Some of the most common questions I get from young couples preparing to buy their first home centre around making a withdrawal from RRSP accounts. While most people know about the Canadian Government Home Buyers Plan, few people I talk to fully understand the rules surrounding it so today I wanted to take a few minutes to explain a few key points and dispel at least one myth I’ve heard along the way.
Question – How much can I withdraw from my RRSP to purchase a home?
Answer – $25,000.
The amount was set back in the days when the average cost of a home in Canada was less than $200,000 so it was thought that $25,000 would be enough to cover the down payment and help with closing costs and moving expenses. Nowadays you need to have other money set aside as well to make sure everything goes smoothly but it is a good start. While it makes sense that this amount will eventually be indexed to inflation in some way I am not aware of any plans to increase the limit in the foreseeable future.
Question – How long do I have to repay the withdrawal?
Answer – 15 years.
You don’t have to put the money back into the same account or financial institution that it was take from either. So long as you put the money back into a registered account at a Canadian financial institution it can count as a repayment to your RRSP.
Question – Can I continue to make regular contributions to my RRSP or do all of my payments have to count toward the repayment of the withdrawal?
Answer – A minimum 6.67% of your total withdrawal must be paid back every year for 15 years. (6.67% x 15 = 100%).
You can designate any additional RRSP contributions to either pay back the withdrawal or not. It must be noted however that money paid back is not subject to the tax deferral of a regular RRSP contribution, you already got that tax advantage when you put the money in the first time so you can’t claim it again. For that reason I would stick with the minimums so that any additional payments receive the tax advantages of a regular RRSP contribution.
Question – Speaking of taxation, what is the tax rate on the withdrawal?
Answer – 0%.
Other than access to cash when you need it, this is the number one advantage of this program. Money in an RRSP grows tax differed and is only taxed when withdrawn to live on, ideally in retirement. When you withdraw money to purchase a home it’s not considered a living expense in the same way so as long as you put it back within 15 years it is not taxed. However, any amount you fail to pay back under the minimum annual amount (the aforementioned 6.67%) is considered money withdrawn to live on and is taxed as part of your income for that year.
And now for the myth –
It’s not the First Time Home Buyers Plan, it’s just the Home Buyers Plan.
I admit that before I became a financial advisor I thought that the only way people could access this money was on the purchase of their first home which made it possible to only access it once in your lifetime. Since the program is mainly marketed to younger Canadians most people, including a lot of finance professionals believe that is the way it works but the fact is that you can go back to your RRSP and draw this out multiple times provided you have not owned a home at any time in the proceeding 4 years. In my case I bought my first home in 2001 but when my job changed I was forced to move to a more expensive city. I didn’t have enough equity in my home at the time to roll over into a new one so I was forced to rent. Four years later, with the original RRSP withdrawal repaid out of the sale of my first home, I am eligible to go back in and withdraw more money. I am not technically a first time home buyer but because I have been out of the market for four years I am able to use the program a second time.
For more information, here is another article on the subject published last February in the Globe and Mail. “A quick guide to using your RRSP to buy a house.”
I hope this information is helpful and if you have any further questions on the Meekonomist approved method of accessing investments to purchase a home feel free to contact me directly at: email@example.com