It can be tempting to put off thinking about your retirement, especially if you're still in college or just starting your career. But the fact is, the earlier you start investing in your retirement, the longer your money has to grow. So, in theory, the best time to start investing is yesterday.
PLUS, you don’t have to wait until retirement to make use of your RRSP. In Canada, the government offers a Home Buyers' Plan or HBP to aid homebuyers in getting their new house. We'll take an in-depth look at Home Buyers' Plan, how it works, and how to use your RRSP to buy your first house.
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a special investment account designed to help you save for retirement. It is registered with the Government of Canada. You can contribute to your RRSP until the age of 71. You can create an RRSP for yourself and/or for your spouse or common-law partner. Your contributions to an RRSP are tax-deductible and can be used to reduce your taxes each year and in retirement.
What is the Home Buyers' Plan (HBP)?
The Home Buyers' Plan is a government program that lets you borrow from your RRSP tax-free to buy or build your home. You then have 15 years to pay back the amount you withdrew, interest-free.
Who is eligible for the Home Buyers’ Plan?
To participate in the Home Buyers’ Plan, you must meet a variety of conditions:
- You must be a resident of Canada.
- You and your spouse must not have been the owner-occupants of a principal residence during the year of the RRSP withdrawal and the previous four years.
- You have an RRSP with sufficient funds to withdraw.
- You are a first-time home buyer. According to the Government of Canada’s website, you are considered a first-time home buyer if, in the four-year period before you began participating in the HBP, “you did not occupy a home that you owned or one that your current spouse or common-law partner owned.”
- You are a repeat buyer purchasing or building a home for a relative with a disability.
- You have a written agreement to buy or build a home for yourself or for a relative with a disability.
- You plan to purchase a qualifying type of house located in Canada. Most types of homes, including condos and apartments, qualify. Co-op housing doesn’t always qualify, but there may be exceptions.
You can use the HBP more than once if you've paid back your previous HBP in full by the deadline.
To learn more about the Home Buyers' Plan, see the Canada Revenue Agency site
How does the Home Buyers’ Plan work?
- Once you are approved for the Home Buyers’ Plan, you can withdraw up to $35,000 from your RRSP without paying any withholding taxes. Couples may each be able to withdraw $35,000, for a total of $70,000.
- Your RRSP funds must have been in the account for at least 90 days, or they are not eligible for withdrawal under the HBP. You have until October 1st of the year following your withdrawal to buy or build your home.
- You must also withdraw from your RRSP no later than 30 days after obtaining the title of your new home. All your withdrawals under the HBP must be made within one calendar year.
RRSP Home Buyer's Plan Advantages
One of the advantages of the RRSP Home Buyer's Plan is that it helps aspiring first-time homeowners make their mortgage down payment. Through your RRSP, you can gather the 20% down payment required to prevent paying default insurance premiums. Plus, you won’t pay tax on your RRSP withdrawal. (Withdrawals from your RRSP outside of the HBP are taxable.)
Another immediate advantage is that you get a tax deduction for your RRSP contributions. Here's an example of how it works: Your annual income was $50,000. So, you made a $5,000 RRSP contribution. When you file your taxes, you can claim a deduction for the $5,000 contribution, which will bring your taxable income down by the exact amount of your contribution to $45,000.
And your future self will thank you! With an RRSP, you defer paying tax on your investment growth until you withdraw your money in retirement. Not only will you have potentially 40+ years of tax-deferred growth, you’ll also be in a lower tax bracket when you withdraw your funds. More long-term growth plus less taxes equals a better retirement!
Things to Remember
- If your RRSP doesn't already have thousands of dollars in it, then HBP won't be of much help to you. Although purchasing a house is a huge life decision, it's also important to have extra money to compensate for the withdrawn funds. Moreover, once funds are taken from your RRSP, you cannot cancel your HBP, except if you move out of Canada as a non-resident or you did not end up purchasing a home.
- The growth in your account is only tax-deferred, not tax-free. While you're benefiting from tax deductions for your contributions now, it's important to remember that when you do start withdrawing the funds in retirement, it will become taxable income. However, as we mentioned above, you’ll probably be in a lower tax bracket in retirement, which means paying a lower tax rate than when you're working and accumulating wealth.
- Since this is a loan, you must repay it according to the plan. Commonly, repayment should be accomplished within 15 years, wherein 1/15 of the amount loaned should be made yearly. That means you must secure that you have the financial means to make payments to your regular mortgage and RRSP repayment. Failure to follow these repayment rules can result in a penalty.
- Withdrawing some funds to make a down payment for your first home will affect your finances in the long run. This means that reducing your RRSP funds today to be repaid after 15 years will not give your remaining fund the chance to grow and earn compound interest.
How to Use Your RRSP to Buy a House
Step 1:
For at least 90 days, you must provide sufficient contributions in your RRSP before withdrawing them. This will be the most vital step to qualifying for the program.
Step 2:
Submit a completed copy of Form T1036 to the financial organization that has your RRSP account.
Step 3:
After providing the needed documents, make your home purchase. You can finally withdraw the funds from your RRSP account thirty days after buying the house.
Step 4:
Declare your HBP withdrawal in your income tax return.
Additional Help For Home Buyers
Some other national first-time home buying programs include:
- First-Time Home Buyer Incentive. The government gives eligible home buyers a tax-free loan amounting to 5% or 10% of an eligible property’s purchase price.
- GST/HST New Housing Rebate. Eligible home buyers can recover some of the GST or the federal part of the HST they paid on a newly built home.
- Home Buyers’ tax credit. Eligible first-time home buyers can receive a $5,000 non-refundable income tax credit.
Takeaway
RRSP Home buyer's plan is an excellent program for any first-time homebuyer looking to increase the size of their down payment. The HBP is accessible to the average Canadian, and the application process is not onerous. Most homes will qualify under the program, and as long as you remember to pay back your contributions at a rate of at least 1/15th per year, the HBP can be a valuable, tax-free way to boost your home down payment. Yes, it has drawbacks, but no one can deny the ease it may provide to people trying to buy their perfect home!
Need help saving for a house or with your RRSP?
Do you need help saving to buy your first house? Or maybe you need to set up an RRSP? Whatever the case, we can:
- explain your options,
- answer your questions, and
- help you build a plan that meets your needs and goals.
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