With the 2016 RRSP contribution deadline quickly approaching (March 1st), there is no better time than now to learn about RRSP’s and how to use the RRSP Home Buyer’s Plan. Using this program the correct way can generate a larger income tax refund, giving you a quick boost to your down payment savings goal. For this blog post I will cover the following:
- What is an RRSP?
- What is the RRSP Home Buyers Plan?
- How can I take advantage of this to get to my down payment goal quicker?
- Is there a catch?
- Who is eligible for this program?
What is an RRSP?
A Registered Retirement Savings Plan (RRSP) is a type of savings account that allows you to defer taxes on income that is contributed towards it until it is withdrawn. For example, if in 2016 Josephine earned $60,000 before paying taxes, and contributed $10,000 towards her RRSP savings account, her income tax would be calculated based on $50,000 instead. This would result in a larger 2016 tax refund. If the following year she was to decide she wanted to withdraw all those funds from her RRSP account, and she was still earning $60,000, her taxable income in that year would be $70,000.
What is the RRSP Home Buyers Plan?
The RRSP Home Buyers Plan is a federal government initiative which grants first time home buyers a one time withdrawal exemption up to $25,000 from their RRSP savings account without any tax exposure for the purpose of a down payment. Going back to the same example, if Josephine were to buy a home in 2017, she could withdraw the $10,000 from her RRSP’s without any income tax exposure. This means she was able to drop her taxable income when she made a deposit into her RRSP in 2016, and also had no added tax exposure when she withdrew it for the purpose of down payment in 2017.
How can I take advantage of this to get to my down payment goal quicker?
Looking back at the example of Josephine’s situation, she was able to drop her taxable income by $10,000 in 2016, the year she made her RRSP contribution. She also did not have to increase her income in 2017 when she made the withdrawal from RRSP’s for her down payment, as she used the RRSP Home Buyers Plan. This exemption to tax exposure combined with her decreased income in 2016, allowed her to increase her tax refund by $2820. This way, she was able to put away more as extra savings, and it allowed her to reach her down payment goal quicker. Josephine’s situation is a very moderate example of how this program can be taken advantage of. The program actually allows one to withdraw up to $25,000 from their RRSP’s, and also allows partners to both individually take advantage of the program.
Is there a catch?
The program requires one to re-contribute the withdrawn funds back to their RRSP’s over a 15 year period. This means if one were to withdraw $25,000 from their RRSP’s using this plan, they would have to contribute that $25,000 back in the next 15 years. They would not have to contribute anything in the first year, but in the following 14 years they would need to make an annual proportional contribution back to the RRSP savings account. In the example we used of Josephine, she would have to contribute $714.29 to her own RRSP account annually.
Who is eligible for this program?
- Applicants cannot have owned a home in the previous four years
- Must intend to be living in the property within one year of the purchase
- The withdrawal needs to be made within 30 days of taking title of the property
- The money you are withdrawing must be in your RRSP account 90 days prior to making the withdrawal
If you have any other questions related to this article, or any other mortgage related topics, please either send me an email at firstname.lastname@example.org, or give me a call or text at 778-822-5466 and I would be happy to help!