If you are a first-time home buyer, you may be wondering how to save up for your dream house. One option that you may have heard of is the Registered Retirement Savings Plan (RRSP). But how does it work and what are the benefits of using it for your home purchase?
In this blog post, we will explain the basics of RRSP and how you can use it to your advantage as a first-time home buyer. We will also cover some of the rules and limitations that you need to be aware of before you withdraw from your RRSP.
What is RRSP?
RRSP is a type of savings account that allows you to defer taxes on your income until you retire. This means that you can contribute a portion of your income to your RRSP every year and reduce your taxable income for that year. The money in your RRSP grows tax-free until you withdraw it, which is usually when you retire.
However, there are some exceptions to this rule. One of them is the Home Buyers’ Plan (HBP), which allows you to withdraw up to $35,000 from your RRSP to buy or build your first home. This is a great way to boost your down payment and lower your mortgage payments.
How does HBP work?
To qualify for HBP, you need to meet the following criteria:
- You are a Canadian resident
- You have not owned a home in the last four years
- You have a written agreement to buy or build a qualifying home
- You intend to live in the home as your principal residence for one year after buying or building it.
- You can save on taxes by reducing your taxable income when you contribute to your RRSP, this will also lead to increase in your child tax benefit.
- You can access a large amount of money for your down payment without paying any tax or penalty
- You can lower your mortgage payments and interest costs by having a larger down payment
- You can build equity in your home faster by having a smaller mortgage balance
- You can still enjoy the tax-free growth of your RRSP after you repay the amount withdrawn
- You will lose the potential growth of your RRSP while the money is withdrawn
- You will have to keep track of your repayments and report them on your tax return every year
- You will have to pay tax on the amount withdrawn if you fail to repay it within 15 years or if you become a non-resident
- Your current and future income and tax bracket
- Your retirement goals and savings plan
- Your other sources of funds for your down payment
- Your risk tolerance and investment strategy
If you meet these requirements, you can withdraw up to $35,000 from your RRSP without paying any tax or penalty. However, you need to repay the amount within 15 years, starting from the second year after the withdrawal. You can repay more than the minimum amount each year, but you cannot skip a payment or pay less than the minimum amount.
The minimum repayment amount is calculated by dividing the total amount withdrawn by 15. For example, if you withdraw $30,000 from your RRSP, your minimum repayment amount is $2,000 per year ($30,000 / 15). You can make your repayments directly to your RRSP account or designate another RRSP account for this purpose.
What are the benefits of using RRSP for your home purchase?
There are several benefits of using RRSP for your home purchase, such as:
What are the drawbacks of using RRSP for your home purchase?
There are also some drawbacks of using RRSP for your home purchase, such as:
Is using RRSP for your home purchase right for you?
Using RRSP for your home purchase can be a smart move if you have enough savings in your RRSP and if you plan to repay the amount within 15 years. However, it may not be the best option for everyone. You should consider factors such as:
Before you decide to use RRSP for your home purchase, you should consult a financial planner or an accountant who can help you assess your situation and weigh the pros and cons. You should also review the rules and regulations of HBP on the Canada Revenue Agency website.
We hope this blog post has given you some insight into how RRSP can benefit first-time home buyers. If you have any questions or comments, please feel free to contact us at +1-905-216-6628 or info@sanchet.com