First Time Home Buyer? How To Make The Most Out Of Your Home Buyers Plan Withdrawal
This strategy applies to you if..
- You are planning to buy a home in more than 3 months from now.
- Have RRSP contribution room – the more the better!
The Home Buyers Plan (HBP) allows a qualified first time buyer to withdraw up to $25,000 from their RRSP, tax-free. This amount is to be paid back evenly over 15 years.
The Strategy…
If you are buying a home in more than 3 months’ time, and you have the available RRSP room, you can contribute up to $25,000 into your RRSP and then 3 months later withdraw the funds under the Home Buyers Plan. By having the funds in your RRSP for at least 3 months, it allows you to still claim the tax deduction when filing your income tax return.
Example 1
John has $30,000 in RRSP contribution room and has no RRSPs. He has $50,000 in his savings account which he will use to buy a home.
To take advantage of the HBP, he simply contributes $25,000 (of the $50,000 sitting in his savings) into his RRSP. After 3 months, the RRSP qualifies to be redeemed under the HBP. When buying his home he withdraws the money tax free from his RRSP as a registered HBP withdrawal.
When he files his taxes next year, he will still be able to claim a $25,000 tax deduction on his income tax. If he is in a 30% tax bracket that would be a tax cred it of $7,500.*
Example 2
Mary has $15,000 in RRSP contribution room and has $50,000 sitting in her savings account which she will use as a down payment.
Mary can only contribute $15,000 to her RRSP as that is the maximum room she has. Therefore, she can maximize her RRSP by contributing $15,000. After 90 days she can withdraw the entire $15,000 under the home buyers plan. Remember $25,000 is the maximum you can withdraw under the HBP, but if you have less than $25,000 you can pull out all of it.
By contributing $15,000 she will get a tax refund of approximately $$4,500 assuming she is in a 30% tax bracket.*
When does this strategy not work?
- If you already have existing RRSP of $25,000 or over, that you plan on withdrawing for a home
- Only works for Individual RRSP’s and not for a Spousal RRSP
This strategy also works if you plan on using the RRSP as a withdrawal under the Life Long Learning Plan.
As you can see some advanced planning can go a long way.
*Individual tax rates and situation may vary. Speak to your accountant or tax preparer to get a more accurate picture of your individual tax situation.
