What Canadians need to know about RRSPs and the first-time Home Buyers’ Plan

With the rising cost of housing and tougher lending rules, first-time Canadian homebuyers haven’t had it easy edging into today’s market. Fortunately, there are a number of programs offered by the government to help homeowner hopefuls get a leg-up — including drawing from your retirement plan to buy your first home. The Home Buyers’ 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’s important to understand the pros and cons of raiding your retirement fund.

Let’s start with the basics. What is an RRSP?

RRSPs are designed to help Canadians save for retirement but there’s 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 — 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). Sounds pretty great, right? Hang on. You’ll eventually have to pay taxes when you withdraw the money. But by that point, you will likely be in a much lower income bracket — which means more to cushion your golden years and less in the hands of the tax man.

You can invest your RRSP in mutual funds, ETFs, stocks, bonds and the like and any capital gains won’t be taxed while they’re 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 – 30 percent, depending on the sum you take out) and hand the dough over to the government. 

There are a few exceptions to the rule — one of which being when you’re a first-time homebuyer putting the money towards your home purchase. “These days, it’s getting really hard for my clients to come up with a downpayment — especially in cities like Toronto,” explains Jeanette Brox, a Toronto-based certified financial planner (BAS, CFP, CLU, RRC). “Couples can each pull up to $25,000 from their RRSPs — giving them a $50,000 tax-free advantage. That’s a big help.”

How to qualify for the Home Buyers’ Plan

To be eligible you must be a Canadian resident. You’ll 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.

You don’t technically have to be a first-time homebuyer to use the Home Buyers’ Plan. You can take advantage of the program more than once by following the four-year rule — wait four years between home purchases and pay the first withdrawal back to your RRSP in full and you’re good-to-go. If you’re 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’ Plan has to live there as the primary residence. And if you’re tempted to ramp up contributions right before you buy a house, be warned — the money has to be sitting there for at least 90 days before you can pull it out.

The HBP is technically a loan to yourself — with real consequences for missed payments

The Home Buyers’ Plan is a welcome break for prospective homeowners grinding it out in Canada’s housing market — but there’s 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 — but like any loan, there are financial consequences for missing a payment.

According to Canada Revenue Agency, nearly half of the participants are missing their annual required payments each year. If you don’t 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’re in — further strapping homeowners and burning a hole in their retirement savings.

“If you weren’t in a comfortable financial situation to purchase a home in the first place, the Home Buyers’ 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,” explains Brox. “Buying a home is an emotional process and people have to go in with eyes wide open so they’re aware of the risks.”

Even bankruptcy won’t get you off the hook from repaying your RRSP — “There’s no mercy there,” explains Brox. While it’s a great lever to pull, Brox encourages you to also consider “the opportunity cost” of keeping your savings in your RRSP, untouched. “Real estate over the long run — and I stress the long run — 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’ll have seen far greater returns.”

In a perfect world, the HBP is designed to incentivize homebuyers to transform their saved funds into real estate equity. While you’re technically giving a loan to yourself, you’ll benefit from having both a replenished RRSP and your home’s equity to live off of when you retire.