Unlock the power of the FHSA: Eligibility, tax savings and investments!
The First Home Savings Account (FHSA) is a registered account created in 2023 to help first-time homebuyers grow their down payment dollars, combines the best features of the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA).
Here are four key things you need to know about FHSAs to get you started.
Who can open a First Home Savings Account?
To open an account, you must be a Canadian resident who is at least 18 or 19 years old (depending on your province) and under the age of 71. You also can’t have owned a home in the past four years. If you or your spouse or common-law partner owns a home that isn’t your primary residence, such as a rental property, you may still be eligible.
How to maximize contributions in your First Home Savings Account
The first thing to know is that you have 15 years to use an FHSA, starting from the day you open your account. You can contribute up to $8,000 every year, with a lifetime cap of $40,000.
Unlike RRSPs, where unused contribution room carries forward indefinitely, with the FHSA, you can only carry forward a maximum of $8,000 in unused room each year. In other words, the most you can contribute in a single year is $16,000 (your current year limit of $8,000 + $8,000 max from last year). If you go multiple years without contributing to your FHSA, you could find yourself without enough time to make up for those lost years.
Since over-contributing to your FHSA can lead to penalties, you’ll need to make sure you stay within the contribution limits. If you keep track of your deposits and make use of the carry-forward rules that exist, you can get closer to your home ownership goals.
An important note to remember is unlike an RRSP, contribution room does not begin to accumulate until the year that the account is opened, so it could be in one’s best interest to open an account even if there is not an immediate plan to fund the account. How to invest with Fidelity
Tax benefits of a First Home Savings Account
The FHSA offers significant tax benefits for aspiring home buyers. As with an RRSP, contributions to your FHSA are tax deductible, meaning you may be eligible for a refund when it’s time to file your tax return. And as with a TFSA, you won’t pay tax when you withdraw your money for your first home purchase.
It’s worth noting that the reporting periods for FHSA and RRSP contributions differ slightly. An RRSP allows you to include contributions made in the first 60 days of the current year on your previous year’s tax return, but FHSA contributions only apply to the year in which they were made.
Don’t stress if you’re not sure you’ll end up buying a home by the end of the account’s 15-year duration. If your plans change and you decide that home ownership isn’t in the cards anymore, you can transfer your FHSA savings tax-free to an RRSP and keep growing your investment for the future.
Leveraging investment in a First Home Savings Account
You can purchase a variety of investment options, including mutual funds, exchange-traded funds (ETFs), stocks and bonds which can help diversify your portfolio. While the FHSA provides tax-sheltered benefits, keep in mind it also involves risk. Informed choices make it possible to build a stronger financial foundation in the FHSA. To make informed decisions that align with your financial goals, you’ll want to carefully consider your individual circumstances. Consulting a financial advisor can provide valuable guidance in building an investment strategy that suits your unique needs and risk tolerance.
The FHSA holds a lot of potential for first-time homebuyers. By understanding its nuances and making smart decisions, you can move closer to securing your financial future and owning a home.
Ready to take the next step towards home ownership? Download our comprehensive FHSA guide for all the information you need to get started.
