How to Use An RRSP to Buy a Home (and maybe get some free money from the government too!)
In some cases, this is a great idea and even better, you may get some free money from the government to help! Read on.
How Does It Work? For qualifying home purchases, and if certain conditions are met, you are permitted to withdraw up to $25,000.00 from your RRSP towards your downpayment on a home. Each spouse or common law partner can withdraw this amount under the Home Buyers’ Plan (HBP) if they are the annuitant, INCLUDING spousal RRSPs. The limit is $25,000 each, or $50,000 in total if you’re purchasing the property together, jointly.
Who Qualifies? First time homebuyers are able to participate in this federal Home Buyers’ Plan. (You are deemed to be eligible as a first-time buyer if during the 4 years previous to the year of withdrawal of the funds from the RRSP, and up to 30 days prior to the withdrawal, neither you nor your spouse nor common-law partner owned a home in which either of you lived. You must provide a signed agreement to purchase or to build a qualifying home.
Other details: You must pay back the withdrawal from the RRSP over 15 years. The payments start in the second year following the year you take the money out of the RRSP. (If you don’t make the required repayment, an amount must be added to your income in the year of the shortfall.)
The withdrawal remains non-taxable as long as you repay it within the 15 year time period. So, each year, you must repay at least 1/15th of the amount you with withdrew from your RRSP.
Note: You cannot make a withdrawal under this Home Buyers’ Plan within 90 days of a contribution, or your ability to claim a deduction for that contribution may be restricted. So, you should make the RRSP contribution more than 90 days before the date you plan to make the withdrawal. (After 90+ days, your deduction may generate a refund and just think – you could add that to your downpayment, or use the tax refund amount to help with moving expenses.)
Here’s the part about free money. That’s right, tax refund (amount depends on your marginal tax rate!) Let’s say you’ve been saving cash for a downpayment, and you’re not buying for at least 91 days. It may be a good idea to put your downpayment funds into your RRSP, providing you have contribution room to do so, and then withdraw your downpayment through the Home Buyers’ Plan. The advantages are two-fold:
- You are making a contribution to an RRSP and will likely receive a tax refund because you did. Just think what that refund could help pay!
- You repay 1/15th of the amount you withdrew yearly into your RRSP, resulting in a nest egg at the end of the 15 years, that you might not have had, had you not utilized this HBP.
By the Way, Second Time’s a Charm! Even if you’ve used the HBP before, there are certain situations where you may be able to participate again. You have to have repaid any previous withdrawals in full back into the RRSP before the beginning of the year in which you’re hoping to participate in the HBP again. You must also qualify to be a first-time homebuyer once again.
Things to Consider: 1. Is it the right time to withdraw out of your RRSP (ie. what investments are you currently in/rates, etc) 2. Are you likely to discipline yourself to repay 1/15th of the withdrawal amount to your RRSP each year (note: most on-line banking have ways to set up an automatic payment with a future date…)
As with any tax strategy, you should run your plans by your tax advisor.