RSP Home Owner Tax Trick

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

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