What Is the Home Buyers' Plan?
The Home Buyers’ Plan (HBP) is a Canadian program that allows individuals with registered retirement savings plans (RRSPs) to use up to $25,000 of plan holdings as a loan for a home purchase.
- The Home Buyers' Plan (HBP) allows first time home buyers in Canada to borrow up to $25,000 from their qualified retirement savings with no penalty.
- To qualify, funds must not exceed the limit and must be withdrawn within 30 days after residing in the home.
- Funds borrowed from the retirement plan must be repaid over a seventeen-year period (with no mandatory repayments for the first 2 years of the loan).
Understanding the Home Buyers' Plan (HBP)
The Home Buyers’ Plan is open to first-time home buyers with a written agreement to buy or build a qualifying home for themselves. Individuals with a disability or those helping a relative with a disability also qualify. Canada defines first-time home buyers as those who have not owned and occupied a home over a four-year period beginning on January 1 of the fourth year prior to the withdrawal. For example, funds withdrawn in June of 2018 would yield an eligibility period beginning January 1, 2014 for purposes of determining whether or not an individual qualifies as a first-time home buyer. Spouses or common-law partners may qualify singly as long as they have not occupied a home owned in their name or in the name of their current partner or spouse.
To take advantage of the program, home buyers must withdraw no more than $25,000, and must make all withdrawals within a single calendar year. Home buyers also must withdraw the funds no later than 30 days after they begin living in the home. After the second anniversary of the withdrawal, home buyers have 15 years to repay the loan by making deposits back into their RRSP accounts with at least level minimum payments required annually. Required repayment amounts that remain unpaid at the end of a given year become taxed as income.
Lifelong Learning Plan (LLP)
In addition to the HBP, Canada offers citizens the opportunity to withdraw tax-free funds from RRSPs to pay for educational expenses via the Lifelong Learning Plan (LLP). These benefits extend to payments for training or educational expenses for an individual or for a spouse or common-law partner. Individuals may not use LLPs to pay for children’s education, however.
Using Retirement Funds to Buy a Home in the U.S.
The U.S. offers a similar program for qualifying first-time home buyers. Under the Taxpayer Relief Act of 1997, U.S. citizens may withdraw up to $10,000 from an IRA to cover the cost of building or buying a home. Where the HBP allows a tax-free loan, however, the U.S. requires first-time homebuyers to take the withdrawal as income subject to tax if it comes out of a traditional IRA. In the case of Roth IRAs, which require post-tax contributions, first-time home buyers do not pay taxes on the withdrawal. In either case, the IRS waives the 10 percent premature withdrawal penalty that would otherwise apply when an individual takes a retirement distribution before the age of 59 1/2.