Be Smart And Use Your RRSP For A Down Payment
An RRSP bank account is your retirement reserve that should not be touched until the time is right. While funds go in, ideally they should not come out until your retirement kicks in. There is one primary exception to this hard and fast rule. Making use of the Home Buyers’ Plan should not bring on the smallest amount of guilt about going into those funds. In fact, in the last 22 years approximately 2.5 million homeowners have used their RRSP to make full or partial down payments on their homes. In today’s market any extra help can be welcome, and partial payment from an RRSP is becoming much more common.
The Home Buyers’ Plan Acts as a Loan
It allows you to make a down payment on a home by withdrawing up to $25,000 from your RRSP to use towards it, but there are some stipulations. You must be a first time buyer or have not have owned a home within the last five years. Generally, you have a 15 year period to repay all withdrawals to your RRSPs.
You are allowed to withdraw up to $50,000 if you are in a couple that is buying as each partner can withdraw $25,000 each. This can be a big help if you don’t have the full 20 percent down that is required to avoid buying the mortgage insurance.
To enjoy tax advantages and make withdrawals, available funds must be in your RRSP for no less than 90 days. You may take the opportunity to talk to a tax advisor to help you plan properly, especially if your main reasons for an RRSP are the tax advantage and saving for that home. You can go on with contributing to the RRSP for retirement after you purchase the home.
Time and again people will consider leaving their RRSP alone and have a tax free savings account to save for that down payment; however not all financial advisors agree with that policy. A Home Buyers’ Plan puts forward tax deductions, which can help you put away more money. It depends, however, on the individual and how much money can be saved in that account.
Because it acts as a loan, one disadvantage of the Home Buyers’ Plan is that you must pay back that money within the legal time frame or be subject to taxation. This may not permit you to make added contributions towards retirement in anticipation of the money owed. If however, your primary reason for opening the RRSP is to save for a down payment, this may not be an issue. If you already had an RRSP and are using it for retirement, then you may not be able to contribute the maximum sum each year, which can leave more of your earnings subject to taxation.
Remember, you will have to pay taxes on the payment amount if you miss a yearly payment on the withdrawal. That may or may not be too much of a burden, depending on the tax category you fall in.
Consult With a Financial Advisor
In life, unexpected and unforeseen occurrences occur. You and your spouse may have bought your home while both were working, but what happens if one of you suffers a job loss or other reasons. Even in such dire circumstances, taking a loan from your RRSP to buy a home can still be a wise financial move. At the end of the day you will find that the money was well spent as your home increases in value.
Get the right advice for your retirement and home buying plan for your situation. Consult a financial advisor who can show you how an RRSP could help you make a down payment on your first home.