It is that time of the year again … RRSP season is back!
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First time buyers, ACT NOW !
With Canada’s great benefit system, you have access to the RRSP investment, commonly known as the Retirement Registered Savings Plan. However, not everyone understands what it actually is and how you can use it at your advantage. Here is what you should pay attention to !
First things first, what is the RRSP ?
To make it simple, the RRSP is an account to which you contribute by investing money. The funds’ primary purpose is to finance your retirement.
What are the main advantages of owning a RRSP ?
Your contribution is tax free as long as the money stay in your plan ! If you withdraw it, you will have to pay taxes. Moreover, the contribution you use from your salary to put it on your plan is tax-free so it will also diminish your income tax.
First-time buyers, watch out ! HBP is your friend !
You saw the property of your dreams but you cannot afford to pay for the down payment ? Indeed, there is a way for first-time homebuyers* to withdraw money from the RRSP without having to pay tax on it: the HBP (Home Buyers Plan). This plan allows you to withdraw up to $ 25,000 from your invested RRSP ($ 50,000 for a couple). This way, you can use the funds towards the new purchase and also to benefit from the tax shelter of that fiscal year.
Note : should you have not contributed towards your RRSP, then you would be qualified for the following. Example: the loan would be provided to you by the institution for 91 days to be able to receive the tax credit and to use towards closing cost, furniture, etc….
What are the conditions to reimburse the HBP ?
Even though the withdrawal must be paid back, the terms are quite advantageous:
– The first payment must be made 2 years after withdrawal at the latest
– You have 15 years to reimburse the total amount
– You do not pay interest
– You can pay back everything at any time, without penalty
– If you cannot pay back towards your RRSP, then the portion of that amount will be taxable in addition to your annual income.
Why should I use my RRSP to finance my home purchase ?
Let’s say your significant other and yourself have your eyes on a stunning $250,000 condominium in downtown Montreal. Unfortunately, you do not possess 20% of the property value to make the down payment.
Normally, two scenarios are possible: either you can kiss your dream home goodbye, or you can continue the purchasing process and might have to spend a lot in mortgage default insurance.
The reality is that not everybody has a large quantity of cash at their fingertips, which is why using your RRSP turns out to be a good solution to access to property ownership without breaking the bank.
*First-time homebuyers: you never bought a property. In addition, the HBP plan is good if you do not own a property during the last 5 years of withdrawing your HBP.