What’s the Tax-Free First Home Savings Account (FHSA)? In the simplest terms, it means money back in your pocket if you’re buying your first home.
With this tax-advantaged savings account, you can cut down on taxes when your funds are used for an approved purpose. Or, at least you can once it’s available. The Department of Finance Canada reports this tax-free home savings account is expected to become available in 2023 to everyone who qualifies.
Let’s quickly review what this tax-free first home savings account for Canadians is, then look at how you can get the most out of it.
What is the First Home Tax-Free Savings Account?
This tax-free savings account for first-time home buyers offers two key advantages as compared to a regular savings account:
- FHSA contributions are tax-deductible. That means savings every year you contribute. The Financial Post pointed out the similarity to a Registered Retirement Savings Plan (RRSP) in that regard.
- FHSA withdrawals are non-taxable. That’s the same benefit offered by a Tax-Free Savings Account.
Either benefit is worthwhile by itself, but together they offer even more savings.
Other key points to keep in mind include a maximum yearly contribution of $8,000 and a lifetime maximum of $40,000. The FHSA can be maintained for up to 15 years. The account can hold cash as well as qualified investments.
If you decide not to buy a home, you can transfer the funds to an RRSP, Registered Retirement Income Fund (RRIF), or pay taxes on it and use it however you please.
Want to learn more? Check out our in-depth review of the FHSA.
Four Ways to Make the Most of Your Tax-Free Home Savings Account in Canada
1. Contribute as Much as You Can
$40,000, the lifetime FHSA contribution limit, can make a dent in the purchase price of your first home. It could pay for a sizeable amount of the down payment, or even that entire cost for a smaller home in certain areas.
However, that $40,000 is only part of any home’s cost. You’ll never have to worry about putting too much money into your tax-free home savings account as it relates to home prices.
With that in mind, remember the savings this account delivers. If you’re committed to buying a home, maxing out your FHSA saves you money. You don’t even necessarily need to hit the $8,000 yearly maximum, as long as you’re planning to buy a home further in the future.
2. Build Your Budget Early On
If you start building a budget that prioritizes your FHSA now, you can find the contribution level that works best for your needs. You’ll want to find an amount that doesn’t cut into your essential expenses or severely restrict your lifestyle.
If you’re concerned about how much you can contribute annually, don’t worry too much about it. You can maintain this account for up to 15 years, and the $40,000 lifetime maximum won’t change. Even if you don’t reach that maximum, committing to your FHSA will still save you money on taxes — both when contributing and when making a withdrawal.
3. Don’t Forget About Qualified Investments
Investments offer an opportunity to earn more money for your tax-free home savings account. And many of them carry a relatively low risk.
The Department of Finance noted that government and corporate bonds can be kept in an FHSA. While there isn’t an absolute 100% guarantee that a bond will pay off at maturity, they’re recognized as one of the safer investments available.
You can also include guaranteed investment certificates (GICs) in this account. These investments don’t offer the highest returns but are guaranteed by the issuer. The major drawback of these certificates is the need to keep the money invested in place until it reaches maturity. However, that’s not a concern when you know the funds will go toward purchasing a home in the future.
4. Don’t Assume You Can’t Qualify
The only way you can build your tax-free home savings account smartly is if you know you can open one in the first place.
You might assume that if you’ve owned a home before, you can’t qualify for this account. That’s not quite true.
The account only excludes individuals who have owned a home in the previous four calendar years. The exact measurement of that time is a complex piece of legislation. Just remember that, as long as your ownership ended more than four years ago, you can open an FHSA.
Waiting for FHSAs
At Innovation, we’re eagerly anticipating the official announcement that FHSAs are available and can be offered to our members. In the meantime, feel free to check out our other tax-advantaged savings accounts, like the TFSA. Apply online today!