The Home Buyers' Plan (HBP) allows Canadians to withdraw up to $35,000 ($70,000 per couple) from their RRSP for a home, but key disadvantages include required repayment within 15 years, loss of long-term compound growth, and potential tax penalties if annual minimums are not met. It requires strict, long-term repayment, reduces retirement savings, and is restricted to qualifying first-time buyers.
There are no direct penalties or fees for participating in the HBP. However, there can be financial consequences if you don't follow the rules: If you don't repay the required annual amount, the outstanding amount is added to your taxable income for that year.
Using the HBP after you've been a homeowner
Even if you've been a homeowner, you can purchase a home with the HBP if you haven't lived in a residence you own in the past 4 years. However, if you have already used the HBP, you must have repaid the amount you withdrew before you can use it again.
The HBP is a valuable tool to help you increase the size of your home down payment and purchase the home of your dreams sooner. Increasing your home down payment size will make homeownership more affordable by decreasing your mortgage payments, or it can help boost your purchasing power.
Are you eligible? You're eligible if you and your spouse were not the owner-occupants of a principal residence during the year of the RRSP withdrawal and the previous 4 years. You can use the HBP more than once if you've paid back your previous HBP in full by the deadline.
You might be an ideal candidate for the HBP if: You have substantial RRSP savings to withdraw from. Your job and income are stable enough to handle 15 years of repayments. You're looking to enter the housing market sooner rather than later.
RRSP withholding tax is charged when you withdraw funds from your RRSP before retirement. The current rate of RRSP withholding tax is 10% for withdrawals up to $5,000, 20% for withdrawals between $5,000 and $15,000, and 30% for withdrawals over $15,000.
Other tax efficient ways to withdraw your RRSP funds
» Convert to a RRIF
In this scenario, a smart strategy is to convert either the full or a partial amount of your RRSP to an RRIF. By converting to a RRIF, you can obtain a consistent income stream. No tax is withheld when the minimum amount is withdrawn from the RRIF.
You can regain status as a first-time homebuyer after not owning a home for a certain period, such as several years. Even if you've owned a home before, some loan programs allow exceptions based on life circumstances, such as job relocation and financial hardship.
Any portion of the withdrawals from your RRSPs under the HBP that exceed $60,000 will have to be reported as income on your income tax and benefit return for the year you received it. In addition, your RRSP issuer will have to withhold tax on the amount in excess at the time of the withdrawal.
Can I choose to make an early repayment under the HBP? You sure can! As mentioned above, you're required to begin making repayments in the second year after the year you made a withdrawal from your RRSP.
The $1,000 a month rule is a retirement guideline suggesting you need about $240,000 saved for every $1,000 per month in desired income, based on a 5% annual withdrawal rate (5% of $240k is $12k/year, or $1k/month). It's a simple way to set savings goals, but it doesn't account for inflation, taxes, or other income like Social Security, so it's best used as a starting point, not a complete plan.
The one-word secret to lowering your IRA RMD tax hit is Charity, specifically by making a Qualified Charitable Distribution (QCD) directly from your IRA to a charity, which satisfies your RMD, reduces your taxable income, and avoids income tax on that amount, unlike a normal withdrawal.
It can also make sense to withdraw early if you anticipate significant future income from other sources, such as a property sale or deferred stock options. By drawing from your RRSP in lower-income years, you create space for that future income to be taxed at a lower marginal rate.
Hold U.S. dividend-paying securities in RRSPs: Consider holding U.S.-listed dividend-paying securities in your RRSP account. U.S. dividends received in an RRSP are generally subject to zero withholding taxes. However, the same dividends received in TFSAs or non-registered accounts are subject to 15% withholding tax.
The attribution rule.
If the spouse who owns the RRSP (the annuitant) withdraws funds within 3 years of the last contribution, the Canada Revenue Agency (CRA) will attribute that withdrawal back to the contributing spouse, meaning the contributor will pay the tax on the withdrawn amount.