The RRSP Home Buyer’s Plan is a great opportunity to use some of the money that you’ve got saved in your retirement funds towards buying your first home. There are only a few instances where you can actually take that money out of your RRSP to pay for a particular life milestone and one of these instances is when you buy your first home.
To qualify for the RRSP Home Buyer’s Plan you must meet the criteria defined as: in the last four year period, you have not occupied a home that you or your current spouse or common law partner owned. If you were a home owner prior to the last four years, sold that home and have been renting in the meantime, you may still be able to re-qualify for the RRSP home buyers plan. I recommend you check with your accountant to verify the possibility of qualifying at this time.
For the most part, if you are a first-time homebuyer, you will be eligible to qualify.
The RRSP Home Buyers Plan is set up in such a way that you can actually take up to $25,000 as of now in 2017, out of your RRSP without paying a penalty. This means that you are not paying tax when borrowing that money from yourself. You can use those funds towards any element of your purchase. This can be towards your down payment or your closing costs. You will have to prove, however, that you are actually purchasing a property.
One of the advantages of doing this is that when you put money into your RRSPs, you will experience a tax deferral. Also if you are making a fairly good income, it is worth putting some of your earnings into an RRSP as you will likely get a lump sum back in your tax returns, since it will effectively reduce your taxable income
Take note that when you are borrowing that money from your RRSP, and you really are borrowing it because you have to return it to your RRSP over a 15-year period. This pay back will be calculated equally over the 15 years and must be paid yearly.
You may be wondering if you should pay back that full amount earlier, but this is like an interest-free loan so you’re not actually benefiting from paying it back faster. You might as well pay the minimum amount that you’re required to every year and have that extra money for other life choices.
Even if you are receiving money towards your purchase from your family as a gift, I recommend that you use that gift to contribute to you RRSPs assuming you don’t have $25,000 in your RRSPs and you have contribution room.
This will give you the benefit of the tax benefit up front and you will receive money in your tax returns. Remember that the money does have to be inside of your RRSPs for at least a 90 days (three full months) before you take it out to ensure you aren’t taxed on the withdrawal.
So if you are planning to purchase your first home, which is super exciting, make sure that you have maxed out your RRSP contributions up to $25,000 so that you can in fact take that money out and use it towards your first home purchase and still benefit from the tax credit.
Happy home hunting!