As in life, too with RRSPs: there are always exceptions to the rule.
I mentioned yesterday that if you withdraw funds from your RRSP prior to retirement, you pay a hefty amount of tax on these funds. However, the government has set up some programs to assist people in certain situations to temporarily withdraw these funds for use, and not have them taxed as income. These programs include:
- Home Buyers Plan (HBP)
- Lifelong Learning Plan (LLP)
Home Buyers Plan
If you are a first time home buyer* the government will allow you to withdraw up to $25,000 from your RRSP when you purchase a home. If you are part of a couple, each person may withdraw up to the full amount, for $50,000 total. The intention is that you use this for your down payment, but it can be used for anything including, but not limited to: closing costs, renovations, furnishings, a trip to the Maldives, etc.
*Note: the government defines a first time home buyer as anyone who has not owned their residence in the last 4 years (approximately – see the CRA for exact conditions.) So you may qualify even if you have owned a home previously, just not recently.
Two conditions to note:
- You cannot withdraw funds you have contributed in the last 89 days
- These funds have to be repaid to the RRSP within 15 years: the program is in effect a loan to yourself.
Lifelong Learning Plan
This is effectively the “Adult” version of the Registered Education Savings Plan (RESP). A person can withdraw up to $20,000, with an annual limit of $10,000, from their RRSP in order to pursue full-time post-secondary studies. Of course, there are conditions. Check the CRA’s website to be sure.
There are similar conditions to the LLP:
- Same as the HBP, you cannot withdraw funds you have contributed in the last 89 days
- These funds have to be repaid to the RRSP within 10 years instead of 15 like the HBP. However there is a grace period from repayment while you are studying full-time, and briefly following your studies.
Remember, if you’re interested in participating in these programs, they are a bit more complicated than the overview I’ve given here. Consult the Canada Revenue Agency’s website, and speak to a financial professional.…
Financial independence is being able to make decisions with your money to do what you want with it, when you want to. If you’re in debt, your creditors are making those decisions for you. Thus, one of the first steps towards financial independence is paying off your debt.
People tend to get into the most trouble with debt when they have access to what’s called “revolving credit”. That is, you ring up debt, pay some or all of it off, then the credit is again available to you. The typical instruments of revolving credit are: credit cards, and lines of credit.
Of course, when you have credit you’re paying interest on the money you’ve borrowed. (If not, I’d like to know where you got a 0% rate!) The worst culprits for getting people into trouble misusing their credit, and charging high interest rates are credit cards. Department store credit cards can have interest rates approaching 30% interest! Even your regular Visa, MasterCard, or AMEX likely has a rate around 18-19% unless you have a low-rate card. (The crux being, to qualify for a lower rate card, you have to have good credit in the first place.) Lastly, credit line interest rates are commonly tied to prime rate, with a certain percentage added based on your credit risk. (Ex. Bank Prime Rate + 4.5%).
To make things worse, banks and credit card companies often only require you to pay monthly, either just the interest on the money you’ve borrowed, or a small percentage of the balance after the interest has been applied (5% of your balance for many credit cards). Of course creditors are happy to take your minimum payment since that $500 you charged on your credit card could end up costing you (and thus earning them) much, much more over time!
The moral of the story is: if you only pay your minimum payment, you basically have a snowball’s chance in hell of ever getting out of debt! So how do you get out of it all? Fight back with your own snowball! More on that tomorrow.…
Well, this ends my first week blogging, and it’s been quite fun so far. Being an IT “geek” the technical part of setting up and maintaining the blog is just as interesting to me as writing the posts so far!
This week I wrote about RRSPs for a few reasons: I think they’re a somewhat misunderstood entity, despite their ubiquity. My RRSP is my first serious foray into investing. And lastly, I plan on taking advantage of the HBP when we purchase out first home.
And finally, this is the start of what will be a Friday tradition here (and seems to be a popular practice in the PF blogging world!). I’m going to feature my five favourite (in no particular order) financial articles from the last week, either from the blogoshpere or in the media:
- Kathryn wrote a guest post on MDJ about some of her Financial Regrets
- According to Canadian Dream: Free at 45, The Most Important Thing to Get to FI is… you’ll have to click-through to find out.
- “Will 5-year Mortgage Rates Fall Further?“, was the question of the day at Canadian Mortgage Trends.
- Canadian Tax Resources wrote about What You Need To Know About Getting a Mortgage
- Consumer advocate Ellen Roseman explained Your right to a credit card refund
Thanks to everyone who read my blog this week. I’m enjoying it so far, but start leaving comments and let’s get the discussion going! Have a great weekend everyone!…