Who says that your retirement savings should only be used when you retire. OK. Lots of financial advice tells us not to touch our retirement nest egg — apparently we’ll need it when we no longer have a regular income filling up our daily checking account. But does that mean you should never, ever, ever touch the money saved in your Registered Retirement Savings Plan (RRSP)?
Turns out saving up a down payment for a home using your RRSP is a great way for Canadians to speed up the process of becoming homeowners.
The Canadian government started the RRSP Home Buyers’ Plan (HBP) back in 1992. The concept was simple: A diligent saver who contributed to their RRSP could apply for an interest-free loan under the federal government’s Home Buyers’ Plan. At present, the HBP allows each first-time home buyer to withdraw up to $25,000 from their RRSPs to purchase or build a home, without having to pay tax on that withdrawal. (That means a couple can withdraw up to $25,000, for a total of $50,000 that can be used to purchase a home, as long as they each qualify as a first-time home buyer.)
Great. Right? But now that you’re ready to jump into the real estate market, how do you actually go about using your RRSP for that down payment? Let’s start with the basics.
What is the RRSP Home Buyers’ Plan (HBP)?
As mentioned, the Canadian government started the RRSP Home Buyers’ Plan (HBP) in the early 1990s and recently, they increased the borrowing limit to a maximum of $25,000 from your RRSP as an individual, and up to $50,000 from your RRSPs as a couple.
The loan is considered tax-free and you have 15 years to pay back the full amount.
Who qualifies for the Home Buyers’ Plan?
The qualifications to be eligible for the Home Buyers’ Plan are quite simple:
- You must be a first-time home buyer
- You must have a document stating that you are buying or building a home for your own personal use in the same calendar year that you withdraw your RRSP money (under the HBP)
So what does this mean? While it might seem self-explanatory, a first-time home buyer means you have not owned a property in the four calendar years prior to the year you opt to participate in the HBP. For those living with a common-law or spouse in a property owned by this partner, you may not disqualify as a first-time home buyer. While provincial rules will designate who is considered a common-law or spouse, federal laws stipulate that anyone who has lived together for a year or longer are considered common-law. This is important because this designation will disqualify you from qualifying for the federal HBP. It also means that neither you or your partner will qualify for the Home Buyers’ Tax Credit, a rebate of up to $750 given to first-time buyers (based on the same criteria as the HBP).
For those that do qualify for the HBP, there are a few rules to follow. If you plan on building a home, the property must be completed and suitable to be lived in before October 1st one year after the year you withdraw your RRSP funds under the HBP. If the property will not be ready by that date, you may cancel the HBP or choose to buy or build a different home.
How do you withdraw from your RRSP?
Now that we know the HBP is regulated and monitored, it’s important to meet all the requirements of the program. According to the Canadian government, you must:
- Be a resident of Canada
- Take no more than $25,000 from your RRSP
- Receive the full amount within one calendar year
- Not be withdrawing from a group RRSP or locked-in RRSP
- Keep the funds in your RRSP for a full 90-days before withdrawing
- Fill out the Home Buyers’ Plan (HBP) Request to Withdraw Funds from an RRSP.
It’s this last bit — the form — that often gets people confused. In practice, the best option is to book an appointment with the financial advisor or bank manager where you hold your RRSP. Sit down and talk to this person about your plan to withdraw funds to purchase real estate. They should be able to provide you with the form and the next-step instructions on how to complete this process. Remember, you cannot simply withdraw money from your RRSP — you must fill out the official federal request form.
What are the advantages and disadvantages of using your RRSP?
It all sounds great, right? So, why do so many financial advisors suggest not using an RRSP as part of your home’s down payment? Like with most things in life, because this awesome program also has a downside.
To help you determine whether or not the Home Buyers’ Plan is a good option for you, we recommend examining a good ol’ pros and cons list. The list considers both the advantages and disadvantages of using money saved in your RRSP as part of your real estate down payment.
- You’ve already saved this money;
- The money can be used stand-alone or you can add it to additional savings to really bump up your down payment (and reduce the cost and risk of buying real estate, particularly in hot Canadian real estate markets);
- The withdrawal comes out tax-free and you will have 15 years to repay the loan;
- The minimum monthly payment on the loan is one-fifteenth of the actual loan value.
- You potentially miss out on 15 years of tax-sheltered growth (think compound interest) on the money you withdraw;
- Neglect to pay the annual repayment and you get charged income tax (at your current marginal rate) on the one-fifteenth amount you should’ve paid that tax year;
- You can not withdraw any RRSP money until it’s been in your registered account for at least 90 days;
- Neglect to use the HBP money to purchase or build a house and you’ll be taxed on the full amount, at your marginal tax rate, of the withdrawal.
So, what are you waiting for?
As intimidating as it sounds it’s awesome to know that we have the legal option to help ourselves out with a home purchase. After going through the pros and cons, it may be time to take the plunge and to withdraw a large chunk of your hard earned and well-invested cash to become a homeowner for the first time.