An RRSP account is your retirement nest egg, an untouchable egg if you will. Funds go in but they should not come out until retirement. That’s the point. But, there is one exception to this hard-fast rule. Taking advantage of the Home Buyers’ Plan, if done wisely, should not induce the slightest built of guilt about tapping into those funds. In the last 22 years over 2.5 million homeowners have used this plan to make down payments on their homes, in full or in part. In today’s home market the “in part” help is much more common.
The Home Buyers’ Plan allows you to pull up to $25,000 from your RRSP to use towards the down payment on a home. You must be a first time buyer or you must not have owned a home within the last five years. The money must be paid back within a 15 year period which starts 2 years after the date you pulled the funds. If your are married or in a common law relationship, both of you may pull out $25,000, giving you $50,000 to play with, a more realistic figure in the current real estate market. This can help you put down the minimum 20 percent down that is needed to avoid buying the mortgage insurance.
Available funds must be in your RRSP for at least 90 days before you make the withdrawal to still enjoy the tax advantages. No putting the money in the account one week and taking it out the next. If your primary reasons for an RRSP are saving for that home and the tax advantage, then your tax advisor can help you plan accordingly. After you buy that first home, you can keep contributing for retirement.
Often people will consider using a tax free savings account to save up that down payment and leaving the RRSP alone, but not all financial consultants agree with that strategy. A Home Buyers’ Plan offers tax deductions, which can help you save more money. Then again, it depends on the individual and how much money can be salted away in that savings account.
A disadvantage of the Home Buyers’ Plan is that you must pay back that money within the legal time frame or be subject to taxation. This may not allow you to make additional contributions towards retirement until that money is paid back, simply because of budgetary concerns. You may not be able to contribute the maximum amount each year, which leaves more of your earnings subject to taxation. Plus, if you miss a yearly payment on the withdrawal, you will have to pay taxes on the payment amount. That may or may not hurt you, depending on what tax bracket you fall into.
Life sometimes throws you a curve ball. You and your partner may have bought your home while both were working. Then a baby comes along and someone has to stay home with the child, or one of you suffers a job loss for other reasons. Even with those scenarios, borrowing from your RRSP to purchase a home is still a positive financial move. Over time your home increases in value, giving you an equity nest egg that is tax free. To find the best retirement and home buying plan for your situation, consult a financial advisor. It is money well spent.