Put your lazy retirement savings to work

Author: Nina Dragicevic, The Toronto Star

From buying rental property to paying for school, RRSPs can help you hit your targets

If you’re going to make a mistake, make it while you’re young.

Josh Goodwin, at 20, got his first credit card in college and immediately maxed it out, he admits, “like a lot of students do.” After surfacing from his credit trouble, he turned his financial situation around — tucking away extra cash into an RRSP at an age when many are concerned with beer money or spring break in Cancun.

“I started looking at all my options by myself, started figuring things out, started planning for the future,” he says. “Now here I am.”
At the age of 28, Goodwin purchased a home in Cobourg, Ont. — just moving in this past December — after dumping all his RRSP savings into his down payment through the Home Buyers’ Plan (HBP).

Originally from Scarborough, Goodwin worked in the oilfields out west, hauling home high salaries and reducing his taxable income with RRSP contributions over the years. His reward, after years in a ruelling
industry? A 1.5-storey home on a quarter-acre of land.

“There were a lot of things with RRSPs that were positive for me,” Goodwin says. “I can speak from my own experience and having the ability to use the RRSPs for what I did, it really benefited me — it was huge.”
While RRSPs helped Goodwin buy a home, investors can use them to achieve other goals, too:

Purchasing a rental property

Using RRSPs to buy a rental property would not fall under the HBP, a plan that requires you to live in the home as your principal residence. But there are options, says Allan Madan, of Madan Chartered Accountant in Mississauga, including a non-arm’s length mortgage.

“Your RRSP acts as the mortgage lender and you are the loan recipient, or the borrower,” he says.

For example, you might use RRSPs for the down payment and the bank finances the rest, but some institutions can roll both repayments into one mortgage payment.

“So rather than making two separate mortgage payments, one to the bank, one back to your RRSP, you can make one simple payment and the bank will pro-rate the principal payments accordingly,” Madan says.

There are associated costs: Canada Mortgage and Housing Corporation (CMHC) insurance, the bank’s administration fees and interest. But if you otherwise don’t have a down payment saved, Madan says, it works. He encourages those considering this option to research nonarm’s length mortgages online.

“It’s a great option for someone who has a lot of money in their RRSP and they want to buy an investment property, but they don’t have the (down-payment) funds personally available in their chequing or savings account.”

Going back to school

The Lifelong Learning Plan (LLP) is available to those returning to fulltime education — up to $10,000 per year drawn tax-free from the RRSP, up to a $20,000 maximum. Students have 10 years to repay their RRSP without penalty.

“Nowadays, that’s pretty limited in terms of tuition, but I think it’s intended as a supplement for your returning education,” says Sami Ghaith, principal of SDG Accountant, which has locations in Scarborough, Toronto and Ajax.

“It’s like the Home Buyers’ Plan,” he says. “It’s not included in your income.”

There are stipulations, of course: The Canada Revenue Agency website’s section on the LLP has details about timing, eligibility, qualifying programs and designated institutions.

“I think it’s still a great strategy,” Madan says. “You have this money locked in your RRSP that, if you would otherwise withdraw, you’d pay tax on it at your marginal rate.

“But here, they’re allowing you to extract this trapped money on a taxfree basis and you have a very generous repayment period.”

Retiring in 10 years

If you’re married, lucky you. The spousal RRSP is a major opportunity to accelerate saving, says Andrew Ramires, an accountant with SDG.

“The higher-income individual contributes to the spousal RRSP and then, later on when they need to withdraw, the lower-income individual can withdraw at their lower marginal tax rate,” he says. “That’s one of the biggest places they can save some taxes.”

There are countless considerations as you approach retirement, and it’s a crucial time to seek financial advice, Madan says.

A professional will audit your preparations and your expectations — sizing up your savings and assets against your anticipated lifestyle, once you stop working.

“I think a lot of potential retirees will be surprised that, based on the amount they need to live every single year of retirement, they haven’t saved enough,” Madan says.

And if you happen to read this before retirement is on the horizon — the ultimate advice is to do what Goodwin, the young homeowner, did.

“Start early,” Ghaith says. “People find that if they contribute to RRSPs earlier, it creates a snowball effect — when they keep contributing, they save the tax they otherwise would have paid, so it allows them to compound the investment over 10 years. “That’s going to be the biggest advantage.”

ABOUT THE AUTHOR

ALLAN MADAN

CPA, CA

Allan Madan is a CPA, CA and the founder of Madan Chartered Accountant Professional Corporation. Allan provides valuable tax planning, accounting and income tax preparation services in the Greater Toronto Area.

Related Resources