With the rising cost of housing and tougher lending rules, first-time Canadian homebuyers haven\u2019t had it easy edging into today\u2019s market.<\/p>\n
Fortunately, there are a number of programs offered by the government to help homeowner hopefuls get a leg-up \u2014 including drawing from your retirement plan to buy your first home. The Home Buyers\u2019 Plan (HBP) is a government program that allows eligible first-time homebuyers to withdraw up to $25,000 tax-free out of their registered retirement savings plan (RRSP). But before you take advantage of this popular option, it\u2019s important to understand the pros and cons of raiding your retirement fund.<\/p>\n
Let\u2019s start with the basics. What is an RRSP?<\/strong><\/p>\n RRSPs are designed to help Canadians save for retirement but there\u2019s another major perk beyond funding your golden years: you can reap substantial tax breaks right away. Say you make $50,000 a year and contributed $9,000 to your RRSP \u2014 you will only be taxed that year as if you made $41,000, resulting in thousands of dollars saved in tax breaks. You can contribute a maximum of 18 percent of your income or $26,230 a year to your RRSP (whichever one is highest).<\/p>\n Sounds pretty great, right? Hang on. You\u2019ll eventually have to pay taxes when you withdraw the money. But by that point, you will likely be in a much lower income bracket \u2014 which means more to cushion your golden years and less in the hands of the tax man.<\/p>\n You can invest your RRSP in mutual funds, ETFs, stocks, bonds and the like and any capital gains won\u2019t be taxed while they\u2019re sitting in there. With interest-earning capabilities that will accumulate over time, your RRSP is a wise long-term decision. On the other hand, withdrawing from your RRSP before retirement will result in a withholding tax penalty. This means the bank will immediately hold back the tax on your withdrawal (at a rate of 10 percent \u2013 30 percent, depending on the sum you take out) and hand the dough over to the government.<\/p>\n There are a few exceptions to the rule \u2014 one of which being when you\u2019re a first-time homebuyer putting the money towards your home purchase.<\/p>\n \u201cThese days, it\u2019s getting really hard for my clients to come up with a downpayment \u2014 especially in cities like Toronto,\u201d explains Jeanette Brox, a Toronto-based certified financial planner (BAS, CFP, CLU, RRC). \u201cCouples can each pull up to $25,000 from their RRSPs \u2014 giving them a $50,000 tax-free advantage. That\u2019s a big help.\u201d<\/p>\n How to qualify for the Home Buyers\u2019 Plan<\/strong><\/p>\n To be eligible you must be a Canadian resident. You\u2019ll have to sign an agreement stating the money is for a home purchase or build and take up residence in the home before October 1st of the year following the year of the withdrawal. More fine print to consider: though as mentioned above, you can delay move-in, you need to use the money on your new home purchase within 30 days of withdrawing it.<\/p>\n You don\u2019t technically have to be a first-time homebuyer to use the Home Buyers\u2019 Plan. You can take advantage of the program more than once by following the four-year rule \u2014 wait four years between home purchases and pay the first withdrawal back to your RRSP in full and you\u2019re good-to-go. If you\u2019re related to a person with a disability, you can gift them money from your RRSP. The golden rule is that whoever benefits from the Home Buyers\u2019 Plan has to live there as the primary residence.<\/p>\n And if you\u2019re tempted to ramp up contributions right before you buy a house, be warned \u2014 the money has to be sitting there for at least 90 days before you can pull it out.<\/p>\n The HBP is technically a loan to yourself \u2014 with real consequences for missed payments<\/strong><\/p>\n The Home Buyers\u2019 Plan is a welcome break for prospective homeowners grinding it out in Canada\u2019s housing market \u2014 but there\u2019s one small catch. The money taken out has to be paid back through installments over a 15-year period beginning two years after your withdrawal. Future you will thank present day you for not robbing your RRSP blind \u2014 but like any loan, there are financial consequences for missing a payment.<\/p>\n According to Canada Revenue Agency, nearly half of the participants are missing their annual required payments each year. If you don\u2019t pay the expected amount that year (1\/15th of the total), the government will treat it as income, remove it from your RRSP and tax you on it. It can get costly depending on the amount owed annually and the tax bracket you\u2019re in \u2014 further strapping homeowners and burning a hole in their retirement savings.<\/p>\n \u201cIf you weren\u2019t in a comfortable financial situation to purchase a home in the first place, the Home Buyers\u2019 Plan can have major drawbacks. Homeowners struggling to make their mortgage payments will find it really hard to put the money back into their RRSPs,\u201d explains Brox. \u201cBuying a home is an emotional process and people have to go in with eyes wide open so they\u2019re aware of the risks.\u201d<\/p>\n Even bankruptcy won\u2019t get you off the hook from repaying your RRSP \u2014 \u201cThere\u2019s no mercy there,\u201d explains Brox.<\/p>\n While it\u2019s a great lever to pull, Brox encourages you to also consider \u201cthe opportunity cost\u201d of keeping your savings in your RRSP, untouched. \u201cReal estate over the long run \u2014 and I stress the long run \u2014 is a good investment but with anything worthwhile you have to make sacrifices. If you would have not touched that RRSP for 15 years, you\u2019ll have seen far greater returns.\u201d<\/p>\n In a perfect world, the HBP is designed to incentivize homebuyers to transform their saved funds into real estate equity. While you\u2019re technically giving a loan to yourself, you\u2019ll benefit from having both a replenished RRSP and your home\u2019s equity to live off of when you retire.<\/p>\n