How to maximize RRSP contribution room | RRSPs and RRIFs | Discussion forum

Much as I dislike RSPs, they have their uses and it probably makes sense in your situation, at least for 2019.

I'm not sure what province you are in, but, taking Ontario as an example, the combined Federal-Provincial marginal tax rate for 2019 in the income level you are suggesting is:
over $89,482 up to $92,825 33.89%
over $92,825 up to $97,069 37.91%
over $97,069 up to $150,000 43.41%
https://www.taxtips.ca/taxrates/on.htm

It's a crap shoot as to what your income will be in retirement but most people will not see anywhere near 43% unless rates skyrocket - which they could.

You are still young. You may be able to use the RSP to help finance your home. You may want to draw on it if there is a period of unemployment, illness or special need in the future. In my view, it should be looked at as an income averaging tool rather than a retirement plan, so I would cash in some or all of it whenever income drops to a suitable level or you have some other unexpected need.

If your short term goal is home ownership, then I would make sure I had enough money for that as a first priority. The RSP may be a help with it but I am not up to date on the rules regarding that.

If you contribute to RRSP you defer taxes on that amount and drop into lower tax bracket. Then you can withdraw it for home purchase and you can put it back in over 15 years if you can afford to or pay the tax on it over 15 years. This helps increase your down payment so I think it's a good strategy.

Unfortunately there is no easy answer to your most recent question, but I will offer a few thoughts.

Home ownership is a personal lifestyle choice as well as an investment. So you should ask yourself if it's what you really want. Some people choose never to buy. There is some research that suggests one is not necessarily better off by buying, although I am not familiar with it. You just need to be clear that it's what you want for yourself. It also helps if you enjoy fixing things and making home improvements.

Another factor that may enter into it is how stable is your cheap rent situation? And would you be content to live there indefinitely?

Assuming the sum total of all this is that you still want to buy, then do you want a house or a condo? And what can you afford? How much are you willing to allow the cost of mortgage, property taxes and maintenance interfere with your ability to spend money or save it? And bear in mind that in Toronto the current mayor has chosen to pretend he is only hiking taxes annually by the rate of inflation. In fact, he uses the local (city) inflation rate, which is higher than the national one, so it is higher than you might expect and likely higher than any salary increase related to inflation; and secondly he has chosen to hide additional tax increases by charging fees for things that used to be included in taxes (e.g. waste management). In addition, the Ford government has attempted legislation limiting wage increases to well below inflation, a trend which will trickle down to other employers. This is now before the courts. The sum total of all this is that home ownership becomes ever more onerous. One hopes it will be mitigated by low interest rates and decreasing principal owed over time.

Have you spoken to a banker about how much you can carry in terms of mortgage, property taxes, utilities, fees? Whatever they say, reduce it by at least 20% before you buy. One of the few ways of reducing your risk in home ownership is to reduce the amount you owe. Be happy with less house; you will be especially glad of this when the utility bills start rolling in and show regular increases well above inflation, as they surely will. If you find you can afford to pay down more faster, then do so. Times are indeed uncertain.

You can also reduce your risk exposure by sharing your space with someone else or having a unit that you can rent out. You don't say if you are married or have a partner, but, to be honest, even 100K is not enough income to carry a lot of mortgages in this city. For example, the street I live on is not luxurious by any means but it is well located. Many would consider it "affordable" in the current climate. All the young families who buy houses here have two professional-type incomes in order to afford it.The only single people who buy here now are either older or have a nest egg from a divorce, and they are rare.

So, I would say, if you really want to own property, just buy enough to meet your needs, spend less on it than you can "afford", use some of it for income if you are buying a house, but more likely get a condo.

Buying a condo is a whole other thing, with its own risks and advantages. I won't get into that right now.

Some people will be happy buying the biggest place the bank says they can afford and putting every spare penny into the mortgage. That has worked in the past, but times are very uncertain right now due to high evaluations, record low interest rates, and global uncertainties, so I would not recommend it at this time.

You may wonder why I suggest buying less than you can "afford". This is to give you some leeway if something goes wrong or you find yourself overextended. I was talking to a loan officer at one of my credit unions not long ago. He told me he regularly assesses the ability of would-be home owners to pay at a level that is about 25% less than what the banks have told them they can "afford". He finds the banks do not include many essential budget items in the estimates. It's a small credit union and it is managed conservatively with a low default rate. He says some members appreciate what he is saying and buy "less house" than they initially intended; others go with the bank. He doesn't budge and prefers to let them go. And this is a closed bond CU where most members have middle incomes and jobs that are fairly secure. I think his position makes sense.

You ask whether you should buy now or wait in case of a correction. Nobody knows. I think it's more important to be really sure that you are doing what you really want to do, not buy out of a sense of panic, and to buy something that you will be able to afford to keep paying for if there is a downturn. If you can do that now, then do it now. If not, then wait.

promise, nobody knows the future any more than you do, so not much help there. And though the advice here is useful remember that this site is populated mainly by hard-core savers, so the advice will be about caution, be prudent, etc, not likely folks will point out that if your $2 million house doubles in value you make way more tax free than if your $1 million house doubles, probably have to go to another site to get that kind of advice.

I wanted a house when I was young so I got one as soon as I could afford one that I could see staying in at least until we'd raised our family, and we're still in it, kids long gone (except they keep bringing grandkids over to drop off during these cursed teacher strike days, I'm exhausted!). It was helpful to know this plan/timeline for our first house, and so whether prices rose or fell was irrelevant to me after day one. That's another thing for you to consider, how long can you see yourself living in this house or will there be further subsequent financial implications due to wanting to move again in the future?

I think you are now considering an "investment property". This may have tax implications for you. If you buy a place and live in it, you will not have to pay capital gains tax when you sell it. But if you rent it out, then it is subject to capital gains for the period of rental. You need to check on the details as I don't know a lot about it.
The rental income may not fully pay for the mortgage (and insurance and property taxes and maintenance) at first, but, since you are paying low rent, you can probably afford to top it up. This strategy does assume some capital appreciation. Without that, there isn't really any point in buying a rental property. And, as I said before, yit really helps if you are handy and can do most of your own repairs.
Another risk to consider in renting out the entire property would be the possibility of getting bad tenants or tenants who don't stay long. Such people can be very expensive and you need to have a cushion to cover any problems or period when the house is not rented.
That said, if you are going to buy an investment property, a condo might be the easiest as much of the maintenance is covered by the condo corporation, albeit with fees.

If the bank thinks you're good for 800K and you plan to put 20% down, then you are looking at up to about 1.2 milion for a house. You can certainly get one for that price, even in Toronto. And you can get one for less than that which will be quite liveable but maybe not in your preferred neighbourhoods.

I share your scepticism about condos but can't rule them out. I see two or three possibly significant issues. Maintenance fees are subject to change, sometimes very significant change. In my opinion, there will be a lot of expensive retrofitting to be done in older condos - and not necessarily all that old either - as we adjust to new requirements to reduce carbon impact. This will also impact houses, but you have more control over your own individual house. Maintenance fees in older condos are generally higher than new ones for easons like this. But the fees in teh newer ones can be expected to increase.
Not all condo buildings permit rentals. You'd need to check the by-laws. Avoid condos with swimming pools and other high maintenance frills A good realtor can be an enormous help - someone who is experienced, knows the market well, and will honestly work in your best interests. (If you are stuck, I can suggest someone for you to consider; PM me if you want.)

I guess that, in sum, I am not too keen on you buying a rental property but I know that people do this and I guess it can work. Perhaps it is my personal bias.
If you are leaning in that direction, I think you'd be better off buying a house with a rental unit such as a basement apartment in it. You can live in either the basement apartment or the main section, and rent out the other. YOu get more equity in the end bill would be happy), you can keep a close watch on your tenants, and you don't have to go across town when they report something not working. the rental portion would be subject to capital gains. The bank will count the rent as a credit on your ability to pay. Check with insurance company before buying to ensure it is not in an area prone to flooding.

I read recently that condo prices in TO are increasing faster than house prices at the moment. Apparently people are maxed out for buy8ing houses, at least for now. There is also a move afoot to build more uhousing units. This includes |laneway housing". Apparenlty teh city recently approved the concept that people can build uits in their backyards or driveways. I am not sure of the dtails but 2 of them are under construction on my block already. i don't think they can be severred - yet. This will presumably increase the value of the existing properties, with or without new unit already being added, making it harder for you tobuy. It will also, one imagines, slow down the overall price of houses as it means more units will be available on the market. We recently (this week) received a flyer from a company which purports to evaluate our property for a possible laneway construction. I have no doubt our property would be suitable as we have, arguably, the best lot on the block (wider and deeper), but we are not likely to do this as we have no need of it. The flyer tells us our property will have increased in value by about 300k since this new law was passed permitting the construction, which may or may not be true. (Show me the money!) I hope it's not true actually, in the sense that I don't want to be stuck for higher property taxes on the basis of nonexistent construction.
I wouldn't give up on buying in the city yet. But it depends on where you work, how comfortable you are with commuting (consider carbon pricing etc, electric vehicles) and where you feel comfortable living in terms of local amenities. It also depends on the economic prospects of teh community you are considering. Oshaw is probably cheap righ tnow due to GM leaving, but I don't know about the future. Hamilton has been a very good investment in recent years but I understand prices are rapidly catching up there. Newmarket and points north of there such as Bradford are relatively inexpensive, have GO transit and seem to be doing OK economically from what I can see but have not researched it. Anything closer to the city such as Markham, Richmond Hill, Vaughan, Mississauga, Brampton, Ajax is not likely to be much cheaper but could be somewhat cheaper - and a good deal if closer to your work.

Here's a possible scenario. You buy a house for about 1.1 million. It should be in good shape, with a rentable unit , in a decent neighbourhood but perhaps not the one you most prefer. You put down 220K (20%) and you also have about 50K which you hold back for closing costs and an emergency repair fund (minimum). You borrow 880K, of which 300K is covered by rental income, so you are just paying for 580K, giving you leeway for downturns of various sorts, home improvements or whatever.
If the price of houses goes up and your income goes up, you can eventually afford not to rent. If prices don't go up, you still have the rental income to fall back on.

If you are currently living in mom's basement, then you still would probably have that to fall back on if you needed to rent out the whole house, at least for the next 10 years until you make serious headway on the mortgage.

promise, sounds like your house buying decision is driven pretty much only by what's best financially, so you've got a lot of calculating variables to consider, many of them guesstimates about the future, etc - good luck!

You've got the general idea as, yes, you can withdraw from RRSP so that in years when you are taxed at a lower tax rate it can be a good idea for some people. What your tax rate was when you previously contributed is irrelevant, a withdrawal is just treated as taxable income in the year you withdraw. Don't have to or get to put any of it back in, except for home buyers or lifelong learning plans, just lose the contribution room. Depending on the amount withdrawn there may be "withholding tax" at time of withdrawal but it's not an additional tax, it's just a prepayment of taxes, like an instalment payment, credited against your income tax payable for that year. That's generally it.

What Bill says is correct as far as it goes - particularly to beware of the withholding tax which would reduce your available capital, but I think there would not be withholding tax if used as the HOme Buyers Plan.
That said, I'm too old to be up to date on this aspect of RSPs, so I can't reliably help you on that question. It would be best not to depend on anything I said about it in regards to what you can or should do in the next couple of years. The info is probably available somewhere on the CRA site if you can navigate that - not always easy.

As a person in their 70s, I can say that it does make sense in my mind for older people to take money out of RSPs before they are required to do so, but it depends on individual circumstances. I have done this. But I don't think that's relevant to you. I say this for two reasons. First, you really have no idea what your situation will be by then, and you can't possibly know. Second, the rules regarding taxation and government-sponsored plans are always subject to change and will change before then, so you can't project from what is in place now. So, in sum, forget it!

I'm getting curious as to what line of work you are in where you can work a lot of overtime and also take a year's leave of absence with impunity if you want, but none of my business.

If you are planning on travelling during time off, you need to think about who would manage any rental property in your absence. Some real estate companies will do this for a fee, but not all.

I'm getting the feeling that your main reason for buying is out of fear of being shut out of the market by rising prices later. This is valid but not necessarily the best reason since we don't know if prices will go up or not, although it seems likely over long enough period.
You need to remember that a property, especially a house, is primarily a place for you to live in and feel safe and enjoy it. If you're not going to be happy living there, it's a bad investment.

Working downtown brings additional options. You could, if you wanted, buy a downtown condo, of which there are zillions, and walk to work, get rid of car, use the car-sharing companies as needed, and save a lot of money to put towards the mortgage. Last time I looked, CAA estimated it costs about 10000/yr to operate a car here, but I am not up to date.

To drive back and forth to a place like Oshawa would be an absolute grind, not recommended - by me at least. You could probably take GO though if you are careful to live close to station. But you really need to take a good look at any community you are thinking of relocating to asn ask yourself if it's a place you'd like to live.
I heard yesterday that there is a move afoot to possibly turn the GM plant into a faciility for manufacturing commercial electric vehicles - delivery trucks etc. Would be great for the town if it goes forward - and for property values.
I do know the town somewhat (or used to) and don't know what it would offer for a young person like yourself. I think Hamilton is more promising in terms of amenities, but it's your decision.

You do have a lot of research to do because you haven't really eliminated anything. Perhaps you should prioritize what it is you need to know. I would think that getting an idea of where you want to live would be af priority, then see what you can afford there. Iw ouldn't rule out Toronto yet. There are still things you could afford here but you'd need a good realtor to find them probably. One question would be where your social life is centred, as you would probably want to be near that.

promise, I totally agree that you should not assume you're checking out prematurely, it is true that lifestyle, diet, etc has a greater impact than genes according to latest research. And because families tend to repeat similar lifestyles, diets, etc I always wonder if that's the reason for patterns that we assume are due to genetics. I'd advise take charge of your health and don't worry.

But if you want to leave a financial legacy in the form of Toronto real estate, I'd respect that and wouldn't dissuade you. You mentioned you share a child with an ex so perhaps you don't have access to the child enough to create lots of memories or to have a strong impact on her development (though seems to me the strongest impact on children is via observing what their parents spend their lives' moments on, what they do with every hour they've been given, from my experience the rest is pretty much ignored), so if you feel a financial bequest, in conjunction with your normal parental presence, and even if it causes some extra work or inconveniences, is your way then do so. Easy for relatively-affluent 1st world people who've been here a few generations to say it's not about money, it's about memories, etc, but much of the rest of the world would disagree and many would be very grateful to be left a financial benefit that may be life-changing for them and maybe their children too. Who knows, keep your health up and you may see another generation that will benefit from your financial legacy! In my opinion.

You're welcome, promise, and good luck!