An RRSP (Registered Retirement Savings Plan) is a valuable tool for saving for retirement, offering tax-deferral on both contributions and on any interest your account receives. That means you can rack up some serious compound interest on your savings before paying tax. You’ll only pay tax on the funds you withdraw from the RRSP in retirement.
But did you know you can use your RRSP to increase your down payment on your first home?
Generally, the funds in your RRSP need to stay there until you retire for it to make financial sense, as there are penalties for early withdrawals. However, the RRSP Home Buyers’ Plan (HBP) is an exception to that rule, at least for first-time home buyers. With the HBP, you can withdraw up to $35,000 from your RRSP for a down payment on a home, which can make owning a home much more financially achievable.
If you’re thinking of using the RRSP Home Buyers’ Plan, there are a few things you should know – beyond the fact that it’s a tax-free loan to yourself. Before you inquire about making a withdrawal, here are 6 facts to consider about the RRSP HBP.
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1. The maximum size of the withdrawal
The Home Buyers’ Plan allows you to withdraw up to $35,000 from your RRSP. This was increased from $25,000 in March 2019. If you’re buying your first home with your partner (or another first-time home buyer) then you can withdraw a maximum of $70,000.
Your withdrawal can come from multiple RRSPs that are in your name (see point 4) but the total withdrawal cannot exceed the maximum amount.
2. The RRSP 90-day withdrawal rule
Any money you withdraw has to have been in your RRSP for at least 90 days. This is true if you were to withdraw money from your RRSP for any reason (eg. the Lifelong Learning Plan), not just to use it as part of your down payment. If the money doesn’t sit in your RRSP for at least 90 days before being withdrawn, it may not be tax-deductible for that year.
If you think you’re going to come into some money soon, or if someone is going to gift you part of your down payment, don’t just invest it in your RRSP for the tax break. If you need to withdraw it in the next 90 days for the HBP, you may find that your deposit is on-hold. This would mean you wouldn’t be able to access it until after those 90 days are up. If you are expecting something like this, it might be a good idea to speak to a financial advisor or mortgage broker.
3. When you can make the withdrawal (and when you can’t)
You’re able to apply to make a withdrawal from your RRSP before you build or buy a home, on a few conditions. You must already have a written agreement to buy or build a home when you make the withdrawal. You’ll also need to be a Canadian resident at the time you make the withdrawal, all the way up to when the home is built or bought.
You can also make the withdrawal after you buy or build the home, but there’s a time limit. You must make the withdrawal within 30 days of taking ownership of the home. If you try to make the withdrawal more than 30 days after you take the title of the home, your withdrawal won’t be eligible for the HBP and you’ll be taxed on the amount you withdraw.
4. Withdrawing from multiple RRSPs
You can make withdrawals from several RRSPs, so long as you are the owner of each plan. The total amount withdrawn from all funds cannot exceed the maximum withdrawal amount. It’s generally not possible to withdraw from locked-in RRSPs or a group RRSP.
To make a withdrawal, you must complete a T1036 form for each RRSP you want to borrow money from, and submit each form to the issuer of your RRSP. For example, if you have RRSPs at both RBC and TD, you will need to submit two T1036 forms: one to each individual bank. As the second part of this rule suggests, it’s a good idea to submit all of your T1036 forms at the same time because you have to claim the full HBP amount you borrow in one calendar year on your taxes for that year.
The entire HBP amount needs to be withdrawn and claimed on your tax in the same calendar year, with one small exception. If you make a withdrawal in one calendar year and a second withdrawal in January of the following year, the CRA (Canada Revenue Agency) considers the second withdrawal to have been made in the same calendar year as the first.
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5. Repaying the withdrawal amount
Your first repayment isn’t due until 2 years after you make your withdrawal, and the full amount must be repaid within 15 years. You can start making repayments anytime, and you can repay the full amount early with no penalty, but these are your minimum repayment requirements. If you do pay more than the minimum, your remaining balance for future years will be reduced. The amount you have to repay each year is equal to 1/15th of the total amount you borrowed from your RRSP. You’ll be able to find your full repayment schedule in your CRA My Account. The CRA will also send you a yearly Home Buyers’ Plan statement of account.
Our Mortgage Math video below explains the repayment process in further detail. Note that the maximum withdrawal under the Home Buyers’ Plan is now $35,000, not $25,000, as is stated in this video. Other than that, the details haven’t changed.
6. Not making your minimum repayments
If you do not make your minimum repayment one year, you have to include the amount you did not pay as RRSP income on your taxes. To do this, subtract any amount you did repay from your minimum repayment amount and put the answer in-line 129 on your return. This amount will be taxed (which defeats the purpose of taking out this tax-free loan), and your HBP balance will be reduced accordingly.
The Bottom Line
As a first-time home buyer, it can be difficult to scrape together enough cash for a down payment on a home. However, if you’ve been diligent in your RRSP contributions, then the Home Buyer’s Plan is a great way to unlock the potential of your savings. However, you need to understand the program and its overall implications on your finances. For a full list of qualifying conditions for the RRSP HBP, as well as a list of important dates, visit the CRA website.