The new Liberal government is introducing a number of updates for household finances - and one of them will change the game for first-time home buyers. A slew of expansions are slated for the Home Buyer's Plan, which currently allows first-time buyers to pull up to $25,000 from RRSPs to fund their home purchase.
Not Just For First-Timers
The existing rules of the HBP are pretty strict. You have to meet the eligibility requirements to be considered a first-time home buyer and withdraw funds tax-free from your RRSP. Under the new rules, home buyers will be able to withdraw funds from their RRSP more easily. You will now be able to make RRSP withdrawals up to $25,000 ($50,000 for couples) to purchase a home in a number of scenarios:
- If you have to relocate for work
- Your spouse passes away
- You divorce your spouse
- To provide care for an elderly relative
Furthermore, there’s no limit on how many times you can use the HBP.
No Increase Planned for Withdrawal Limits
However, the lack of change in the RRSP withdrawal limit is sure to draw ire from some home buyers; the former Conservative government had pledged to up the limit to $35,000 per buyer. It's argued the current HBP withdrawal limit hasn’t kept pace with the rising cost of homeownership. Since the HBP was introduced in 1992, the withdrawal limit has only gone up 25% (from $20,000 to $25,000 in 2009), while the average price of a home has increased an astonishing 205%.
What About Retirement Planning?
Having increased access to saved funds is sure to help many Canadians - but is this diverting too far from what RRPSs are actually intended for? With only a third of Canadians with the benefit of a workplace pension plan in the private sector, for many Canadians the RRSP means the differences between retiring comfortably and struggling to make ends meet. Nancy Grouni, Certified Financial Planner (CFP) at Objective Financial Partners Inc. weighs in on how this could impact retirement planning.
“While it’s true that RRSP’s are meant to be used to fund retirement, these accounts also represent hard earned savings that many Canadians have set aside for a rainy day. So the ability to draw on funds tax free for a home purchase if sudden life changes are experienced can be a great option giving you the ability to draw on your existing resources while not increasing your taxes owing in a given year,” says Grouni.
Have Your Repayment Plan Ready
If you decide to borrow money from your RRSP, it’s important to make sure you repay the money on time. You have 15 years to repay the amount borrowed from your RRSP. Failure to repay not only results in the income being fully taxable, you also lose the RRSP contribution room forever.
“It is good to ensure that loan repayments are made in subsequent years to avoid having the unpaid amount fully taxable as income in your hands, given the rules for loan repayment are the same as the existing ones in place under the Home Buyers plan,” advises Grouni. “Also, it's good to keep in mind is that dipping into your RRSP means missing out in years of tax-sheltered growth, and as a result could impact your retirement plan negatively. As always, it is best to evaluate the effect that such a decision would have in the long run by crunching the numbers and having a financial plan built.”
Before you decide to withdraw funds from your RRSP, it’s a good idea to sit down with a financial planner and weigh your options.
“A comprehensive financial plan can help you analyze both the short term and long term impact that dipping into your RRSP’s is likely to have on your retirement as well as overall financial plan,” says Grouni.
Sean Cooper is a Financial Journalist and Personal Finance Expert, living in Toronto, Ontario. He offers Unbiased Fee-Only Financial Advice, specializing in pensions and the decumulation of financial wealth in retirement. Follow him on Twitter @SeanCooperWrite and read his blogs and request his writing services on his personal website: http://www.seancooperwriter.com/