Rounding it up
It is possible to take money from your RRSP a second time but you must repay the previous HBP balance and wait four years.
There are many alternative incentives and credits available to both first-time home buyers and existing homeowners.
Before you prematurely withdraw from your RRSP, think about the potential financial consequences.
Buying a new home can be a monumental financial step. Whether you’re a first-time homebuyer or getting your second vacation home, purchasing a property is incredibly complicated and generally quite expensive. How expensive depends on multiple factors, such as the neighbourhood, the size of the home, the nearby school districts, and more. That litany doesn’t even include the general economy and home sales market, which, in 2021, has been totally bananas.
Any way you cut it, you’re looking at a sizable chunk of capital, even in a down market. The smart home buyer looks to take advantage of any tax credit, government program, or another avenue for funds available to them. The Canadian government offers a host of different programs for homebuyers, especially first-time homebuyers. One of these programs, the Home Buyers’ Plan (HBP), allows Canadians to withdraw money from their Registered Retirement Savings Plan (RRSP). Sounds great, yeah? Hold your horses—you should first learn more about this program and who can use it.
The Home Buyers’ Plan
The Canadian government provides tax-advantaged status to Registered Retirement Savings Plans (RRSP) to get Canadians saving for their golden years. The government also says, however, that you can pull funds from your RRSP for the purchase of a home. This stipulation, unfortunately, mainly applies to first-time homebuyers. However, borrowers that meet strict qualification standards may be able to use the HBP again.
Don’t lose hope, though. There are lots of other credits and deductions available for homebuyers of all types! First, let’s cover how the Home Buyers’ Plan works and how you can use it if you do qualify.
The HBP allows first-time homebuyers to withdraw up to $35,000 per year from their RRSP to cover the cost of purchasing the home. There are a few clear qualifications for the program, but, in essence, you must be a first-time homebuyer with a written agreement to purchase a home. You have 15 years from the date of withdrawal to repay the amount. This can be a great way to get a leg up on your down payments or a way to cover closing costs.
Now, let's cover when you can take advantage of the Home Buyers’ Plan for a second time. Pay attention, because this gets pretty specific. You need to have sold your home four years before you want to purchase again. For example, if you sold your home in 2016, then you need to wait until 2020 to purchase a new home using the HBP. This, in addition to the fact that you must have a $0 balance on your HBP withdrawal on the first of the year in which you intend to purchase. This means that you have to have completely paid off your previous withdrawal before you can use the HBP again.
Let's say you sold your home on January 3, 2016. You move into a rental and begin paying off your HBP RRSP withdrawal. You have to have completely paid off your HBP withdrawal by December 31, 2019 if you want to purchase a new home in 2020 using HBP a second time. If you have even a small balance of a few dollars left to repay, you’ll have to wait a whole calendar year, effectively making for a five-year waiting period.
The Canadian government purposefully makes using the HBP a second time difficult because it is intended to get first-time homebuyers on their feet in their new home. The requirements and the costs—withdrawing another $35,000 from your retirement account—of using it a second time should be weighed carefully.
Ok, no HBP for me. Do I have other options?
There are a lot of other credits and savings you can look forward to whether you’re buying your first home or your fourth. First and foremost, check in with the banks that hold your accounts and mortgages already. It is very likely that they will offer existing customers additional discounts on new services. These discounts come in all shapes and sizes, from interest rate reductions to cutting closing costs.
The government also offers the First Time Home Buyer Incentive, but this program is yet again for first-time home buyers. It allows qualified borrowers to enter into a shared equity mortgage with the Canadian government. You definitely need to do your homework on this one, but you can realize some considerable savings if you take advantage of it correctly.
The Canadian government also offers tax rebates for all homebuyers, whether it’s your first or fourth home. The Home Buyers Amount allows you to deduct a portion of your home purchase price and could result in a tax credit of up to $5,000.
There are several credits and savings plans that are available to all kinds of purchasers. The GST/HST Housing Rebate allows you to write off a portion of the cost of purchasing or even building your new home. In practice, your home needs to be purchased for less than $450,000. Be prepared for the paperwork if you plan to take advantage of this rebate.
Finally, one of the newer but incredibly important tax credits is the Canada Greener Homes initiative. This scheme from the Canadian government allows home buyers to access grants and tax credits to make environmentally responsible renovations to their homes. Canadians can get grants of up to $5,000 for things like energy-efficient water heating and HVAC, solar panels, and more.
What about withdrawing cash from an RRSP generally?
One of the things you may be considering when purchasing your home, whether you’re using the HBP or not, is withdrawing some cash from your RRSP to cover costs. This is possible, but you should think very carefully about the cost. First and foremost, you’re losing the value of tax-free growth that you get from your RRSP. Let’s say you withdraw $10,000. You’re not losing $10,000 alone, you’re losing $10,000 plus the potential dollar amount it would’ve grown by while invested through your RRSP.
Second, there are a number of taxes and fees for early withdrawal that the government levies. In addition to the income tax you’ll be charged, you’ll also have to pay withholding taxes of:
10% (5% in Quebec) on amounts up to $5,000
20% (10% in Quebec) on amounts over $5,000 up to and including $15,000
30% (15% in Quebec) on amounts over $15,000
That is a lot of money; 30% of $15,000 is $4,500, which you’ll have to pay in cash come tax season. Add that to the income taxes you’ll have to pay on that amount and your $15,000 withdrawal quickly becomes something you’d do only in an emergency.
Ask yourself about purchasing a home at all
If you’re in a position where you need to pull funds from your RRSP, at a rather large penalty, and pay taxes on top of that amount, you should perhaps ask yourself if now is really the right time to be purchasing a home. Even if you do purchase the home, there are various costs that come along with home ownership. These include maintaining appliances, cleaning supplies, and furniture, not to mention the property taxes. Many individuals and families nationwide rent a flat or home their entire lives, and if you need to pull cash out of retirement accounts at a penalty to buy, renting is likely the way to go.
You can use the Home Buyers’ Plan a second time as long as you meet the strict requirements for doing so. In practice, this means selling your home and renting or living with family for nearly five years. This may work for some, especially as the economy changes post-pandemic. Remember, though, that there are plenty of other tax credits and programs you can take advantage of as well. Withdrawing money from your RRSP before it matures is almost never a good idea, given the fees and taxes required and the growth you’ll miss out on. Definitely take time to learn more about how retirement accounts work and some other ways that you can take out loans to help you with the purchase of a home.
Dan is a runner and writer living in the Washington, D.C. area, where he currently works for a financial services trade association as the Communications Director.