must be repaid over a 10-year period. The LLP cannot be used to fund your child's education.
With both the HBP and LLP, there are no penalties for paying back the funds earlier than required. "If you repay early, you can benefit from the tax-free compounding of investment returns inside your RRSP as soon as possible," says Mr. Golombek.
Resist using your RRSP as an emergency fund
While an RRSP can help fund long-term financial goals, it should generally not be viewed as a go-to emergency fund, he says.
RRSP withdrawals are taxable at your marginal tax rate and are subject to immediate withholding taxes when withdrawn.
"If you dip into your RRSP for extra cash, you will not only be taxed, but you will lose the ability to recontribute those funds to your RRSP without generating additional room," says Mr. Golombek.
If you think you may have to draw on your long term savings before retirement, a TFSA may be the better option because it offers more flexibility.
A financial advisor or tax expert can help you determine the best option for your retirement savings. This year's deadline to make a RRSP contribution is Feb. 29.
"Regardless of whether you opt for an RRSP or a TFSA, the important thing is to save so you can meet your life goals today and in retirement," says Mr. Golombek.
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SOURCE Canadian Imperial Bank of Commerce
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