As the weather gets nicer, many people start getting the urge to find a new house. For first time buyers, this is an exciting and somewhat scary prospect all at once. Can we afford a house? Do we really want to be tied to a mortgage for the next 20 years or more, and probably the most daunting question of all, do I have the money for the down payment?
The federal government introduced the Home Buyers’ Plan as a means to help Canadians who were saving for retirement but then found themselves unable to save money for a down payment on a house. The Home Buyers’ Plan (HBP) allows someone to withdraw up to $25,000 from his or her RRSP to use toward the purchase of an existing home or one being built. The money has to be paid back to the RRSP within 15 years or it will be considered income by the Canada Revenue Agency (CRA), and therefore, be taxable.
Before Withdrawing The Money
If you're going to use some or all of the funds in your RRSP to buy a home, one of the first things to think about is how liquid is the investment you've put the money into? If the funds are in a GIC for a term of one year or longer, some institutions make it very difficult to get out of these investments and will often charge penalties to do so. Money that is in stocks or mutual funds is generally more easily sold or cashed in, but these investments can be volatile. If you're actively looking for a house, it might be better to move your money into a money market fund to avoid any potential big downswings. This type of mutual fund is usually very safe and they tend to be cashable within one to two business days without any fees.
When it's time to take out the money from your RRSP, keep in mind that it is not an instant process. Most financial firms will take about 24 to 48 hours to process the request and then depending on the type of investments the money is in, there are settlement periods of 1 to 3 business days before the money can be released. My advice is to plan ahead. If you're going to use the Home Buyers’ Plan to purchase a home, start the process at least two weeks prior to your closing date so the money can be released and in your hands on the day you need it.
Paying Back The Money
Repayments to the Home Buyers' Plan must begin in the second year after the money is withdrawn. The CRA will send a Home Buyers' Plan statement to the RRSP holder showing how much is to be repaid and what is still owing. As stated earlier, the money must be repaid within 15 years but can be paid back sooner.
Repaying the Home Buyers' Plan doesn't require any special forms or payments to be sent anywhere. The RRSP holder simply contributes money to the RRSP as normal and when filing his or her income tax return, designates how much of that year's RRSP contribution is to be allocated to the repayment. The amount owing can be paid down sooner than the 15 years but there is no "doubling up" to skip a year. A payment must be made every year until the balance owing is zero. If the minimum repayment is not made in a given year, or if the amount repaid is less than the required amount, the difference must be reported as income.
Ted withdraws $15,000 from his RRSP in 2015. Repayments of $1,000 a year must begin in 2017.
In 2017, Ted contributes $1,200 to his RRSP. When doing his 2017 taxes, he has the option of allocating $1,000 to the HBP repayment and using the remaining $200 as a deduction for that year or putting the entire $1,200 toward the HBP repayment. (For this example, he chooses to put the entire amount toward the repayment.)
If Ted chooses to put the entire amount toward his HBP repayment, his repayment beginning in 2018 will be reduced to $985.71 per year ($13,800 / 14).
In 2018, if Ted only contributed $600 to his RRSP, he would have to report the $385.71 owing to the HBP for that year as income on his tax return.
If you are able to contribute more to your RRSP than the required amount, it's good because it allows you to still use the excess as a deduction on that year's income tax. Alternatively, if you allocate your entire contribution to your HBP repayment you can be done years sooner and get back to using your entire contribution as a deduction.
Using Your TFSA To Buy A House
A friend recently asked me if she could use the money in her TFSA as part of the Home Buyers' Plan. The short answer was no. The longer answer is: Yes, go ahead and use your TFSA funds to buy a house but it won't be part of the Home Buyers’ Plan because there are no restrictions on what the money in a TFSA can be used for.
Funds taken out of a TFSA can be used for any purpose and you're not required to pay it back. These days, now that the lifetime TFSA limit is up to $36,500 as of 2015, there is ample room to save a sizeable down payment for a house. The annual contribution room increase has also just been raised to $10,000 from $5,500 with the new federal budget, so that upper limit is going to climb much more quickly now.
In the ongoing debate about whether it's better to save money in the RRSP or the TFSA, this is another reason the TFSA is becoming the better choice. There are no forms to fill out to withdraw money from the TFSA, making access to the money easier but the same rules about the liquidity of the investments listed above still apply, so plan ahead when withdrawing your TFSA funds for a home, tuition or whatever else you're buying.
Balancing Your Short And Long Term Goals
Saving for the future is important but along the way other things like buying a house may be a reality for many of us so it's nice to have choices for ways to make both things happen, be it the RRSP or TFSA. While the TFSA doesn't require the money to paid back the way the Home Buyers' Plan does for the RRSP, I encourage anyone who uses the TFSA as a means for a down payment to make a plan to repay the TFSA to keep building a brighter future for yourself and your family.