If you’re a want-to-be first-time homebuyer in Canada looking for ways to save for your first home, keep reading because in this article, we’ll take a deep dive into the First Home Savings Account (FHSA) – an investment account introduced by the Canadian government to help you achieve your goal of becoming a homeowner.
The FHSA is designed to give you the best of both worlds, combining tax benefits from both the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). With this account, you can reduce your taxable income and watch your money grow tax-free when used for your first home purchase.
But before getting into the specifics of the FHSA, it is important to note that this account is only accessible to Canadian residents aged between 18 and 71 who meet the criteria for being a first-time homebuyer. There are also yearly and lifetime contribution limits to keep in mind, as well as rules on how and when you can withdraw the funds, all of which we’ll cover below. With that in mind, let’s dive into the world of FHSA and discover how this account could be the perfect solution for your first home purchase journey, or not.
Key Takeaways
- The FHSA enables Canadians to reduce their taxable income and enjoy tax-free growth for their first home downpayment.
- Eligibility requirements for the FHSA include being a Canadian resident, being between the ages of 18 and 71, and being a first-time homebuyer (or someone who has not lived in their own home for four years).
- There are yearly and lifetime contribution limits to the FHSA, and legally compliant withdrawals must be used for purchasing a home.
What Are the Benefits of The FHSA?
Although The FHSA is called a savings account, it’s more like a registered investment account where your money can grow. In fact, the FHSA combines many of the same benefits you’re used to from the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).
Here are the key benefits of the FHSA in a nutshell:
- Reduce taxable income: The money you contribute to your FHSA account can be used to reduce your taxable income for the current year, similar to the RRSP. For example, if you add $5,000 into your FHSA and your salary is $55,000, your taxable income would be reduced to $50,000, allowing you to pay less tax for that year.
- Tax-free growth: Your contributions grow tax-free within the FHSA, just like in a TFSA. This means that any interest, dividends, or capital gains you earn within the account are not subject to tax.
- Withdrawals for home purchase: When it’s time to buy your first home, you can withdraw the money from your FHSA account tax-free. However, the catch is that you must use the money to buy a home in order to take advantage of this benefit.
Take note that if you decide not to use the money from the FHSA to purchase a home, you will have to pay taxes on the earnings within the account. Thus, the core benefits of the FHSA lie in its ability to reduce your taxable income in the years you contribute and to withdraw the money tax-free for the purchase of your first home.
Remember that the FHSA has a lifetime contribution limit of $40,000 and an annual contribution limit of $8,000. Unused portions of the annual limit can be carried forward up to a maximum of $8,000 in the following year. Overall, the FHSA offers a great opportunity to combine tax advantages, investment growth, and a viable housing solution as a first-time home buyer.
By leveraging these benefits provided by the FHSA, you can efficiently save and invest for your first home with tax advantages that make the most of your hard-earned money.
Eligibility for FHSA
To be eligible to open a First Home Savings Account (FHSA), you must meet the following criteria:
- Be a Canadian resident.
- Be between the ages of 18 and 71.
- Be a first-time home buyer, which means you have owned a home in the past four years.
The FHSA is designed to remain open for up to 15 years, or until the end of the year you turn 71, whichever comes first. If you haven’t used the funds in your FHSA to purchase a qualifying home within that timeframe, you have the following options:
- Withdraw the money and pay taxes on it.
- Transfer the money into an RRSP or a Registered Retirement Income Fund (RIF) on a tax-deferred basis.
Keep in mind that there are contribution limits for the FHSA. The lifetime contribution limit is $40,000, and the annual contribution limit is $8,000. Unused portions of the annual limit can be carried forward to the following year, but the maximum amount you can contribute in any given year is still $8,000.
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Yearly and Lifetime Contribution Limits Limitations of FHSA
Contribution Scenarios
In order to better understand the limitations of FHSA, let’s look at two different contribution scenarios:
Scenario 1: Suppose you open an FHSA in 2024 and contribute the full $8,000 limit each year from 2024 to 2028 At the end of the fifth year, you would have reached the total maximum lifetime limit of $40,000. At that point, you could either withdraw the money to buy your first home or let your money sit there for up to another 10 years (until 2038) before buying a home, allowing more time for your money to grow.
Scenario 2: Imagine you open an FHSA in 2024, but you only contribute $4,000 in the first year. In this case, you would have $4,000 of unused contribution room that would carry forward to the next year, allowing you to contribute up to $12,000 in 2025. This flexibility enables you to catch up on unused contribution room, just remember that your lifetime contribution limit remains at $40,000.
Scenario 3: Imagine you open an FHSA in 2024, and contribute your full $8,000 in the first year. But, you fall on hard times and aren’t able to contribute in 2025 and can only tuck away $1,000 in 2026. Things pick up for you in 2027 but you’re only allowed to carry forward contribution room from the last year, not further back, so that means your max. contribution for that year would be $15,000. In other words, the $8,000 you didn’t contribute in 2025 can not be deposited in 2027, because the carry-forward expires after one year. But, you can also continue to contribute for the whole of the 15 year lifespan of the account, which means that you can still contribute for additional years until your account reaches the $40,000 maximum.
Keep in mind that the money in your FHSA must be used for the purchase of a qualifying home to take advantage of the tax benefits. If you don’t use the money within the 15-year timeline or reach the age of 71, options include withdrawing the funds and paying taxes on them or transferring the funds into other investment accounts such as RRSP or RIF on a tax-deferred basis.
How do you withdraw money from the FHSA?
To withdraw money from your First Home Savings Account (FHSA) for purchasing your first home, follow these steps:
- Check your eligibility: Ensure that you’re a Canadian resident, aged between 18 and 71, and a first-time homebuyer. You cannot have owned a home in the past four years.
- Verify your account balance: Make sure you have sufficient funds in your FHSA to cover your down payment. Remember, the lifetime contribution limit is $40,000.
- Follow timeline restrictions: You can only have your FHSA open for up to 15 years after the year you opened the account, or until the end of the year you turn 71, whichever comes first.
- Withdraw funds for a qualifying home purchase: When you’re ready to buy your first home, you can withdraw your FHSA funds tax-free. If you use the funds for any other purpose, you’ll have to pay taxes on the money you earn.
If you don’t use the FHSA funds for home purchase within 15 years or by the time you turn 71, you basically have two options:
- Withdraw the money and pay taxes on it.
- Transfer the funds to your Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF) on a tax-deferred basis, which will continue reducing your taxable income.
Using your FHSA to invest and grow your money
As a Canadian looking to buy your first home, the First Home Savings Account (FHSA) can be an excellent tool for you to invest and strategically grow your money. This registered investment account offers tax benefits while helping you save for a down payment on your first home.
First Home Savings Accounts can be used to invest in Stocks, ETFs, Mutual Funds, and much more just like your TFSA or RRSP. You can also continue to contribute until you’ve reached the lifetime limit, or 15 years after the account’s initial opening.
Your investments can continue to grow tax-free within the account like an RRSP, making the FHSA an ideal choice to avoid capital gains and/or income tax on your investments while saving for a home.
Impact of Current Market on FHSA
Based on the current housing market in Canada, the First Home Savings Account (FHSA) is designed to help you save for a down payment on your first home, but may not meet everyone’s needs.
The lifetime contribution limit for this account is $40,000, which represents about 5 to 6 percent of the average home price in Canada. But when considering the average home price, it’s essential to note that housing prices may vary significantly depending on your location.
For instance, if you want to buy a home in Toronto or Vancouver, the average home price will be much higher than the national average. Therefore, it’s crucial for you to assess the housing market in your area and plan accordingly.
Remember that the main benefits of using an FHSA come from taking advantage of the tax breaks and growing your money tax-free. However, you must use the funds to purchase a home to fully enjoy these benefits.
Luckily, you can use the FHSA in combination with the RRSP First Time Buyers Plan if you need more for a downpayment and have an RRSP available to you, though for some, one savings vehicle may be enough.
How helpful is the FHSA compared to the RRSP First Time Buyers Plan?
When you’re trying to save for your first home, it’s crucial to understand the differences between the First Home Savings Account (FHSA) and the RRSP First Time Buyers Plan. Let’s break down the key aspects to help you make an informed decision:
- Tax Benefits: Both the FHSA and RRSP First Time Buyers Plan offers tax advantages. Contributions to the FHSA reduce your taxable income, similar to the RRSP, and money grows tax-free in the account, like the TFSA. However, keep in mind, the tax-free benefit in FHSA is only applicable if you use the funds for purchasing your first home.
- Contribution Limits: The FHSA has a lifetime contribution limit of $40,000, while the RRSP has an annual limit based on your income and available contribution room. You can contribute up to $8,000 per year to your FHSA, with any unused portions carrying forward up to a maximum of $8,000 for the following year.
- Time Limit: You can only have the FHSA open for up to 15 years after opening the account, or until the end of the year you turn 71, whichever comes first. If you don’t use the money to buy a home within the timeframe, you have options like paying taxes on the withdrawal or transferring the funds to your RRSP or Registered Retirement Income Fund (RRIF) on a tax-deferred basis.
- Simultaneous Use: You can use both the FHSA and the RRSP First Time Buyers Plan at the same time to maximize your savings and benefits for buying a home. This strategy enables you to effectively utilize the available tax perks, contribution limits, and time window of each account.
In summary, both the FHSA and the RRSP First Time Buyers Plan can be valuable tools when saving for your first home. Understanding the key differences and using them strategically, or together, can help you achieve your home-buying goals more efficiently and in a tax-advantaged manner.
Conclusion
The First Home Savings Account (FHSA) is designed to benefit Canadians who are looking to purchase their first home. As someone who fulfills the criteria, such as:
- being a Canadian resident
- aged between 18 and 71
- a first-time home buyer or haven’t owned a home for over four years
You can take advantage of the tax benefits offered by this account, which combines the perks of both the TFSA and RRSP. By contributing to your FHSA, you are able to reduce your taxable income while your money grows tax-free. It’s essential to remember that in order to enjoy these benefits, you must use the funds for the down payment for your first home.
With a lifetime contribution limit of $40,000 and an annual contribution limit of $8,000, strategically funding the account can help you achieve your home-purchasing goals. Keep in mind that you can have your FHSA open for up to 15 years or until you turn 71, whichever comes first. By utilizing this account in your financial planning, you can make the significant step of buying your first home a more attainable and less taxing endeavor.
thewriteDuffy
At home, April is a mom, wife, and DIY darling. Among other home projects, she helped her husband Dan renovate their 1986 bungalow and is currently designing and decorating the 2023 custom home they are building themselves. Professionally, April is a writer, author, and online marketer with 15 years of experience writing for newspapers and magazines, building online authority websites, and publishing books.
With any project, 80 percent of the work is done in the planning stage. We have simple checklists to help you get organized and make sure you’re prepared for every step along the way. Download them now for FREE: