First Home Savings Account (FHSA)

Introducing the First Home Savings Account: A Tax-Advantaged Solution for Canadian Homebuyers

If you’re in the market for a home — and even if you’re not — you’ve probably  heard about the new First Home Savings Account. These tax-advantaged accounts can help you save  up to $40,000 toward your first home. And if you invest that money, it could turn into even more. Because it’s a government program, how it works can seem a little complicated.  But we’re here to help. Here are some of the most important things to know: So to open an FHSA you just have to be between 18 and 71 years old,  living in Canada and you can’t be living in a home owned by you  or your spouse in the year that you open the account or the four years before it. And you have to live in the home you buy. So no rental properties or weekend cottages! You can deposit up to eight thousand dollars per year in the account until  you’ve contributed forty thousand.

FHSA: A Tax-Deductible and Versatile Option for Homebuyers and Investors

Those deposits can be claimed as a tax deduction. The money in it can be invested in a bunch of things including stocks and  ETFs or even a savings account or high interest savings portfolio. Unlike RRSPs or TFSAs, you start accumulating room in your FHSA only after you open it. So if you’re  even considering buying a home, it’s probably worth opening one as soon as possible. And if  you don’t end up buying a home there are ways to take your money out without tax implications. You have 15 years from the time you open your account to put the money toward your first home.  If you want to withdraw that money for anything else it’s possible,  but you’ll have to pay taxes on it. One thing about FHSAs that a lot of people overlook: you don’t actually have to use it  toward a home. Since you can transfer your FHSA balance into a retirement account — totally  tax-free — FHSAs can effectively offer a $40,000 boost to your current savings cap.

Understanding the Differences Between TFSA and FHSA: Funding Limits, Rules, and Tax Implications Explained

If you have any questions, our advisors are always available to help.  Stick around for a few seconds, because in the next part of this video I’ll be answering 6 of the most common FHSA questions we’ve been asked. So, both are tax-sheltered accounts, but each one has its own annual funding limits,  and each has different rules–and tax implications–for withdrawals.  With a TFSA, you can deposit a fixed amount each year. In 2023, that limit was $6,500.  It doesn’t reduce your taxes owed for the year, but that money, along with any gains,  can be withdrawn at any time and for any purpose, without penalty or taxes. With an FHSA, you can also deposit a fixed amount each year. It’s capped at $8,000 per year,  for a maximum of $40,000. Unlike with a TFSA, though, FHSA contribution room  is not based on your age. It actually doesn’t start accumulating until you open an account.  With an FHSA, contributions do reduce your taxable income for the year.

Comparison of RRSP and FHSA for Home Buyers

And you’re not  taxed on that money — or any gains — when you withdraw it to buy your first home. So the big difference between an RRSP and an FHSA — at least when it comes to withdrawing money  to use toward a home — is that you have to pay that money back to your RRSP within 15 years.  Otherwise you get taxed. The FHSA doesn’t have that payback requirement. So for many people,  that means the FHSA is a great place to start saving for a home. After they  max out those contributions, then they might start saving in an RRSP. Yes. So the Home Buyer’s Plan lets you withdraw up to $35,000 from your RRSP, tax-free,  to use toward the purchase of a home. But you will have to repay yourself within 15 years of  the withdrawal. You can combine that money with the money in your FHSA. And if you’re buying  with a partner who has their own accounts, you can essentially double the money that you have available.

Considerations for Transferring Funds from RRSP to FHSA: Assessing the Benefits and Drawbacks

So you might be tempted to transfer money from your RRSP to your FHSA,  but whether you should depends on your circumstances. If you have new savings to put into your FHSA,  you can reduce your taxable income by as much as $8,000 for the year. But if you were to move  $8,000 from your RRSP to your FHSA, you wouldn’t get that benefit. Now if you don’t have new savings available to add to your FHSA, but you do have more than  $35,000 in your RRSP, you could transfer some of that money to your FHSA. How much depends on how  much contribution space you’ve accumulated. The benefit of doing that would be that you  can access more of your savings for the purchase of your first home. There is a downside, though:  If you transfer that money from your RRSP, you lose that contribution room permanently.

Important Considerations for Using your FHSAs for Home Purchase and Retirement Savings

Even if  you wanted to pay it back, you couldn’t, so you’re reducing your ability to save for retirement. So when you’re ready to purchase your home, you’ll need to fill out Form RC725. You will be answer a few questions and complete the form. Once you have your money,  the clock starts ticking. You need to close on your home by October 1st of the year after  you withdraw your money. Otherwise the CRA will tax you retroactively. If you have  any more questions maybe even ones that aren’t about FHSAs we’re ready to answer those too.