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Guide to FHSA
For many Canadians, owning a home remains a significant life milestone. Even though housing prices have slightly eased in recent years, many prospective buyers are still concentrating on saving for their down payment before making the leap.
If you’re setting money aside for that future purchase, it’s important to remember that where you keep those savings can directly affect your buying power. While a traditional savings account may seem like the obvious choice, it offers little in the way of growth or tax advantages.
That’s why the introduction of the Tax-Free First Home Savings Account (FHSA) has quickly become a game-changer. Designed specifically for first-time buyers, it’s now among the most recommended tools to help Canadians reach their homeownership goals faster.
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What is an FHSA?
The FHSA is a registered plan that blends the best features of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).
With an FHSA, you can contribute up to $8,000 annually, with a lifetime maximum of $40,000. If you don’t use all your contribution room in a given year, it rolls forward, allowing you to fully maximize the account in just five years.
Despite its name, the FHSA isn’t limited to simple savings. You can invest in a wide range of options, including mutual funds, stocks, ETFs, bonds, and more. The real advantage is that your investments grow tax-free, and when you’re ready to purchase your first home, you can withdraw the funds without needing to pay them back.
To be eligible for an FHSA, you must be at least 18 years old, have a social insurance number (SIN) and not have owned a home where you live in the last four calendar years. That means if you sold your home a decade ago and haven’t owned since, you’d qualify to open an FHSA.
You have 15 years from the time you open your FHSA (or by the time you turn 71) to purchase a home, or the account must be closed. If you decide not to buy a home, you can transfer the funds to your RRSP or Registered Retirement Income Fund (RRIF), regardless of how much RRSP contribution room you have left.
Key benefits of an FHSA
Contributions to your FHSA are fully tax-deductible, much like RRSP contributions. For example, if your annual income is $75,000 and you contribute $5,000 to your FHSA, your taxable income drops to $70,000. Since you’ve likely already paid taxes on that $5,000, you’ll probably receive a refund when you file. On top of that, any growth inside the FHSA, whether from capital gains, dividends or interest, is completely tax-free, just like in a TFSA.
Imagine you max out your contributions and invest wisely. Ten years later, your account grows to $50,000. When you withdraw the funds to buy your first home, the $10,000 in gains is yours tax-free. This is why the FHSA is often described as the perfect blend of RRSP and TFSA benefits.
And if you already have an RRSP, you can also use the Home Buyers’ Plan (HBP), which allows you to withdraw up to $60,000 toward your first home. The key difference is that HBP withdrawals must be repaid, whereas FHSA withdrawals do not.
FHSA strategies
Since the FHSA is an incredible tool, you should make every attempt to maximize it. That said, here are some FHSA strategies to consider:
● Start early: The sooner you open and fund your FHSA, the more time your investments have to grow tax-free. That said, if you plan to buy a home soon, you want to make sure your investment strategy aligns with your timeline.
● Contribute regularly: Since the yearly contribution limit is $8,000, that works out to roughly $667 a month. If you can’t come up with that full amount, choose a number that works for your budget and set up monthly auto-deposits.
● Co-ordinate accounts: For those planning to buy a home with a partner, consider pooling resources to max out each account. This only works when one partner can save more than $8,000 a year, while the other one can’t.
● Open one even if you don’t plan on buying a home: If you don’t buy a home within 15 years of opening an FHSA, you can transfer it to your RRSP or RRIF tax-free.
Final thoughts
Put simply, the FHSA is the most impactful savings initiative since the launch of the TFSA. Its only real drawback is that if you withdraw funds for anything other than a qualifying home purchase, the amount will be treated as taxable income. Even so, the FHSA stands out as one of the most powerful tools available to Canadians looking to buy their first home.
Barry Choi is a paid spokesperson of Sonnet Insurance.
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