What Is the Home Buyers' Plan (HBP)?
I'm here to explain the Home Buyers' Plan, or HBP, which is a program in Canada that lets you pull up to $35,000 from your registered retirement savings plan, or RRSP, to use as a loan for buying a home.
You need to know that an RRSP is a savings and investment tool for employees and self-employed people in Canada. You put pre-tax money into it, and it grows tax-free until you withdraw, when it's taxed at your marginal rate. These plans are similar to 401(k)s in the U.S., but they have some differences.
Key Takeaways
The HBP is a government program in Canada designed to help first-time homebuyers by letting them use their retirement savings. To qualify, you can't withdraw more than the limit, and you have to take the money out within 30 days after you start living in the home. You repay the borrowed funds over 17 years, but there's no required repayment in the first two years.
Understanding the Home Buyers' Plan (HBP)
This plan is available to first-time homebuyers who have a written agreement to buy or build a qualifying home for themselves. If you have a disability or you're helping a relative with one, you qualify too. Canada considers you a first-time buyer if you haven't owned and lived in a home during a four-year period starting from January 1 of the fourth year before your withdrawal.
For instance, if you withdraw funds in June 2021, your eligibility period starts from January 1, 2017, to check if you're a first-time buyer. You or your spouse or common-law partner can qualify individually, as long as neither has occupied a home owned by either of you.
To use the program, you withdraw no more than $35,000, and all withdrawals happen in the same calendar year. You must take the funds no later than 30 days after moving into the home. After the second year from withdrawal, you have 15 years to repay by depositing back into your RRSP, with minimum annual payments. If you don't pay the required amount by year's end, it's taxed as income.
Lifelong Learning Plan (LLP)
Besides the HBP, Canada has the Lifelong Learning Plan, or LLP, which lets you withdraw tax-free from your RRSP for educational expenses. This covers training or education for you or your spouse or common-law partner, but not for your children.
Using Retirement Funds to Buy a Home in the U.S.
In the U.S., there's a comparable option for first-time homebuyers under the Taxpayer Relief Act of 1997, where you can withdraw up to $10,000 from an IRA for buying or building a home. Unlike the HBP's tax-free loan, a traditional IRA withdrawal is taxed as income in the U.S.
For Roth IRAs, which use post-tax contributions, you don't pay taxes on withdrawing your contributions. In both cases, the IRS skips the 10% early withdrawal penalty that normally applies if you're under 59½.
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