Should you use your RRSP's to purchase a new home?
Registered Retirement Savings Plans (RRSP) were created to encourage Canadians to save money for their retirement. In 1992, the government hoped to stimulate housing sales with the creation of the Home Buyers' Plan. The plan allows qualified homebuyers to use up to $20,000 each from their RRSPs to purchase a home. In effect, people are borrowing tax-sheltered money from themselves. The questions many people have are what are the requirements of the plan and what impacts will the loan have on retirement savings.
An Overview of the Home Buyers' Plan
You and your spouse or partner can borrow up to $20,000 each from your RRSPs to purchase a home, as long as the funds are accessible. For example, if you have a "locked-in" RRSP, or if your funds are in a Guaranteed Investment Certificate (GIC) that has not reached maturity, you many not be able to access your funds.
The rules regarding the type of housing that qualifies are quite lenient and include the following: an existing or new property, a detached or semi-detached home, a townhouse, condominium, mobile home, apartment, or a share in a cooperative housing corporation if you are buying equity.
Stipulations of the Home Buyers' Plan:
- Neither you nor your spouse or partner can have owned a home and lived in it as a principal residence during the previous four years. That four-year period must end no sooner than 31 days before your withdrawal through the Home Buyers' Plan.
- You must be a Canadian citizen
- If you are withdrawing funds from your RRSP to purchase a home, you must be registered as one of the owners of the property.
- Once the funds are withdrawn, you must complete your purchase or build your home by October 1st of the following year.
- The home must also be used as your principal residence within one year after the purchase.
- RRSP contributions made within the last 90 days before applying to the Home Buyers' Plan are not eligible.
In 1999, the government introduced an exception to the first-time homebuyer rule. You do not have to meet the first-time homebuyer condition to participate in the HBP if any of the following situations applies to you:
- You are a disabled person and you wish to acquire a home that is more accessible, or better suited to your needs;
- You withdraw funds to acquire a home for a disabled person (or to give funds to a disabled person) related to you by blood, marriage, or adoption, that is more accessible to, or better suited to the needs of, that person
The same rule regarding acquiring the home by October 1st of the following year applies to disabled persons.
If you comply with the rules of the Home Buyers' Plan you will be able to withdraw money from your RRSP without it being subject to withholding tax. The money must be repaid to your RRSP over the following 15 years, beginning the second year after your withdrawal. If the minimum repayment is not made, then the payment is taxed as income for the year it is due.
The repayment of 1/15th of the amount withdrawn must be made by the RRSP contribution deadline of a given year. For example, if you are paying your RRSP back for a given taxation year, you have until the first 60 days of the following to make the minimum payment. You must contribute the minimum repayment back to your RRSP each year, but you can also repay the entire amount at any given time.
It is important to note that repayments are not tax-deductible like the original RRSP contributions and they do not use up the RRSP contribution room.
If you are unable to meet a payment, you will be taxed on the outstanding amount as if it was part of your income.
By taking money out of your RRSPs to fund a home purchase, you will lose compound growth. However, if the home appreciates significantly you may be able to offset these costs. The calculations of future returns can become quite complex and a consultation with an accountant or financial planner can be time well spent.
The amount of compound interest you lose when taking money out of your RRSPs will depend on your age. The older you are, the less time your savings have to benefit from compound growth, so the amount of lost interest will be less.
If you have questions about your financial future and whether a Home Buyers' Plan loan would be good for you, considering consulting a financial planner or an accountant.
The Canadian Customs and Revenue Agency can provide more information as well as various forms. You can get these documents from any tax services office or tax centre, or by calling the government agency toll free at 1-800-959-2221. You may find more information by visiting the Canada Revenue Agency website.