April 29th 2016
Do you want to know about a fantastic way of saving towards your dream of owning a home? It’s called The Home Buyers Plan (HBP), set up for first time home buyers who can withdraw up to $25,000 from their RRSP to use toward the purchase of a home. The funds can be used towards the down payment, legal fees, closing costs or even furniture to help you get started. The definition of first time home buyer also includes previous home owners who meet certain criteria.
The advantage of saving funds in an RRSP is that you generally receive a tax refund (provided the RRSP contribution is made with after-tax dollars and the proper amount of income tax has been deducted from all sources of income). In turn, you can take that refund and contribute it to your RRSP along with your regular contributions, thus creating a second refund. These funds help you to save money that much quicker, thus realizing your dream of owning a home so much sooner!
When you are ready to withdraw from your RRSP under the HBP, there is no withholding tax applicable and you can use the entire amount (up to $25,000) towards your home. In essence, you are borrowing the funds from your RRSP, and have 15 years to re-deposit the funds back to your RRSP. Repayment starts in the second year following your home purchase. For example, if you used $15,000 of your RRSP, then you will be required to deposit $1,000 each year, over 15 years, back into your RRSP. If you wish to “repay” the HBP quicker, you can contribute more and designate the higher amount specifically to your HBP repayment. If you are unable to contribute to your RRSP in any given year, you add that annual repayment requirement to your income for that year. Continuing from the previous example, you would have to add $1,000 to your income and you pay income tax on that $1,000 when submitting your annual tax return.
The above information is broken down into a very simplified version of how the HBP works. There are many details about the HBP that you should review to ensure eligibility to participate, as well as clear understanding of the rules. The information can be found here
Feel free to contact one of our mortgage lenders, or myself, to find out specific details. Let us help you get started today on realizing your dream of home ownership.
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Written by Betty Anne Flynn