When examining financial options for a downpayment when buying a home, many people consider making a withdrawal from their Registered Retirement Savings Plan (RRSP) account.
Is this a good decision to make?
There are a few things to consider and be aware of when contemplating this choice.
Like many other similar types of transactions, there are terms and conditions to meet.
You must be a resident of Canada. All withdrawals must be made in the same calendar year. That is particularly important when considering the timing of when you are buying a home. Any RRSP contribution must be held for 90 days before being withdrawn under the Home Buyers’ Plan (HBP).
Keep in mind that you have to be a first time home buyer in order to qualify for the HBP.
If the withdrawal being made will be used under the HBP plan, it is tax deductible.
This means that not only are you withdrawing pre-tax funds, but you will also receive a tax deduction for it. This is a huge benefit.
You can borrow up to $25,000 which adds room for more options when choosing a home. Because of the amount, the limitations that may be faced when working with a smaller down payment no longer apply.
A withdrawal from an RRSP can be made at any age, giving hope to more than just retirees.
Because RRSP funds are viewed by the government as normal income, equity gained from these withdrawals are taxed accordingly.
The only exception being the previously mentioned HBP candidates. The funds remain exempt from taxes as long as they remain saved in the plan. Although withdrawals can be made at any age, pre-retirement withdrawals can be subject to an additional tax as well.
Taking money from your RRSP account will also impact your future contribution room in the plan as well.
Withdrawing from an RRSP is not an option for everyone. There are other avenues to consider, though. The down payment may be borrowed and even non-repayable gifted funds from an immediate relative are a possibility. If you have invested in stocks or bonds, those could be sold to put toward the home as well.
Reach out to us to inquire about your options and to ensure every possibility is presented to you.