RSP and Tax Advantages

I don’t mind paying taxes but if there is ever an opportunity to pay less I am certainly interested. When my wife and I bought our home we had amassed a nest egg in RSPs. We cashed in the RSP funds as part of the first time home buyer’s plan.

This plan allows anyone who has not legally owned a home in the last five years to cash out $20,000 of RSPs for each person on title without enduring the regular taxation hit of withdrawing funds from an RSP- assuming you are willing to refuel your RSP back to its initial value over the course of 15 years. While this is certainly a help if you are coming up short on a down payment, it can also come in handy if you just want a nice tax advantage.

Let me Explain

By cashing out the $20,000 per person you are obliged to refuel your RSP fund to the sum of $1400 per year. Any funds beyond this amount contributed yearly to an RSP can be demarcated as a “new” RSP contribution, or can be routed towards next year’s required payment.

So here is where the nice twist comes

After retrieving your first time home buyer’s $20K, invest all of the sum immediately back into an RSP (or whatever portion will bring you into the desired tax bracket that you have the RSP room to fill).

Let me walk you through, When you put the initial $20,000 into your RSP you get a tax advantage as the RSP fund reduces your taxable income. Now you direct the $20,000 for the first time homeowner plan and put it into a new RSP and voila your taxable income goes down again. You have, in effect, had the same $20,000 reduced from your taxable income twice. If you want to double this process again put your spouse on title and you can increase the first time home buyer’s to $40K.

As a reader pointed out this

As with any tax tip I would suggest you speak with your accountant or financial consultant.

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