“Money is only a tool. It will take you wherever you wish, but it will not replace you as the driver.” – Ayn Rand
The Home Buyers' Plan (HBP) is often referred to as the first time home buyers' plan which isn't strictly accurate. While it's often used by first time home buyers, you don't have to be a virgin homeowner in order to use it. Provided that you haven't lived in a home you owned during the previous four years (or lived with a common law or marriage partner in a home that they owned) you may still qualify for the Home Buyers' plan. You can find out for sure by consulting the HBP section of the CRA website.
Related article: Buying your first home
If you qualify for the HBP you can borrow up to $25,000 from your RRSP towards the purchase of a home. If you happen to work for a company that offers a group RRSP, there are some key advantages to saving for your down-payment through your company plan rather than through a personal RRSP. Most group plans allow members to make HBP withdrawals but you should check your group's plan rules to make sure. Assuming your group plan allows HBP withdrawals, here are three reasons why you might want to use your group RRSP account to save for your down-payment:
Related article: Lesser known facts about the RRSP
1. Employer Matching
About 85% of employers who offer group RRSP plans to their employees also offer some form of matching incentive. If your employer will match a percentage of the money you are putting into the plan then that gives your savings an instant boost. Matching rules vary greatly from plan to plan so it's important to ensure you know what the rules are for your plan in order to make sure you're getting the maximum match you're entitled to.
Related article: Are you missing out on FREE money?
2. Before-Tax Savings
Many employers who offer Group RRSPs allow their employees to make payroll contributions with before-tax dollars. This means the employee gets the tax savings on each paycheque rather than in a lump-sum at the end of the year. This is very powerful when it comes to saving because it allows the employee to save more each paycheque than they could if they were saving with after-tax dollars.
Related article: Marginal tax vs Average Tax
Here's an example . . . Jenna is saving for her first home and decides to put $300 per pay into her RRSP account at the bank. Jenna makes $55,000/year which, in Alberta, puts her in a 32% tax bracket. This means that she has to earn about $450 before taxes in order to put $300 of her net pay into her personal RRSP. Jenna's employer offers a group RRSP. If Jenna used that account to save, she could contribute $450 per pay to the group plan and she would save about $150 (32% x $450) in taxes on each paycheque. This would make her net pay about $300 less. In her pocket it would feel the same, Jenna would still have $300 less per pay, but by saving with before tax dollars she can increase her savings rate by 50% without feeling it. Over 24 pay periods, saving $450 before taxes instead of $300 after taxes lets her save an extra $3600/year which gets her to her goal faster.
3. Automatic Savings
The strategy of “paying yourself first” is widely accepted as a cornerstone of financial success and having an automated way to save makes it much easier to do. Saving through a group RRSP plan allows you to save directly off your paycheque before your pay even hits your bank account. It's an easy and straightforward way to achieve your goals.
Related article: Pay yourself first
For many people, saving for a down-payment on a home is their first major savings goal. With house prices in Canada on the rise, it's not a goal that can be reached overnight; it takes time and discipline. While I'm not totally convinced that using retirement savings towards a home purchase is a good idea (that's a whole other article!) there are some definite advantages to saving through a group RRSP compared to a personal RRSP, especially if you're trying to increase your savings rate. If you have access to a plan that you're not taking full advantage of, it might be worth looking into how you can use it to help you reach your goals.