Not all the details surrounding FHSAs have been ironed out yet. The federal government plans to release more information in the near future as it works with financial institutions to make the accounts available to the public next year. However, based on the information revealed in the 2022 budget, here’s what you need to know.
What is the first home savings account?
When the first residential savings account officially opens in 2023, Canadians who are 18 years of age or older and have not owned a home in the current calendar year or the previous four calendar years will be able to save a total of $40,000 toward the purchase of a home.
Jessica Moorhouse, a millennial money expert and host of the More Money podcast, says the FHSA combines elements of the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP), giving account holders cash, stocks, bonds, mutual funds or ETFs. “It’s specific to buying a house, though — and specific to buying your first home.”
What is the FHSA Contribution Limit?
FHSA account holders can contribute up to $8,000 per year while earning a tax deduction on the contributions, as with an RRSP. In addition, money withdrawn from an FHSA — as well as any investment growth in the account — is not taxed, as with a TFSA, as long as it is used toward the cost of a first home.
Account holders have 15 years from the time they open the FHSA to spend the money on their first home. If they don’t spend the money within that time frame, the account must be closed and the money transferred to an RRSP or Registered Pension Fund (RRIF). Alternatively, account holders can still withdraw the money from their FHSA at that time, but if the money is not used to buy a home, they become taxable.
“The clock is ticking as soon as you open that account and start saving,” says Moorhouse. “You really have some strict guidelines that you have to stick to.”
How can first-time buyers take advantage of the FHSA?
Anyone using an FHSA should be prepared to put away as much money as possible from the moment they open the account, Moorhouse said. Account holders who do not meet their maximum annual contribution limit of $8,000 will not be able to carry it forward to the following year. “You just lose that space,” she says. “If you’re going to use this account, you want to make sure you can maximize it every year.”
She also advises FHSA holders to use the account for passive investments, such as index ETFs, rather than just holding cash. Someone who contributes $8,000 to the account each year will reach its maximum lifespan in five years, giving them only 10 years to grow that money before it needs to be transferred or withdrawn. The money saved won’t “do much by just sitting cash with inflation” [currently] by 6.7%,” says Moorhouse.
This post How do you take advantage of the first savings account at home? was original published at “https://www.moneysense.ca/spend/real-estate/first-home-savings-account/”