You're dreaming about a new home and starting to save for your down payment. But you're also wondering what the best strategy is for doing it. Let's explore an option with your RSP (Retirement Savings Plan) that you might not be aware of.
RSPs are ideally meant for money that you won't need until retirement. And if you take money out of your RSP, you're taxed on it. But not with the first time Home Buyers' Plan (HBP) provision.
How the Home Buyers' Plan Works
Jason Heath, fee-only CFP and Managing Director with Objective Financial Partners says, "The Home Buyers' Plan allows a tax-free withdrawal of up to $35,000 from an RSP to use towards the purchase of a home for an eligible first-time homebuyer. As a result, your RSP can be a way to save for a home down payment."
You have to pay the money back into your RSP within 15 years after a two-year grace period following the withdrawal.
When a Home Buyers' Plan Might Work for You
With the HBP, you get your RSP money working for you, a tax deduction and tax-deferred growth. However, the money you withdraw misses the opportunity for growth and compounding within the RSP.
Prospective first-time homeowners might want to consider going the HBP route if:
1. They have a plan to pay it back
2. They don't have enough saved for a 20% down payment and want to avoid purchasing mortgage loan insurance
Heath said there are tax considerations as well:
"RSP contributions are most beneficial when you are in a higher tax bracket. The higher your income and tax rate, the larger the tax deduction. When your tax rate is lower, Tax-Free Savings Account (TFSA) contributions may be preferable, particularly given TFSA withdrawals can be used to fund a RSP contribution in a future year when income is higher."
If you're still in the phase of saving for a down payment and deciding between a TFSA or HBP with your RSP, you might be wondering if there's a sweet spot to help you decide if an RSP or TFSA is the better choice for you when saving for your down payment.
Heath said: "There are a number of factors like age, future income expectations, existing RSP assets, saving and spending goals, province of residence, and whether you have a matching contribution from your employer. When you are saving for a home down payment and have less than the Home Buyers' Plan (HBP) maximum of $35,000 in your RSP, this can be another situation to consider RSP contributions."
What About Group RSPs for the HBP?
"There are no tax rules that prevent taking a group RSP withdrawal under the Home Buyers' Plan (HBP), but a group RSP may limit withdrawals," said Heath. "A potential homebuyer considering the HBP should inquire with the plan provider if they may want to take an RSP withdrawal from a group plan."
HBP: A Tool for Prospective Homeowners
Heath said he often sees young savers preferring TFSAs over RSPs.
"The HBP can be a good tool for a first-time homebuyer. Many young, aspiring homeowners struggle to save up a down payment, and RSP contributions and the HBP can help, especially if a withdrawal can help achieve a 20 per cent down payment. That 20 per cent threshold is important to avoid Canada Mortgage and Housing Corporation (CMHC) mortgage loan insurance otherwise required."
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