There is a new product being released in the financial industry called the First Home Savings Account (FHSA) and here are the details on it and why you should act now to open this account if you are savings to purchase a house or planning to build a house!
Who Qualifies?
The FHSA begins April 1, 2023 and is no April Fools joke! This is an amazing product to help qualifying first time home buyers save for the purchase of a qualifying home! This registered account is available to any Canadian citizen that is 18 years of age or older (no less than the age of majority in your province/territory) and has a Social Insurance Number. In order to be considered a “first time” home buyer, you and/or your spouse cannot have owned a home that you lived in this year, or any of the preceding four calendar years. You must qualify to be able to open this account and if you qualify then I urge you to open one as soon as possible if you’re actively saving for a home or are considering beginning your savings for a home.
Why the FHSA?
Why the urgency? The FHSA differs from other tax sheltered accounts because you can only accumulate contribution room in your FHSA once it is open. Unlike a TFSA or RRSP which give you access to your lifetime contribution amounts once you open said accounts, the FHSA only gives you access to that year’s contribution room and then you can accumulate contribution room each year it is open up until you reach it’s lifetime maximum. There is no backdating of contribution room with the FHSA. So, this is why, if you would like to start saving for a house or are currently saving for a home and you qualify to open the account, you should open it! Once your account is open, you can carry forward any unused contribution amounts to future years until you reach the maximum lifetime contribution amount or the maximum contribution room you have accumulated thus far, but you need to start with opening the account! There is no minimum balance required to open the account at some banks.
Contribution Details
Once you open your FHSA, you can contribute up to $8,000 per year which is tax-deductible, and up to a lifetime contribution amount of $40,000. These funds are to be used towards the purchase of a home or to build a home. If your spouse opens an account, they can also save up to a maximum of $40,000 towards the purchase as well. So that means you can combine the accounts to save up to $80,000 towards the purchase of your home and the contributions are tax-deductible in the year of contribution, as long as the account is open.
Investing Within Your FHSA
You can also invest the funds within your FHSA. You do not pay taxes on any investment income earned within your FHSA. Just like a TFSA and RRSP, you can invest the funds within your FHSA to leverage and compound your money within the account to help you save for your home faster! This means that the funds within your FHSA can earn income of its own when invested and in less time than a traditional savings account.
Initial product offerings inside of the FHSA are: savings deposits, stocks, options, bonds, exchange-traded funds (ETF’s), and cash. More products will be available over time.
you can USE it with the hbp
Another benefit of the FHSA is that this account compliments the Home Buyers’ Plan (HBP) as detailed in the RRSP section of The Best Way to Save Money post. This means that you can use the funds within your FHSA and RRSP towards the purchase of your home. While you will need to repay the amounts used within your RRSP which were used through the Home Buyers’ Plan, you will not have to repay anything to the FHSA because it is specifically designed to use towards the purchase of a home! So if you are thinking about using the Home Buyers’ Plan, I would suggest contributing and maximizing the contributions in your FHSA first. RBC compares the benefits of the FHSA, TFSA and RRSP in this article. You can transfer funds from your RRSP to your FHSA as long as the amount being transferred is within your contribution limits. The funds that you transferred are transferred on a tax-free basis! This way you can utilize the FHSA first and you do not have to worry about the repayment portion of the Home Buyers’ Plan if you only use the FHSA.
other fhsa details
Once you are ready to purchase a qualifying home, the withdrawal is tax-free and the funds from your FHSA do not need to be paid back! The account will close at the end of the year following the year you made the qualifying withdrawal, after 15 years, or until the end of the year you turn 71, whichever once comes first. A qualifying home is a home, located in Canada, that you have a written agreement to purchase or build before October 1 of the year following the year of the withdrawal and you must intend to occupy the home as your principal place of residence within 1 year of purchasing your home or building your home.
Any unused funds within your FHSA could be transferred to another FHSA, a RRSP or a RRIF if you don’t purchase a home. The funds will be transferred on a non-taxable transfer basis, subject to applicable rules, and will be taxed when you decide to withdraw the funds from your RRSP or RRIF. If you choose to withdraw the funds from your FHSA instead of transferring your funds to a RRSP or REIF and instead of purchasing a home, then the withdrawn funds are subject to taxes. You can name your spouse or common-law partner as a successor account holder or a non-spouse as a beneficiary.
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