Are you currently saving money in your registered retirement savings plan (RRSP) for a house purchase? Now is a great time to understand how the homebuyers plan (HBP) works with your RRSP. This feature is included within your RRSP account and allows you to save for a down payment on your first home. It can be hard to save for retirement while saving for the down payment but the plan can help kill two birds with one stone:
You can withdraw up to $25,000 tax free from your RRSP to put towards your down payment. If you are purchasing a house with your partner, together you can withdrawal $50,000 (i.e. $25,000 each) for a down payment on your first home. The money can be withdrawn from multiple RRSP accounts as long as the total does not exceed the $25,000 limit. If your employer has a group RRSP that you contribute to, this account can also be used towards your HBP withdrawal.
Can only be used for the purchase of a first home. However, if there has been 4 years since the sale of your previous home, you can re-qualify for the HBP again. If your partner just sold their home to purchase a new one with you and this is your first home purchase, you can still withdraw $25,000 for the down payment, but your partner cannot. The four-year rule is very specific - it is not based solely on the calendar year, but down to the exact sale date. In addition, the previous HBP withdrawal must be paid back in the RRSP before you can re-qualify.
You must repay back the amount in 15 equal installments. Any money you withdraw must be paid back the second year after the withdrawal date or sooner. If you do not make the repayment for that year, the withdrawal amount will be added to your income and you will pay taxes at your current marginal rate. You can pay back more towards the HBP in any given year, but that does not mean the next year you owe less. The installment amounts remain the same each year regardless of if you paid more the previous year. All additional installments are removed from the last payments working backwards. For example, if in Year 5 you pay double the amount back, in Year 6 the amount will be the same but Year 14 will be the final payment.
The withdrawal must take place 30 days after closing. To be considered part of your HBP amount, the money must be withdrawn from your RRSP within 30 days of closing. Because the paperwork is sent to the government for processing, withdrawals counting towards the HBP can take additional time. Ensure that you get your paperwork in order and ready to submit right away so you do not miss the deadline. You cannot start to withdraw the money until you have a written agreement to buy or build a house.
The money must be in your account for 90 days before withdrawing it. If you made a large deposit on January 31st, this money cannot count towards the HBP until April 1st. If you are planning to contribute to your RRSP this year and you are looking to use the HBP feature, take the 90-day period into consideration. You will also want to remember this restriction when determining your closing date.
HBP repayment does not count towards tax breaks. The money you deposit into your RRSP to pay back the HBP will not be used as a tax break on your current income. It does not matter if you pay the minimum amount or more; the money repaid is used against the HBP and not towards your tax break. If you depend on your RRSP contributions to lower your tax bracket, you will need to increase your contributions while still paying the minimum amount to the HBP.
The HBP can be a beneficial feature if you fully understand all the rules and regulations surrounding it. However, it is not the only way to save for a house; you can also use a Tax-Free Savings Account (TFSA) or even a simple high-interest savings account. Planning for a home, retirement and even a family can be a daunting task, so be sure to speak to an independent financial advisor to look at all your options and what can work best for you.
If you'd like more advice from Aaron on budgeting for homeownership, give him a call!
Susan Creasy Financial Inc.
621 Norris Court, Unit 5 Kingston, Ontario, Canada K7P 2R9