RRSP Home Buyer's Plan Explained

RRSP Home Buyer's Plan

One of the great features in an RRSP is the Home Buyer’s Plan which allows you to withdraw funds from your RRSP to purchase a house. With the Home Buyer’s Plan, you are allowed to withdraw $25,000 from your RRSP to use to help finance your down payment on a home. With the Home Buyer’s Plan, you are essentially able to use your RRSP as an interest-free loan from your retirement savings to make up your down payment, and repay the withdrawal over 15 years.

With an RRSP, you are able to make tax-deferred contributions to the account and receive and tax deduction when you file the following year. The main advantage of an RRSP is that it allows you to contribute to the account and receive a tax deduction when you are at a higher tax bracket, then when withdrawing the funds in retirement, you will theoretically be at a lower tax bracket.

Since the funds in an RRSP are tax-deferred, any withdrawals from the account prior to retirement are taxed at your marginal tax rate and increase your net income.  This makes a withdrawal while you are working disadvantageous as it greatly will raise your income and taxes.

Qualification

To qualify for the RRSP Home Buyer’s Plan, you must not have had a principal residence for any of the last five calendar years, including the calendar year. If you or your spouse has owned property as a principal residence for any time in that period, you, unfortunately, will not qualify for the Home Buyer’s Plan.

Furthermore, the RRSP Home Buyer’s Plan you must be using the withdrawal to fund a qualifying home, or land for development and the funds must have been in your RRSP for more than 90 days.

Withdrawal

With an RRSP Home Buyer’s Plan, the government is allowing you to withdraw $25,000 from your RRSP without any tax penalties, use the funds to finance a down payment on your first house, and then repay the funds over 15 years. This allows your RRSP to have a dual benefit, to fund your retirement over a long time horizon while also supporting a short-term financing need of a down payment on a house.

For a couple, the RRSP Home Buyer’s Plan allows you to withdraw up to $50,000 to go towards a down payment. For a $1,000,000 house with 20% down payment, you would be able to fund 25% of your down payment with the retirement savings you have already receive a tax deduction for upon contribution. This can make a significant difference to a couple looking to enter the real estate market.

Repayment

With the RRSP Home Buyer’s Plan, the repayments are made over 15 years. For example, if you were to withdraw the maximum of $25,000, each year you would be required to repay $1,666.67 to your RRSP as a designated repayment to the plan.

The CRA’s penalty for non-payment is that these funds are taxed as a regular RRSP withdrawal at your marginal tax rate the year they are supposed to be repaid.

Finally, your first RRSP repayment to the Home Buyer’s plan is required the second calendar RRSP year after your withdrawal. (RRSP Calendar Year includes the 60 days of the following year – for 2018, this would be from January 1st, 2018 to March 1st, 2019)

Conclusion

The RRSP Home Buyer’s Plan is a great way to fund the purchase of your first house and allows you to use your dedicated retirement savings to support a shorter term goal. The Home Buyer’s Plan is one of the primary goals we have for clients who are currently still renting and looking to enter the housing market as it allows you to lower your taxes through RRSP contributions and get an interest free source of capital for a home purchase.