Using Your RRSP for Your First Home?
With the federal government’s Home Buyers’ Plan, you can use up to $25,000 of your RRSP savings ($50,000 for a couple) to help finance your down payment on a home.
To qualify, the RRSP funds you’re using must be on deposit for at least 90 days prior to the withdrawal date. You must also provide a signed agreement to buy or build a qualifying home.
The best part is the withdrawal is not taxable as long as you repay it within a 15-year period. The payback amount is at least one-fifteenth a year of the amount you withdrew from your RRSP.
You need to qualify as a ‘first-time’ home buyer and it’s actually possible to qualify as a first-time home buyer more than once in your life. As long as neither you nor your partner owned a home that was your principal residence during the four calendar years before the year you plan to use the HBP, you will be eligible.
You can withdraw up to $25,000, but it has to be paid back over the next 15 years and you are expected to make payments each year. The repayment period doesn’t start until the second calendar year after you make the withdrawal. For example, if you used the program in 2015 to make the withdrawal, you don’t need to start making repayments to your RRSP until 2017.
The annual repayments required are 1/15th of the original withdrawal amount. So if you borrowed $15,000 from your RRSP under the HBP, the annual payment required would be $1,000 per year for 15 years. Repayments under the HBP do not generate tax relief like a regular RRSP contribution. Remember, you’re paying back what you withdrew, and would have received the tax benefit when you originally contributed the money.
If you’re unable to make the required repayment in any given year, then the annual repayment amount is added to your income and you will owe tax on that amount. So if your repayment amount is $1,000 and you only repaid $500 in a particular year, then the remaining $500 is included as taxable income.
You can make repayments into a different account or even at a different financial institution than the one you withdrew the funds from.
What is the Advantage of the Home Buyers’ Plan?
Even if you already have enough money for your down payment, it may make sense to access your RRSP savings through the Home Buyers’ Plan.
For example, if you have already saved $25,000 for a down payment and assuming you still had enough “contribution room” in your RRSP for a contribution of that amount, you could move your savings into an RRSP at least 90 days before your closing date. Then, simply withdraw the money through the Home Buyers’ Plan. The advantage? Your $25,000 RRSP contribution will count as a tax deduction this year. Use any tax refund you receive to repay the RRSP or other expenses related to buying your home. But remember, you will have to pay that amount back to your RRSP over the next 15 years.
Is the Home Buyers’ Plan Right For You?
It’s very important to your overall plan that both the pros and cons of this strategy be reviewed. There are a number of questions you should be asking yourself about this strategy:
- Will you and are you financially able to repay the requirement amount each year?
- Is it the right time to cash out your RRSP (i.e., this depends on the investments and rate of return you are getting on your current investment)?
- Is it worth forgoing the future tax-sheltered growth potential of your RRSP in favor of putting the funds towards your down payment?
The Home Buyers’ Plan Process and Timelines for Withdrawal
You may have cash or TFSA funds in a bank account available for the initial deposit required when you write an offer to purchase on a home. If you only have the RRSP funds then you will need to plan ahead to complete the withdrawal the funds before writing an offer on a home.
The withdrawal process takes between three to five business days. Each financial institution has a form (T1036) that must be signed to complete the withdrawal. This form is then forwarded to Canada Revenue Agency by the financial institution. This ensures that you will not have to pay income tax on the RRSP amount withdrawn.