For many Canadians, owning a home is a top priority, but saving for a down payment can be a significant challenge. That’s why we’re excited to share information about the First Home Savings Account (FHSA) with you. This type of savings account is specifically designed to help individuals save for their first home, while also providing some significant tax advantages. In this article, we’ll discuss what an FHSA is, who may benefit, and some of the considerations to keep in mind when considering this savings option. Whether you’re a first-time homebuyer or just starting to think about your long-term financial plan, a First Home Savings Account may be a valuable tool to consider.
What is a First Home Savings Account?
In Canada, a First Home Savings Account (FHSA) is a tax-advantaged savings account designed to help Canadians save for their first home. This type of account allows individuals to contribute up to $8,000 annually, with a lifetime contribution limit of $40,000. The funds in the account can be invested in a variety of ways, including mutual funds, stocks, bonds, and savings deposits. You benefit from tax deductions on contributions, tax-free growth on your investments, and tax free withdrawals when you are ready to purchase a home. The FHSA is available to Canadian residents who are 18 years of age or older and have a valid social insurance number.
Who Could Benefit From a FHSA?
The First Home Savings Account (FHSA) is a versatile savings option that can benefit a variety of individuals, including:
- Individuals looking to purchase their first home.
- Those who haven’t owned a home in the previous four years and are looking to buy a home.
- Parents and Grandparents who would like to gift the child/grandchild cash to open and contribute to a FHSA. It’s the gift that keeps on giving!
- Individuals, who have not owned a home in the previous four years and have maxed out their RRSP contributions and are looking for ways to increase their RRSP savings without requiring additional contribution room.
Individuals looking to purchase their first home can benefit from a FHSA. Those who haven’t owned a home in the last 4 years, such as those who went through a separation and have been renting since, can benefit from a FHSA to save for a new home. Additionally, parents and grandparents who want to gift cash to open and contribute to a FHSA can help their children/grandchildren achieve their dream of homeownership. A FHSA offers a unique opportunity to grow their money on a tax-deferred basis. By contributing up to $8K annually, investing the funds for growth, and transferring the funds to their RRSP at a later date, they can enjoy a tax deduction without requiring any additional contribution room. Regardless of your financial situation, an FHSA is worth considering as a valuable savings tool for your first home purchase.
Important FHSA Considerations
You have 15 years from opening your first FHSA, or until you turn 71 years, whichever occurs earlier, to use your FHSA. If you have not purchased a home within this time frame, you can either withdraw your money and pay income tax on it, or you can transfer it to your RRSP or RRIF and continue to grow your money tax deferred. Additionally, FHSA contributions are limited to $8,000 per year, with a lifetime contribution limit of $40,000. It is also important to know what the definition of a “first time home buyer” is. An individual is considered to be a first time home buyer if at any time in the part of the calendar year before the account is opened or at any time in the preceding four years they did not live in a qualifying home. By understanding these factors, individuals can make an informed decision about whether an FHSA is the right savings option for their financial goals and timeline.
First Home Savings Account (FHSA) Frequently Asked Questions:
- How does FHSA work?
- A first home savings account (FHSA) is a registered plan allowing you, as a prospective first-time home buyer, to save for your first home tax-free up to $8,000 a year with a lifetime limit of $40,000.
- What are the benefits of investing in a FHSA?
- FHSA contributions are tax-deductible, just like RRSP contributions. And, like a TFSA, you can withdraw funds tax-free — though, unlike a TFSA, only provided that the funds are used to purchase your first home. Contributions can be invested in much the same way as they are in an RRSP or TFSA.
- Is there an age limit for contributing to an FHSA or a time limit for withdrawing accumulated funds?
- Yes. Your FHSA must be closed on December 31 of the year you turn 71 or on the 15th anniversary of the opening of your first FHSA.
- Do you have to repay the FHSA?
- No repayment is required with respect to the funds withdrawn from your FHSA, amounts withdrawn under the Home Buyers’ Plan must be repaid to an RRSP over a period not exceeding 15 years, beginning the second year after the year of withdrawal.
- Can I open a FHSA if I already own a home?
- The definition of a ‘home’ is important with FHSAs: you cannot open an FHSA or make a tax-free withdrawal if you or your spouse have lived in a home you’ve owned this year or in any of the last 4 calendar years, and you can only make tax-free withdrawals if purchasing a qualifying home.
- Can I utilize both the FHSA and the Home Buyer’s Plan at the same time?
- Yes.
- What is the difference between a TFSA and a FHSA?
- The FHSA is just a savings account but it combines the attributes of a TFSA and a RRSP. Basically, the FHSA lets you save money, with the ability to invest with the same investment vehicle as the TFSA (GICs, mutual funds, stocks, bonds, and ETFs)
Conclusion
In conclusion, the First Home Savings Account (FHSA) can be a valuable tool for individuals who are planning to buy their first home. With tax-free interest and withdrawal benefits, as well as the potential to transfer funds to an RRSP or RRIF after 15 years, an FHSA can help individuals achieve their homeownership goals while minimizing their tax burden. However, it is important to consider the contribution limits, investment risks, and the lifespan of the account before opening an FHSA. At Evergreen Wealth Advisory, we understand the complexities of financial planning and can help you navigate the best options for your unique situation. If you are interested in learning more about how an FHSA can fit into your financial plan, we encourage you to schedule a consultation with our team today.