For anyone who plans to buy a home and happens to have a Registered Retirement
Savings Plan (RRSP), the Home Buyers’ Plan (HBP) is an important option to keep
in mind: the HBP essentially lets you withdraw money from your RRSP to put
towards your home purchase — but without any of the tax penalties.
Before we get into the details of the HBP, let’s talk about how RRSPs work.
The federal government introduced the RRSP in the 1950s to help Canadians
build their own retirement funds. Because your RRSP funds are meant to
be used for the future, the government doesn’t want you to take money
out of the account for frivolous reasons, so they introduced a tax penalty:
every time you take money out of your account, that money counts as taxable income,
and you are taxed accordingly. Let’s say you make $45,000 a year
and withdraw $10,000 from your RRSP. Come time to file your taxes, your income is technically $55,000 — which means you’ll have to pay more taxes.
The HBP is a way around this. Under this plan,
you’re allowed to withdraw up to $35,000 (this was recently updated in 2019
from $25,000 previously) in one calendar year to buy a home, but none of
this money will be considered taxable income. $35,000 is the
total maximum amount you are able to withdraw, and you have to make all your withdrawals within a single calendar year.
That means if you took out $20,000 in 2019, you only had the rest of
the year to take out the remaining $15,000.
The only caveat? The money you withdraw will be considered a loan
(from your retirement funds), and you have to replace it within 15 years.
When considering whether the HBP is right for you, it’s important to think
seriously about whether you’ll be able to keep up with the repayment schedule.