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What is the first home savings account?
When the first home savings account officially launches in 2023, it will allow Canadians who are 18 or older and haven’t owned a home in the current calendar year, or in the previous four calendar years, to save up to a total of $40,000 towards 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 registered retirement savings plan (RRSP), allowing account holders to store cash, stocks, bonds, mutual funds or ETFs. “However, it is specifically for home buying—and specifically for buying your first home.”
What is the FHSA contribution limit?
FHSA account holders can contribute up to $8,000 a year, while earning a tax deduction on the contributions, like with an RRSP. Plus, any money withdrawn from an FHSA—as well as any investment growth in the account—is not taxed, like with a TFSA, as long as it is used toward the cost of a first home.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 a registered retirement income fund (RRIF). Alternatively, account holders can still withdraw the funds from their FHSA at that time, but, if the funds are not used to purchase a home, they become taxable.
“The clock is ticking once you open up that account and start saving,” Moorhouse says. “You really have some strict guidelines to adhere to.”
How can first-time buyers take advantage of the FHSA?
Unused FHSA contribution room can carry forward to the following year, up to a maximum of $8,000. For example, if you contribute $5,000 one year, you would be allowed to contribute up to $11,000 the following year ($8,000 plus the $3,000 from the previous year).
Moorhouse recommends FHSA holders use the account for passive investments, like index ETFs, rather than just holding cash. Someone who contributes $8,000 to the account every year will reach the maximum lifetime limit in five years, leaving them with only 10 years to grow that money, before it needs to be transferred or withdrawn. The money saved is “not going to do a heck of a lot just sitting in cash with inflation [as high as it is today,]” Moorhouse says.
Will FHSAs make home ownership more affordable?
In its most recent budget, the federal government announced different measures aimed at making housing more affordable in Canada. As one of them, the FHSA could help prospective home buyers save up for their first house without using the money saved in their RRSPs or TFSAs.
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