# Stuck with two houses should i cash in RRSP's?



## imaginenewmedia (Apr 4, 2012)

We bought a new house with a firm offer (downsizing) in March and we take possession at the end of August. We haven't managed to sell my existing home yet, (been on the market since early June) so we have the very real possibility of owning two homes. Should we temporarily cash out our RRSP's to ride this out? I'll still need to borrow as we don't have enough in our rrsp's. especially after with holding tax. We haven't contributed to our rrsp's in over ten years, so I'm thinking we may have lots of headroom to reinvest when we finally sell our existing home.
Is there a downside to this?
Any help is appreciated!
facts:
me: 59, retired, 40K per year income, 95k in rrsp's
she: 61, working, 35k per year income, 95k in rrsp's plans to quit work when we move.
existing house: up for sale, expect to get $465k for it
new house: I have to come up with $259k on August 28th
consumer debt: $110k credit line against current house. 
No other major assets or debts.


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## wendi1 (Oct 2, 2013)

You lose your $95K RRSP contribution room when you cash out, and have to pay tax on it. Since you have to borrow anyway (short term, I hope), I wouldn't cash out. Ask your mortgage lender how much it would cost to cover you - this is a very common problem.

Your RRSPs are very small for your ages - do you have substantial pensions?


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## HaroldCrump (Jun 10, 2009)

What is the reason for your old house not selling?
Is the general market in your area slow i.e. houses normally take 2 - 3 months to sell?
Or is this specific to your house only?

Are there any peculiarities in your house that may be turning off buyers (such as no parking, facing onto a busy street, etc.)?
Has your agent contacted the agents of prospective buyers that showed the house, and asked for their opinion/feedback?

Maybe you have overpriced it to an extent that is turning off buyers from even putting an offer?

IMHO, it is simpler to first try and find out why the house is not selling, and make efforts to sell it, rather than take drastic steps such as liquidating nearly $200K of RRSPs.
It may simply be a pricing issue, and lowering the price by $10K or even $20K may draw buyers back in for showings.

On the other hand, if there are serious reasons why the house isn't selling, then you may be stuck with it for a long time, and cashing out your RRSPs at this time may not be the end of your problems with the old house.


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## imaginenewmedia (Apr 4, 2012)

Thanks for the feedback. Our house has been on the market for about 5 weeks, listed at 489.9k. It took longer to get it prepped for market than I thought. Our rrsps and pension incomes are what they are. Some will consider it small, some would think it's a goldmine. My question is about TAXES and RRSP's. Assumming I have enough headroom, is there any financial penalty overall if I cash them out and recontribute before the end of the year?


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## HaroldCrump (Jun 10, 2009)

imaginenewmedia said:


> My question is about TAXES and RRSP's. Assumming I have enough headroom, is there any financial penalty overall if I cash them out and recontribute before the end of the year?


Technically, you cannot "re-contribute" withdrawn RRSPs - the room is lost forever.
However, if you have more RRSP room left, you can use that room to make contributions.

On the other hand, TFSAs withdrawn can be re-contributed, but not before the end of the current year.
You can only re-contribute after 1st Jan of next year, plus the new room for next year.

Regarding taxes, RRSP withdrawals will get added to your regular income (earned T4 income or pension income), and income tax will be payable as such.
On $95K, there will also be a 35% withholding tax, which may (or may not) be partially recoverable when you file your taxes next year.

In general, liquidating RRSPs to finance your 2nd house sounds like a terrible idea.

Why don't you figure out your tax liability (using "napkin" tax filing) for next year, and then reduce the asking price of your house by the same amount?
If this manoevre is going to cost you say $35K, start reducing your asking price by $10K, then $20K, up to $35K.

Unless there are serious issues with your house, surely it will sell at a certain discount point between $10K - $35K.


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## wendi1 (Oct 2, 2013)

Sorry, imagine - I am nosy, it's true.:smilet-digitalpoint

The major problem is the withholding tax, which you will not get back before you file your taxes, whether you recontribute this year or not. I agree with Harold that I would not withdraw RRSP money except as a very, very last resort.


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## tygrus (Mar 13, 2012)

You picked a dangerous time to try and carry two houses. Always sell one first before buying the other even if you have to rent for a while. You are playing with fire here cause the housing market is sputtering in a lot of places now.


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## HaroldCrump (Jun 10, 2009)

tygrus said:


> Always sell one first before buying the other even if you have to rent for a while.


That has its pitfalls as well.
Calling it an _always_ dictum is not right.

Once you have sold your current house, you are on a short leash (usually 45 days) until the sale closes to find, negotiate offer, close on, and move into the new place.
You may not find what you like/need, and may be forced to settle for something inferior and/or end up overpaying.

It is easy to say _just rent_, but it is not easy to move thrice, usually within a period of 1 year.
There are huge expenses and hassles associated with moving.

In the case of OP, it doesn't sound like they have a big family with kids etc. so maybe it is not a big deal, but even then, I can't imagine a 60 yr. old couple being excited at the prospect of moving thrice in a year.


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## marina628 (Dec 14, 2010)

I would drop the house 10k before I would touch my RSP ,Usually on bridge financing the bank will only want interest payments so I would not worry if you cant close for 3-4 months.And coming from somebody with 11 rentals do not fall in the trap of trying to rent it instead of selling


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## imaginenewmedia (Apr 4, 2012)

We saw the new place we wanted to be built back in March, and the builder wouldn't accept a conditional offer.
I don't see why it's such a bad idea. Sure, my income goes through the roof and I pay huge withholding taxes up front , but when I sell my house I get the money back and recontribute using my available overhead, (which i think will be a lot even though it's reduced by the amount I've withdrawn) This should all work out in the wash taxwise unless I'm missing something. 
Btw my house being on the market for five weeks doen't mean there's anything wrong with it. Houses on my street have gone within a week for over asking price, and some have taken six months and sold for the original asking price. Sometimes you have to be patient! 
This post seems to be talking about a similar thing.
http://canadianmoneyforum.com/showthread.php/6337-quot-Temporary-quot-RRSP-withdraw


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## Eclectic12 (Oct 20, 2010)

imaginenewmedia said:


> ... My question is about TAXES and RRSP's.
> 
> Assumming I have enough headroom, is there any financial penalty overall if I cash them out and recontribute before the end of the year?


The question is what RRSP contribution room do you have already. 

From the sounds of "not contribution for ten years to an RRSP", you likely have enough RRSP contribution room. To be sure, I'd figure out how much you plan to withdraw and compare against the NOA from the last tax return - which will notify you of how much RRSP contribution room is available.

For example, if you want to withdraw $90K from your RRSP ... to put it back into the RRSP, your NOA from last year's tax return needs to show something like $95K or more RRSP contribution room available.

The other factor is that on amounts over $15K, a withholding tax of 30% will be taken (Quebec is different, of course ). I'm not aware of ways to reduce this amount or get it back before filing one's tax return the following year.

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/wthdrwls/rts-eng.html


The other question is where the replacement money to contribute to the RRSP is coming from ... if it is the sale of the original house - how can you be confident the sale will happen in time (i.e. in time to have completed the RRSP contribution before the Feb 2015 cutoff)?

If one withdraws and the house doesn't sell (or other means of contributing to the RRSP can't be found), not only will you be carrying two houses, there likely will be a bump up for income - where the 30% withholding tax may not be enough to cover it ... meaning you will have to come up with even more cash to cover the income tax bill.


If all works out (ex. withdraw, sell original house, contribute to RRSP on time) - then the penalty I can think of is losing use of the 30% withholding tax. The intangible penalty is stopping the tax deferred growth, any stress until the original house sells and if the timing does not work out - any stress/scrambling an additional tax bill will cause.

Note that with the existing incomes as well as credit line debts - there's not a lot of room for any issues.


Cheers


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## Eclectic12 (Oct 20, 2010)

imaginenewmedia said:


> ... Sure, my income goes through the roof and I pay huge withholding taxes up front , but when I sell my house I get the money back and recontribute using my available overhead, (which i think will be a lot even though it's reduced by the amount I've withdrawn) ...


Question is how long is it before the original house sells?

If it sells in June 2015 - can you carry two houses plus a potential tax bill for the 2014 $40K income plus the $95K withdrawal where based on these two items - the 2014 income is $135K?

I don't know what other deductions you have or what province you are in ... but on $135K, but in Ontario for 2014, up to $40,120 - the tax rate is 20.05%. As soon as the income has climbed to $43,953 - the tax rate is 31.15% - which a 30% withholding tax does not quite cover. At $83,237 - the tax rate is 39.41%, which is a 9.4% tax bill to pay. I could keep going but hopefully you see the potential issue.

http://www.taxtips.ca/taxrates/on.htm

Bear in mind - these are just for your RRSP withdrawal ... the same calculations are required for any RRSP withdrawal from her RRSP as well.




imaginenewmedia said:


> ... This should all work out in the wash taxwise unless I'm missing something.


AFAICT - the only way it's a wash is if the RRSP contribution is made in time to be applied to the 2014 income, when the RRSP withdrawal pumped up the income as well as the income tax rates charged. If sale happens so that the proceeds are only available after the deadline - the RRSP deduction can still be taken against 2015 income but that won't be at the same income tax rate.

Going back to my Ontario example - the over $87,907 up to $136,270 range is taxed at 43.41% but a 2015 RRSP deduction where income has dropped back to $41K means that the refund will be based on a much lower tax rate of 24.15%.




imaginenewmedia said:


> ... Btw my house being on the market for five weeks doen't mean there's anything wrong with it. Houses on my street have gone within a week for over asking price, and some have taken six months and sold for the original asking price.
> 
> Sometimes you have to be patient!


Trouble is ... in order to make the income tax charged exactly equal to the income tax being avoided, you are on a clock where the cutoff is Mar 3rd, 2015. 

If you sell on Jan 28th, 2015 where the closing is Mar 1st and the proceeds are on hold for another ten business days - the RRSP contribution won't be until Mar 11th and will apply to 2015 income at a much different income tax rate.

Cheers


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## imaginenewmedia (Apr 4, 2012)

Seems like i can get a low interest credit line for 65% of the value of our new home. That would be about 180k. ( They wont give you one for your existing home if it's up for sale) So I need to come up with about $100k. I need to figure out how to rob our rrsp's to make up the difference. I'm prepared to ride this out for a few months if my interest payments are only going to be about $750 a month or less. and I can recover my full rrsp value at the end of this.


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## marina628 (Dec 14, 2010)

Maybe things have changed but in 2010 when we had our new home built , TD Gave us a credit line on old house and then a mortgage on the new house to close the deal.Could you not do 60% HELOC on existing house and a mortgage on new property so you close without hassle?We had no offer when we sort out the money with our bank and luckily we got a sale and only had to keep both homes for about 2 months.


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## Just a Guy (Mar 27, 2012)

Most banks will offer bridge financing to cover the period where you own two houses. Just talk to the bank about your options...if they do t give you the answer you're looking for, ask to talk to their supervisor or manager. It could just be inexperience on the part of your banker.


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## Eclectic12 (Oct 20, 2010)

imaginenewmedia said:


> ... So I need to come up with about $100k. I need to figure out how to rob our rrsp's to make up the difference...


If this is $100K useable ... the 30% withholding will mean needing to pull out at least $130K as from what I've read, the $30K withholding amount will be sliced off by the financial institution to forward to CRA.




imaginenewmedia said:


> ... I can recover my full rrsp value at the end of this.


Once the RRSP withdrawal is made in 2014 - you should be committed to putting the RRSP cash back no later than Mar 3rd, 2015.

I used to the 2013 Ontario tax spreadsheet available at http://www.peeltech.ca/mytax.shtml to run the numbers for my fictional Ontario resident (i.e. pull out of RRSP $95K in 2014 with 30% withholding tax and put back the $95K in may 2015).

This timing change resulted in a 2014 tax bill of $36.2K (the withholding tax covers $28.5K and the 2014 tax return identifies the owing $7.7K). Then in 2015 due to a lower income level, only $7.1K comes back with the gov't pocketing the rest.




Just A Guy said:


> ... if they don't give you the answer you're looking for, ask to talk to their supervisor or manager.
> It could just be inexperience on the part of your banker.


Having a mortgage broker run up a bunch of quotes would also help compare to make sure it's all competitive plus there aren't any artificial limits being put into play.


Cheers


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## imaginenewmedia (Apr 4, 2012)

Lots of good stuff here! Thanks for the info. How do I know my remaining contribution limit? Do I just go through my assessments for each year and add them up? Is there a limit as to how many years back I can use up?


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## HaroldCrump (Jun 10, 2009)

imaginenewmedia said:


> How do I know my remaining contribution limit?


It will be on your last Notice of Assessment.
Or, if you are registered on the CRA MyAccount website, you can check it online there.



> Do I just go through my assessments for each year and add them up?


You don't have to - the NOA (or the website) show you the total.



> Is there a limit as to how many years back I can use up?


No, just go by the amount shown on the NOA/website.


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## Eclectic12 (Oct 20, 2010)

^^^^

+1 ... though there are also other sources CRA provides such as the TIPS (Tax Info Phone Service), Quick Access or if a T1028 was sent to you.

Here's the link (though the text is referring to finding out the 2013 RRSP contribution limit - I can't imagine CRA shutdown any of the services).
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrsp-reer/cntrbtng/lmts-eng.html


Note that when your 2013 tax return was processed, CRA took what they had on file for the 2012 Limit, subtracted off any contributions made in 2013, added in any new RRSP contribution room earned plus any other relevant parameters and the grand total is what's put on the NOA the 2013 tax return and is labelled as your 2014 RRSP limit.

The only reason to go back to previous year's NOA's is if you suspect CRA made a mistake (as they did to me one year) to try to track down where the error was made as well as to figure out what the error was.


For most people with simple RRSP calculations ... an error is rare.

Cheers

*PS*

Since the NOA is working off the 2013 income tax return ... if you've made any RRSP contributions in 2014 after Mar 3rd, 2014 - you will need to subtract these contributions from the NOA number to arrive at the current number.


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