Understanding RRSPs & First Time Homebuyers Plan
There are many members of the Muslim community looking for the most efficient and cost-effective way to save up for their down payment for a house. And for many of the bigger cities in Canada, these down-payments can range from $30,000-$40,000 to $100,000-$150,000. The reality is this is a lot of money for your average Canadian and requires a bit of planning to accumulate it in an efficient manner. One of the strategies we often recommend for families is accumulating money in an RRSP and a Spousal RRSP. By using the RRSP you can accumulate $35,000 under your name and $35,000 under your spouses
name. By doing this it should save you between $20,000- $35,000 in taxes. Further, under the first-time home buyers plan. You will be able to withdraw $35,000 each to put towards the down-payment on your first house.
How does it work?
First things first, You have to contribute money to your RRSP and save on taxes. This could be any
amount up to $35,000 per person. $35,000 is the maximum amount that can be withdrawn from the RRSP. So you and your spouse can
withdraw a total of $70,000 from the RRSP for the first-time homebuyers plan.
Note: If you have previously owned a home in Canada you cannot withdraw money under the first-time homebuyers plan. This seems obvious but I have had a few clients ask me this question.
The money in the RRSP must remain in the RRSP for 90 days in order for it to be eligible to withdraw under the first-time homebuyers plan. After you have successfully used the money from the RRSP for the First-time homebuyers plan you will have two years before you must begin repaying the money. You must repay the money to your RRSP at a rate of 1/15th per year. If you do not repay the money that you did not repay will be subject to income tax. Therefore if you took out the $35,000 from your RRSP after 2 years you have to put back $2333 per year or $194.44 per month.
Things to keep in mind:
1) First-time home buyer withdrawal only works on your First House
2) Money must remain in the RRSP for 90 days prior to first-time homebuyer withdrawal
3) Repayment begins after 2 years of the FHBP being used
4) You must repay 1/15th per year of what you took out.