Way back when, I had talked about how one can use the RRSP for the Home Buyers Plan. Having bought my first home recently, I found the home buyers plan information on the Canada Revenue Agency website a bit difficult to understand (must be all that government lingo), so I thought I would simplify it in easy to understand terms and spell it out step by step on how take advantage of the HBP.
First off, in case you haven’t heard of the Home Buyers Plan, I’ll try to explain it.
It’s where a first time home buyer (you and whoever you buy the home with) can each withdraw up to $25,000 from your RRSP tax-free. The caveat is that you have to repay it within 15 years, following the second year after the home is bought.
e.g. if you buy the home in 2010, you will have to start repaying the Home Buyers Plan withdrawal in 2012.
Conditions in order to be eligible for the HBP plan:
You have to be a first time home buyer (or you are buying it for someone who is disabled)- You must enter into a written agreement to buy a home or build a home (offer of purchase). Getting a preapproval from the bank doesn’t cut it.
- You have to be a Canadian citizen
(Gooo Canada!) - You plan to use the home as a principal residence (not for rental income)
- This is the big one: you cannot own the home for more than 30 days before the withdrawal (so as you can see, it’s a bit time sensitive!)
- You have to build or buy the home before October 1 on the year or after the year of withdrawal
- You have to have money in your RRSP (duh!)
You don’t have to use the HBP as a down payment, you can use it for whatever you want (they don’t check), you could use it for renovations, for a trip around the world (though that might not be a good idea.. just sayin’!) etc.
For each withdrawal from each RRSP account (if you have more than one like me), you will need to complete a T1036 form and answer their questions. You then bring that to the RRSP issuer (e.g. your bank, investment advisor etc.) and they will help you take the money out so that it’s not subject to the RRSP withholding tax.
Starting the year following your withdrawal, the minimum you will have to repay back to the government is 1/15 of the amount that you took out from your RRSP in the first place. Here’s an example:
Let’s say you took out $10,000 for a down payment for your condo in 2009. You get a break in 2010 (woohoo!) and in 2011, you will have to let the government know that you have redeposited money back into your RRSP account, otherwise, it will be included as income for your 2011 taxes. The amount included as income (if you don’t repay it to your RRSP) would be $667, which is 1/15 of $10000.
In order for you to let the CRA know that you have been good and made repayments back into your RRSP, you will have to fill out another form for the CRA (Schedule 7). Unfortunately, these repayments are NOT tax deductible so you are basically putting the money back into your RRSP interest free.
IMPORTANT REMINDER:
Remember that you cannot withdraw from your RRSP any contributions that you have made within 90 days of the withdrawal or else you will get DINGED. This happened to a friend of mine, and she was not a happy camper.
Also, some RRSPs are “locked in” and don’t allow you to take money out for e.g. five years from investment. So make sure you know your investment goals when you invest in your RRSP.
Some pros and cons of using the Home Buyers Plan I have thought about:
PROS:
- It’s money that has been tax sheltered and you can take advantage of the growth in your RRSP (if any )
- You can use it for anything, doesn’t have to be a down payment
- You don’t have to start paying it back until about a year and a half after you buy your home
- If you plan on going back to school, or if your net income somehow gets lower in any calender year (e.g. you started up a business and have tons of deductions), you don’t have to pay the 1/15 owed back and instead, can just leave it as income for that year. You will have low(er) income that year anyway, so you don’t have to worry about paying too much tax (if any) on that income.
- There is no maximum pay back. You could pay back the full $10,000 that you took out if you wanted to, later on.
- It’s an interest free loan over a 15 year span, to yourself, basically
CONS:
- It’s more debt… debt to your own RRSP (interest free)
- Lost opportunity costs of compounding over 15 years (unless you pay it back right away)
- If you have lost more than your marginal rate in your RRSP portfolio (e.g. you got $3200 back from the government for your RRSP contribution, but your portfolio is down $5000 from the market), then you are essentially selling for a loss of $1800 and not really gaining any benefit from tapping into your RRSP
- There’s a small window of opportunity to take advantage of it (namely within 30 days after possession date)
Hope that helps you decide whether the Home Buyers Plan is right for you. You can find very detailed information about the HBP on the CRA website.
Readers, did you use/do you plan to use the Home Buyers Plan for your first home purchase? Do you have any Pros and Cons you would like to add?
Very thorough. I used this plan on my first home purchase and keep paying it back year after year.
@Sustainable PF- Are you doing the minimum 1/15 of the amount, or are you hacking away at it at a greater amount?
I bought a house before I started contributing to my RRSP (houses were cheap then, like $120k) so I never took advantage of this program.
Did you consciously choose different investments in your RRSP knowing that your time horizon was shorter and you’d need the money? At what point did you decide you were going to use this program?
@Echo- So jealous- I wish houses were $120K. Those were the good ol’ days. You can’t even get anything for under $220K in Vancouver now- unless it’s 60 W. Cordova…
Hm I was very wishy washy about whether or not I was going to use this program. I didn’t want to lose the compounded interest that I had built up (which in the scheme of things wasn’t very much). No, the investments I chose in my RRSP weren’t exactly “principle protected”.. I had gotten emerging market mutual funds (BRIC) which ended up doing quite well. I also have it in a TD eseries which includes more fixed income investments.
I didn’t actually take all of my RRSP out. I’m in the process of taking my e-series RRSP out but I am finding out that it is more difficult than it looks (more e-series headache..! Not only is it hard to BUY the e-series. it’s hard to take money out when its an RRSP).
Another plus is the psychological element. I used it and am very happy that I did. I saved a ton of money on interest to the bank. Since I only had a small mortgage I felt I could pay it off quickly and worked really hard to do that, plunking down extra money at each year end and paying off the bank in 4 years. Then I took another 3 years and paid back my RRSP (so total 7 years for the RRSP). If I’d been facing a bigger mortgage with the bank, perhaps I’d have been less motivated because such a large figure would have felt discouraging. The smaller chunk made it look easier.
@anon- Thanks for sharing! Yeah, the RRSP doesn’t seem like such a big chunk to me compared to the mortgage, but it’s still a chunk! Paying off your RRSP self-loan in 7 years is great!
NZ recently introduced a retirement savings scheme, which also has a provision for withdrawal for first home buying. You can also get up to $5000 for the govt to go towards your purchase.
I probably will do that, but I won’t withdraw everything. Also, there aren’t any tax benefits that I know of (contributions are taken out of pay post tax, boo!) Sadly, I doubt I’ll have a significant amount in there by the time I’m ready anyway.
@eemusings- Thanks for letting us know- it’s always interesting to know what goes on in other countries. So how much do you have to contribute to get the $5000 from the government towards your purchase? Hey you never know, eemusings- each little bit counts!
I did not use the plan mainly because I didn’t have much in RRSP since I had just started my career.
On the other hand, I am happy I don’t have to worry after a significant sum that has to be repaid on a yearly basis. I hate debt!
@BeatingTheIndex- I hate debt too! That was one of the things that I didn’t like about the HBP- it’s like debt to myself! Ugh! But it’s not very much, so that’s good.
I plan to use the HBP for my first home purchase but I’ll have to look into some specific details at the time I make the final decision.
Thanks for the post!
@Taylor- Yeah, I had thought I was going to take the entire thing out, but I ended not doing so because of so many nit picky details. it’s easier to take it out of ONE RRSP account (not 3 LOL).
I’m excited to hear plans like this exist! I’m fresh out of college and I absolutely hate paying rent…I feel like I’m just throwing my money away. I really want to be investing in something that will have a long term value to me, like a home. I’ll need to research this further, but thank you for the introduction!
Nice post Young!! I like this “plan” as long as the buyer understands that paying back RRSP is necessary. Having a home is good, but planning RRSP is also a must. You have to make sure you’ll be able to pay it back AND even put more in it since you’ve lost a couple of years in savings… But it is interesting to save interests. And, it is your money after all!
@DoNotWait- Yup! Can’t let the RRSP savings get put to the back burner. So much stuff to save for- RRSP, RESP, TFSA, down payment, wedding, investment properties.. vacations.. the list is endless!
I used it and I am paying back 1/15 every year. 20K was the max 8 years ago. Don’t pay more – take the 15 years. This is a loan that you should drag as long as possible. Anything you decide to pay more doesn’t give anything on your tax return. I put nearly 10K in my RRSP a year now and I only put the minimum to maximize my tax return. Regardless of how much you assign to your HBP plan, it all goes into your RRSP account and should start working for you. So the minimum is enough to maximize your tax return.
I would say that the RRSP investment with a target to use for Home Buyer Plans are the least thought of … If you consider most people have mutual funds with possibly back end fees. Withdrawing them just after 5 years will cost them.
@The Passive Income Earner- Good to hear you used the HBP too (my fellow Vancouverite). Yeah, I’m going to drag this baby as long as possible (unless my income drops, then it will make more sense to pay off more of it then). Yeah, that’s why its a good idea not to take the whole kitten caboodle out, right? If you leave a few hundred (or whatever minimum it is) in the RRSP account, you won’t be dinged with as much fees, I would think.
My entire plan for buying a home, has been based around the Home Buyer’s plan. I’ve been really focused on maxing out my RSP’s each year, to get the 25k, as well as building up a bit more, so I can still keep it compounding… So far its working out really well, just need to find a home to buy soon.
I’m finding now that I’ve met the 25k home buyer amount in my RSP, I’ve switched to focusing on maxing out my TSFA as more ‘disposable’ money for my down payment, so I can earn money (in the stock market), without getting dinged, rather than just having it sit in a savings account.
@twentysomethingmoney- Yeah, that’s how I felt too. I initially didn’t want to use the TFSA but found that it was so much more easy to take money out from the TFSA than the RRSP (don’t have to send in a home buyer’s plan or meet the conditional time frame that its approved in).
[...] Young&Thrifty: How to Use the Home Buyers Plan [...]
I saved money in my RRSP quite aggressively while I was getting a great employer match (4% automatic, 6% matching), then used $15,000 as a downpayment on a home last year. I’ll probably do the 1/15 payments while I work on paying off some “stupid debt”. Once I’ve got that paid off I’ll probably take care of it over the course of a year or so.
Congratulations on the home purchase
@Cassie- Wow, that sounds amazing- your employer matching the RRSP. Yeah, I like the idea of stretching it over 15 years, it’s not very much if you think about it. And if you have lower income for one year (e.g. taking maternity leave/ mature student or something) then you can just not pay that year and it’ll just get added to income.
Hello fellow blogger! I’m new to blogs but I just wanted to say that I like your blog here on Canadian Rental Properties How To Invest. It kept me reading all the way to the end… And then I went and searched for some more posts after that.
Keep up the good work, I’m always looking to learn more about Investing Smart, in particular.
[...] are two options where you are allowed to borrow money from your own RRSP: 1) Home Buyers Plan and 2) Lifelong Learning Plan (with both you are expected to pay back 1/15 and 1/10 respectively, [...]
Hi everyone, got a question… My company offers a matching RRSP program for up to 5%.. I have already saved up enough for a down deposit for my first home (with HBP) ~20%…Question is, is it worthwhile to continue renting for another year and contribute more for the matching rrsp or just buy in the close future?
@Sam- If you don’t mind me asking, how much do you have for the downpayment? You are allowed up to $25,000. And are you profitable in your RRSP? (given the markets these days, it’s a good question to ask). Secondly, the real estate market is really highly priced right now.. are you willing to take a chance that it won’t go down next year?
Has anyone used an RRSP loan to boost the RRSP accounts before using the HBP? My wife and I are close to having what we need for a downpayment in our RRSPs abd I’d like to use a RRSP loan to max out our accounts at $25,000 each. When we withdraw under the HBP we’ll pay off the RRSP loan and reap the benefit of a nice tax refund (which will help for first time homebuyers). What I need help with is the order in which to do the process. Should I move the loan money into the RRSP accounts before getting a mortgage preapproval or afterwards? I know the contribution most be in there for 90 days but what if we find a house before the 90 days? Any help is really appreciated
@Vern- The mortgage preapproval isn’t related to the HBP, you can tell them you are planning to use the HBP but until you actually buy the house/ transfer the money you won’t be needing the HBP (well, in my experience anyways).
According to the CRA:
“You have to buy or build the qualifying home for yourself, for a related person with a disability, or to help a related person with a disability buy or build a qualifying home before October 1 of the year after the year of the withdrawal”
So you can use the RRSP loan, wait 90 days, withdraw the money in 2012, and then buy the house. But this has to be done before Oct 1 next year (if you are buying before Oct 1 next year).
Hope that makes sense
Then you will repay the RRSP HBP in 2014 provided that you bought the home in 2012.
But you will have an loan to pay off for borrowing money for the RRSP.
[...] I’ll contribute a lump sum to max out my RRSP afterwards. After I finish paying back my Home Buyer’s Plan, I’ll likely stop contributing to my RRSP’s (unless I have oodles and oodles of money [...]
My employer pays into my rrsp monthly and I recently bought a home last year. Does my employer contribution count toward as repayment toward money I used out of my rrsp to purchase the home?
The CRA only requires you to be a Canadian resident. For this purpose, the notion of “residency” in the Income Tax Act applies. You are a resident if you spend more than 183 days in a calendar year in Canada.
So, this has some consequences: you may not qualify even if you are a Canadian citizen (for instance, you live abroad).
On the other hand, permanent residents and individuals who are residents in Canada (such as international students, temporary visas) qualify for the plan.
Please refer to http://www.cra-arc.gc.ca/E/pub/tg/rc4135/rc4135-11e.pdf at page 8.
[...] the $190 jackpot in the Mega Millions lottery did!), but I did cash out $7500 from my RRSP under the home buyer’s plan. This money will go toward some renovations on the [...]