How to Use Your Registered Retirement Savings Plan to Purchase a Home
Buying a home can be overwhelming, especially when thinking about how to afford a down payment. The good news is, as a Canadian resident, you have some options for financing your new home. If you’ve contributed money to your Registered Retirement Savings Plan (RRSP), you may be eligible to use those funds to purchase a home with the Home Buyers’ Plan (HBP). Here’s how.
Understanding Your Registered Retirement Savings Plan
If you haven’t contributed to an RRSP and you’re considering buying a home in the near future, now is a good time to start. RRSPs are pre-tax savings plans available to all employed individuals. This type of savings plan is not taxed until you withdraw funds, which means your RRSP investments will be exempt from capital gains taxes, income taxes, and dividend taxes. You can also deduct your contributions from your taxes owed each year.
There is a limit on the amount of money you can contribute to your RRSP each year, so be sure to check with a financial professional when planning your contributions. In addition, you are able to withdraw money from your RRSP at any age. The funds will be considered taxable income according to the year in which you withdrew them—unless you decide to use the money to purchase a home.
How the Home Buyers’ Plan Works
The government-sponsored HBP allows Canadians to use up to $35,000, or $70,000 for a couple, of their RRSP to buy or build a home. This plan allows you to withdraw funds without a tax penalty and pay them back to your RRSP within 15 years.
There are a few eligibility requirements for the HBP. You must:
- Be a first-time homebuyer
- Have a written agreement to buy or build a home
- Be a current resident of Canada
- Occupy the home as your primary residence within one year of buying or building
There are some exceptions to these general requirements. If you haven’t owned a home in four calendar years, you can once again be considered a first-time homebuyer. For example, if you sold your home and have been renting an apartment for more than four years, you can take advantage of the HBP to buy another home. You can also use the HBP if you’re helping out a family member or loved one with a disability.
Advantages to the Home Buyers’ Plan
There are some clear advantages to using the HBP instead of depending on a traditional loan to fund your home purchase. If you already have money saved in an RRSP, you can borrow from it tax-free as long as you pay it back in contributions within 15 years.
If you’ve saved money from a down payment outside of your RRSP, you may consider depositing it into your retirement plan for an added tax benefit. The funds you plan to withdraw for your HBP must be present in your RRSP for 90 days prior. The advantage to depositing your down payment funds and then taking a withdrawal from your RRSP is that money will be tax-deductible for the year you contributed it.
If you’re unsure about the financial implications of borrowing from your RRSP, a financial professional can help you navigate the details and decide the right home-buying plan for your situation.