Buying your first home can be a stressful experience, and you may need some extra help. Many first-time buyers are looking for any advantages they can get, and a common question is if you can use your RRSP to help buy a home?
If you’re interested in buying your first home, continue reading to learn more about if your RRSP can help this process. Consider this your guide to understanding RRSPs and their ability to help you settle into a new property.
What is an RRSP?
An RRSP, known as a registered retirement savings plan, is a tax-exempt savings plan. The funds inside an RRSP are exempt from taxes as long as they remain; you have to pay tax once you receive payments.
There are several types of RRSPs, including:
- Individual RRSPs
- Spousal RRSPs
- Group RRSPs
- Pooled RRSPs
The Canadian Revenue Agency (CRA) registers your RRSP, which sets rules relating to annual contribution limits, contribution timing, and what assets are allowed.
RRSPs offer 2 main tax advantages, the first being the ability to deduct contributions against your income. This ability means that if your tax rate is 40%, you’ll save $40 in taxes for every $100 you invest into your RRSP.
The second benefit is that the growth of your RRSP investments is tax-deferred. The returns you receive are exempt from any capital gains tax, dividend tax, or income tax.
Can You Use Your RRSP to Buy a Home?
You may not know, but your RRSP can help if you’re a first-time homebuyer. The Home Buyer’s Plan (HBP) is a government incentive for Canadians looking for help purchasing their first house.
What is the Home Buyer’s Plan?
The HBP is a Canadian government incentive allowing you to withdraw funds from your RRSP to help buy or build a qualifying home for yourself or a related person with a disability. The CRA defines a qualifying home as an existing or under construction housing unit located in Canada.
The following options count as qualifying homes:
- Single-family homes
- Semi-detached homes
- Mobile homes
- Condominium units
- Apartments in duplexes, triplexes, fourplexes, & apartment buildings
This program allows you to withdraw up to $35,000 as a loan for your home purchase. If you’re interested in the HBP, how does this program work?
How Does the Home Buyer’s Plan Work?
To start, you need an active RRSP with money currently invested in your account. The amount you’re accessing from your RRSP must stay for a minimum of 3 months (90 days) for it to be eligible under the HBP.
Buying a home with a significant other allows you to withdraw up to $35,000 each for a total of $70,000. If you have multiple RRSPs, you can withdraw from different accounts but don’t exceed the $35,000 limit.
The Home Buyer’s Plan can be helpful for first-time buyers, but let’s make sure you’re eligible before attempting to withdraw funds.
How Do You Know if You’re Eligible?
A couple of factors determine your eligibility for the HBP:
- You must be a first-time homebuyer
- You must have a written agreement to buy or build a qualifying home
- You must be a Canadian resident when you withdraw funds from your RRSP
- You must intend to live in your home within one year of building or purchase
- You must pay back your withdrawn amount within 15 years
According to the CRA, you count as a first-time homebuyer if you or your spouse haven’t owned a home or lived in a home that your current spouse owned in the past 4 years. If you meet these requirements, how can you begin to withdraw money from your RRSP?
How Do You Withdraw From Your RRSP?
You’ll need to fill out form T1036 when you’re ready to begin withdrawing funds. Contributions must stay in your RRSP for a minimum of 90 days before you can take out money under the HBP.
You can either make a single withdrawal or multiple, but all money removed must fall into the same calendar year.
After withdrawing your desired amount of money, you can begin making offers for your future home. After you’ve planted roots, how can you repay your loan?
How Do You Repay Under the Home Buyer’s Plan?
You have 15 years to pay back the total of what you withdrew from your RRSP, and there is a specific payment schedule you’ll follow. You must pay back 1/15th of your loan every year, and you’ll receive an annual statement from the CRA with your remaining balance and the total due for the year.
Make Your Down Payment Today
With the right plan, you can begin to take the necessary steps to own your new home. This process can seem complicated, but you don’t need to go through it alone. You can reach out to reliable professionals for advice and support. If you’re interested in buying a new home, contact your local mortgage broker.