Can I Use FHSA or RRSP Funds for My Down Payment or Closing Costs?
Rachel and Tom had been diligently saving for their first home through both their RRSPs and the new First Home Savings Account (FHSA).
As they found their dream home, a key question emerged: how exactly could they use these savings for their purchase? Their story reflects a common situation as many Canadian first-time buyers navigate their savings options and figure out how to best use these programs to help with their property purchase
Understanding First Home Savings Account (FHSA)
The First Home Savings Account (FHSA), introduced in April 2023, combines the tax benefits of both RRSPs and TFSAs. You can contribute up to $8,000 annually with a lifetime limit of $40,000, and the entire amount can be used tax-free for your home purchase.
What makes the FHSA particularly attractive is its flexibility - the funds can be used for both your down payment and closing costs. However, you must use the funds within 15 years of opening the account, and it's exclusively available for your first home purchase.
Using the Home Buyers' Plan (HBP) for RRSPs
The RRSP Home Buyers' Plan works differently from the FHSA.
Through this program, you can withdraw up to $35,000 tax-free from your RRSP for your home purchase, but there are some important restrictions. The funds can only be used for your down payment, not closing costs, and you must repay the amount within 15 years. Annual repayments start the second year after withdrawal, making this effectively an interest-free loan from your retirement savings.
Combining FHSA and RRSP in Practice
Let's look at a practical example using a $500,000 home purchase.
You could potentially access up to $75,000 by combining both programs - $40,000 from your FHSA and $35,000 from your RRSP through the HBP. The FHSA portion offers more flexibility, as it can cover both your down payment and various closing costs including land transfer tax, legal fees, and home inspection costs. The RRSP withdrawal, however, must be directed solely toward your down payment.
It takes Timing and Planning
The timing of withdrawals is crucial for a smooth home-buying process. Your RRSP funds must be withdrawn at least 30 days before closing, while FHSA withdrawals can be more flexible. It's essential to coordinate these withdrawals carefully with your purchase timeline and ensure all necessary documentation is in place for your lender.
For maximum benefit, consider using your FHSA funds for closing costs since they're more flexible, while applying your RRSP withdrawal specifically to your down payment. Keep detailed records of all withdrawals for tax purposes, as you'll need to report these on your tax return.
At Deeded, we understand that coordinating these programs requires careful planning and timing. Our real estate lawyers will help guide you to align with your closing schedule. We'll ensure all legal requirements are met and guide you through using these funds efficiently for your home purchase.
Remember, while these programs offer significant benefits for first-time homebuyers, proper planning and timing are essential. Working with experienced professionals can help ensure you maximize these advantages while meeting all legal and financial requirements for your home purchase.
Frequently Asked Questions (FAQs)
Q: Can I use both FHSA and HBP for the same home purchase?
A: Yes, you can use both programs simultaneously to maximize your available funds.
Q: What happens if I don't use all my FHSA funds?
A: Unused FHSA funds can be transferred to your RRSP without affecting your contribution room.
Q: Do I need to use the full RRSP HBP withdrawal amount?
A: No, you can withdraw any amount up to the $35,000 maximum.
Unlock Your Seamless Closing Experience
Your Journey to a Worry-Free Closing Starts Here!
