Buying Property with IRA & RRSP
A Guide for Canadian Citizens
How to Use Your RRSP for Property Investment?
Real estate investment is a popular portfolio diversification strategy among Canadians, offering long-term financial stability. While buying property may be a more traditional approach to real estate investment, know that it is not the only way: you can invest in property indirectly with your RRSP.
While doing so provides several important tax benefits, this strategy also requires much planning and research. In this comprehensive guide, we will explore in detail how to use RRSPs to buy investment properties and alternative strategies to help you reach your investment goals.
How Do You Invest RRSP in Private Real Estate?
Funds deposited into RRSPs not only offer taxation advantages—they also allow for a range of investment assets. While most Canadians follow their bank advisor’s recommendations and invest in standard stocks and mutual funds, more seasoned investors can benefit from investing their RRSP funds in private real estate.
This investment strategy involves transferring RRSP savings directly to real estate. In return, you earn interest on the investment, receiving a reliable source of rental income. Furthermore, using an RRSP to buy into an investment property can provide tax benefits, such as the ability to deduct losses against other investment income and defer taxes until retirement, when your overall income will likely be lower.
However, investing your RRSP into private real estate investment isn’t as straightforward as other investments you choose to make. It requires a thorough understanding of the private real estate process, and, as a result, the assistance of a private lending company like SeaportCredit.com can make all the difference in securing your investment.
Is Using Your RRSP For a Down Payment a Good Idea?
In addition to investing your RRSP funds into private real estate through a private lending company, you may use the funds to purchase an investment property yourself. However, using your RRSP savings as a down payment requires selling your qualified investment assets and withdrawing cash. The main drawback of this approach is that these funds will no longer be tax-deferred, meaning you would be required to pay taxes on the withdrawn amount, even if you have retired already.
Generally speaking, using your RRSP for a downpayment is not the most efficient way to invest in private real estate. Here is why:
• Withdrawal taxes. RRSP withdrawals are taxed as ordinary income. As a result, such withdrawals may push your income into a higher tax bracket, leaving you with a considerably smaller down payment than expected.
• Opportunity cost. When selling your RRSP investments for cash, you are losing out on the opportunities associated with a continuously growing stock market.
• Investment property taxes. While you don’t immediately need to pay taxes on your RRSP investments, investment property income will be taxed yearly. In addition, should you decide to sell your investment property, you would be charged substantial taxes.
• Increased portfolio risk. Finally, pulling funds out of the stock market and investing them into a single real estate asset will reduce your portfolio diversification and can negatively impact your investment risk profile.
Final Word
Beyond question, using RRSP to buy investment property offers a range of benefits, including deferring taxes on rental income and capital gains until retirement. That being said, investing RRSPs into private real estate is easier said than done: simply withdrawing RRSP savings and using them as a down payment offers more risks than benefits. Even The Home Buyer’s Plan, which allows individuals to withdraw RRSP funds tax-free, is not suitable for purchasing investment properties.
Rather than spending your time and efforts working through the process of investing in real estate with your RRSP yourself, you could choose to work directly with real estate investors. However, not only would you need to find reliable borrowers and trustees, but you would also be required to conduct thorough due diligence and research.
The good news is that these are not your only options. Instead, you can simplify the process significantly by working with a dedicated mortgage administrator like SeaportCredit.com. Our team knows the ins and outs of private real estate investments, and we do the legwork for you when it comes to finding qualified borrowers and ensuring timely payments. Whether you want to learn more about our process or are ready to get started on your real estate investment journey, get in touch with us.