When home ownership beckoned last summer, brothers Doug and Dave Dunlop and their wives, Margaret and Deanne, couldn't resist the opportunity to raid their retirement nest eggs to help pay for a home in Toronto's Riverdale neighbourhood.
The couples took advantage of the federal government's Home Buyers' Plan by withdrawing $25,000 each from their registered retirement savings plans and pooling it for a $50,000 down payment on the 100-year-old duplex they've shared since September.
"Our money is still invested and is building equity tax-free just like if it were in an RRSP," says Doug Dunlop, a social worker. "At the end of day, we will have two investments instead of one because later, when we buy separate homes, we intend to retain the duplex as an income property that will grow in value."
The Home Buyers' Plan (HBP) is one of two federal strategies that allow Canadians to dip into their RRSPs penalty-free for purposes other than generating retirement income. The other is the Lifelong Learning Plan (LLP), launched on Jan. 1, 1999, to help pay for post-secondary education.
Since 1992, the HBP has allowed first-time buyers to tap their RRSPs for up to $20,000 ($40,000 per couple) to purchase a principal residence. The money must be repaid in annual instalments over 15 years, starting in the second year following the year of withdrawal.
As of 2001, the Canada Customs and Revenue Agency says 1.3 million Canadians had removed $13.4-billion from their RRSPs for a home.
The LLP allows individuals to take out up to $10,000 a year tax-free to finance full-time education for themselves or their spouses, to a maximum of $20,000 over four years. Borrowers have up to 10 years to pay the money back and repayment doesn't start until five years after the money is taken.
Since 1999, 41,000 people have withdrawn $275-million from RRSPs for schooling, CCRA says.
Although both plans are attractive sources of funds, most financial experts say withdrawing from an RRSP should be a last resort.
"Most couples are happy to know that using money from their RRSPs for a down payment will keep their monthly payments down and save a lot in mortgage interest payments, but the downside is that using retirement savings will significantly reduce the size of their RRSPs over time," says Dave Ablett, manager of advanced planning and financial support at Investors Group Inc. in Winnipeg.
Lost growth in an RRSP can be significant, especially if the money is not paid back. Left untouched, $40,000 in an RRSP with an annual return of 8 per cent would grow to $186,000 in 20 years, but if a couple were to withdraw $20,000 each from an RRSP and pay it back in 15 years, the retirement savings plan would be worth only $95,000, Mr. Ablett says.
And if they don't pay it back at all, they've lost $186,000 and will be nicked for nearly $16,000 in income taxes because the entire RRSP withdrawal is added to their income.
"If you are self-employed and are depending primarily on your RRSP because you have no company pension plan, I am much less in favour of dipping into it for a home or for schooling," he says. "If you have a pension plan, the opportunity cost is not as significant."
Most financial planners urge consumers to explore other opportunities before raiding their RRSPs.
"If you have money socked away in a savings account, use it first," says Stephen Ison, an investment representative with Edward Jones in Oakville, Ont. "If that fails, try to borrow money from relatives at an attractive interest rate. I would consider taking a loan for a down payment if it can be paid back in a short period of time but interest costs can be a downside if you pay off a loan over a long period. They will add to your costs and you will build debt, which is not a good idea."
Had the Toronto couples borrowed their $50,000 down payment, for instance, the cost of the loan would have added $600 to each one's monthly mortgage payment -- too steep a price to pay on top of property taxes, utilities and renovations, Mr. Dunlop says.
Jonathan Sceeles, the Edward Jones investment representative who oversees the Toronto foursome's RRSPs, was all in favour of their use of RRSP money for a home. In fact, Mr. Sceeles himself used $8,500 to supplement the down payment on a home he purchased in 1998.
"Real estate is a good investment and it's another way to round out a portfolio," Mr. Sceeles says. "The key, however, is that you must pay the money back."
The best way to ensure the money is repaid is to set up an automatic monthly withdrawal from a bank account, says Patricia Lovett-Reid, a senior vice-president with TD Waterhouse Group Inc. in Toronto, who urges consumers to think of their use of pension savings as a debt obligation.
If possible, pay the money back faster than stipulated by the HBP or LLP and continue to contribute new money to your RRSP to take advantage of the tax break, she says.
That's what the Torontonians have pledged to do on the advice of their financial planner who will contact them in the summer of 2005 when it's time to start making repayments. "We fully intend to begin paying the money back," Mr. Dunlop says. "But for now, the nice thing is that the RRSP money gives us some breathing room, some time to get back on our feet."
People who decide that borrowing from an RRSP is the way to go should first determine if the assets in their plan can be redeemed, says Ms. Lovett-Reid, who cautions that not all RRSP money is accessible for a home or education, including money locked into an RRSP term deposit, which cannot be withdrawn until maturity.
In addition, withdrawals of some mutual fund RRSPs could trigger redemption fees, she warns. Money transferred into RRSPs from a company pension plan is also untouchable, Mr. Ablett says.
"The biggest misinterpretation is that taking money from an RRSP is free," Ms. Lovett-Reid says. "It is not free because you will lose growth in your RRSP and there could be charges. People should remember that."
And if you decide to take money from an RRSP, make sure you have the cash flow to cover the payments when it's payback time, she adds.
In the end, the decision to take money from a retirement savings plan for a home or schooling is based on an individual's situation and lifestyle, Ms. Lovett-Reid says.
"You can't put a price on fulfilling a dream but when taking money out, make sure it is worthwhile," she says. "If you are spending your RRSP to go back to school, will you earn enough extra income to make it worth it?"
© The Globe and Mail
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