Aspiring home owners, pay attention! The First Home Savings Account (FHSA) is transforming the way Canadians can save up for their first home purchase. FHSAs combine the best features of other registered accounts like TFSAs and RRSPs and offer unmatched tax benefits to help you get closer to your goal of home ownership faster.
How does an FHSA work?
FHSAs were introduced in 2022. They are available to Canadians between the ages of 18 and 71 years who are saving up to purchase their first home. You can contribute up to $8,000 annually in to an FHSA, and invest it to maximize your savings for a down payment. You can continue investing for up to 15 years but your total lifetime contribution cannot exceed $40,000.
A couple saving for a home can maximize their FHSA benefits by each contributing $667 monthly ($8,000 annually). At a 5% tax-free return, they could accumulate $50,000 in just three years, while also enjoying tax deductions. They can continue this strategy until reaching their individual lifetime contribution limit of $40,000, optimizing both their savings and tax advantages.
Advantages of an FHSA
- Tax deductible contributions – Your contributions to an FHSA are tax deductible – They reduce your taxable income and final tax bill for the year that you make the contributions.
- Tax-free withdrawals FHSAs truly combine the best tax-benefit features of all registered accounts. Your original contribution as well as any growth or income earned on your investments is tax-free when withdrawn for your home purchase. You get to save money, lower your taxes and also withdraw and use the built-up savings tax-free.
- Carry forward flexibility – Your annual contribution room does not expire. You can carry forward a year’s unused contribution (maximum of $8,000) to another year, so you can plan your savings and tax-deductions to maximize them in higher income years when they have a stronger impact.
- Combine with Home Buyers Plan – You can use both the FHSA and the RRSP Home Buyers Plan which lets you withdraw up to $60,000 from your RRSP tax-free. Together, these two options give you more flexibility and access to your own savings to buy a home.
- Leverage your RRSP – If your retirement savings are on track but you don’t have the cash-flow to save more for your FHSA, you can transfer money from your RRSP into your FHSA to kick-start your home ownership savings. Your contribution room is reduced by the amount of your RRSP transfers and such transfers are not tax-deductible because you already received tax-deductions on your RRSP contributions.
- Flexibility of use – Lastly, if you don’t use your FSHA to buy a home, you can transfer the funds to your RRSP, tax-free. This way you still the benefit of tax-free savings and have the flexibility of using the money toward your retirement savings.
How do you make the most of your FHSA?
- Get started early to capitalize on compound growth on your investments
- Consider diversifying investments within your FHSA
- Plan your contributions to maximize tax benefits in high income periods
- Consider the RRSP-FHSA strategy – use your long-term savings for a more pressing mid-term goal, without the need for fresh capital.
FHSAs are innovative and uniquely powerful tools that offer both tax-deduction and tax-free growth. They offer a unique savings and growth opportunity that is too good to ignore.
If you’d like to continue the conversation on this subject, please contact us.