June 28, 2010
The RSP Homebuyers Plan: An Excellent Way to Save for the Down Payment on Your First Home
Lets face it, saving money for the down payment on your first home can be an overwhelming task. These days, you are required to put down a minimum of 5% of the purchase price of your first home, this is the minimum that CMHC or Genworth will allow.
If you are looking at buying a home for $300,000 you will need a minimum down payment of $15,000. Buying a home for $500,000 ? You will need a minimum down payment of $25,000, and so on.
When I meet with first time home buyers, more often than not we have a thorough discussion around the Home Buyers Plan. There seems to be a few misconceptions out there when it comes to the details of the plan and how it actually works. The Home Buyers Plan is an excellent way to get a “boost” from your current savings, or to help you get started saving towards your down payment.
What is the Home Buyers Plan ? It is a government program that lets you withdraw money from your RSP savings (even if you don’t have any), towards the down payment on your first home, tax free and without paying a penalty. You can also use the Home Buyers Plan to help a relative with a disability buy a home.
If you fall into either of the following scenarios, you may be able to take advantage of the Home Buyers Plan and benefit from significant tax breaks:
- You do not have enough money for a down payment, but have money in a Registered Retirement Savings Plan (RSP).
- You have money for a down payment and have unused RSP contribution room.
How does the Home Buyers Plan work ?
- If you can relate to the first scenario above, you and your spouse or common law partner, can each wihdraw up to $25,000 from your RSP’s to help build or buy the same first home for a combined total of $50,000.
- If the second scenario is more like your current situation, then consider contributing the money you have saved into an RSP and potentially benefit from a substantial tax refund. The contribution must be within your RSP contribution limit, you can find your limit on your most recent Notice of Assessment from the government.
Lets look at an example of how to use the Home Buyers Plan to your advantage. We will assume RSP contribution room of $25,000 each and a 35% tax bracket for you and your partner, assuming you are both eligible for a tax refund and you’ve saved $50,000 for a down payment on a first home.
STEP 1 – Use your savings to each contribute $25,000 to your RSP’s. (These contributions must be made prior to March 1, 2011 in order to claim them on your 2010 tax returns).
STEP 2 – File your 2010 tax returns as soon as possible and claim your respective RSP contributions.
STEP 3 – Based on a 35% tax bracket and $25,000 each in contributions, you and your partner could receive income
tax refunds of up to $8,750 each, for a total of $17,500.
STEP 4 – 90 days after making your contribution, withdraw your RSP funds through the Home Buyers Plan program.
Now you and your partner have $67,500 ($17,500 tax refund + $50,000 Home Buyers Plan withdrawal) to use towards the down payment on your first home !
It is important to remember that your RSP contribution be made a minimum of 90 days prior to the withdrawal under the Home Buyers Plan program. To ensure you do not pay any tax on the Home Buyers Plan withdrawal, you must begin to repay the withdrawn amount to your RSP in the second year after the withdrawal and have the full amount repaid within 15 years.