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The federal government has released new details about a new registered savings account for first-time home buyers. It’s called the FHSA and it combines aspects of both the RRSP and TFSA.
Like the RRSP Home Buyers Plan, it allows withdrawals on a tax-free basis to help buy a qualifying home. But, it also offers some other features not found in RRSPs and TFSAs.
What is the FHSA?
The Tax-Free First Home Savings Account (FHSA) is a new way to save for your first home. It combines aspects of the RRSP, TFSA, and Home Buyers Plan (HBP). It provides tax breaks on contributions and lets you grow your investments tax-free without triggering income taxes on investment income or withdrawals.
Unlike the homebuyers’ plan (HBP), it does not require you to repay your funds and has a higher contribution limit. However, if you withdraw funds that aren’t used for a qualifying purchase, the amount will be taxed as ordinary income.
FHSAs are insured by the Canada Deposit Insurance Corporation. Generally, you can have more than one FHSA, but the total contributions for any given year must not exceed your annual and lifetime contribution limits.
The Canada Revenue Agency will provide basic FHSA information to support taxpayers in determining how much they can contribute each year. When any withdrawals are made – qualifying or non-qualifying – the FHSA issuer will prepare an information slip indicating the amount of the withdrawal and, for non-qualifying withdrawals, the amount of income tax withheld.
Who is Eligible for the FHSA?
As with RRSPs, contributions to the FHSA are tax-deductible in the year they are made. Withdrawals for home purchase purposes are tax-free. The account can remain open for a Maximum Participation Period (MPP) of 15 years, or until the account holder turns 71, whichever comes first. After that, withdrawals are taxed on a taxable basis.
You can also transfer money from an RRSP to the FHSA without paying taxes. As long as you do so via the prescribed form RC720 and you are younger than 71 in the year that you make the transfer. This is a big change from the HBP, which requires you to pay back the funds later.
The FHSA won’t magically make housing affordable, but it should give more Canadians a leg up in an already challenging market. To get started, contact your financial institution to confirm eligibility and set up your account. Faber LLP can help you in this regard.
How Does the FHSA Work?
The FHSA is a new registered savings account that allows Canadians to save up to $40,000 on a tax-free basis for the purchase of their first home. It can be used to hold a variety of investments and withdrawals are tax-free (just like TFSAs), up to the lifetime maximum contribution of forty thousand dollars.
To qualify for an FHSA, you must be a resident of Canada and be between the ages of 18 and 71. You must also be a first-time homebuyer, which means that you don’t have ownership or beneficial ownership of any residential property in the year you open your FHSA and in the four years before.
The FHSA combines the best features of an RRSP and a TFSA—you get tax breaks on contributions and tax-free withdrawals for qualifying purposes. It’s a great option for those planning to buy their first homes shortly and we expect more financial institutions to offer them soon.
What are the Benefits of the FHSA?
The Tax-Free First Home Savings Account (TFHSA) offers several benefits that make it an attractive option for Canadians saving for their first home:
1. Tax-Free Contributions
One of the primary benefits of TFHSAs is that contributions made to the account are not subject to taxation. This means that every dollar deposited into the account goes directly towards saving for a first home, without being eroded by taxes.
2. Tax-Free Investment Growth
In addition to tax-free contributions, any investment growth within the TFHSA is also tax-free. This allows account holders to benefit from the power of compound interest and market growth without worrying about tax implications.
3. Flexibility
TFHSAs offer greater flexibility compared to other registered accounts such as RRSPs or TFSAs. Withdrawals from TFHSAs are not subject to strict rules or penalties. It is easier for account holders to access their savings when needed, whether it’s for unexpected expenses or emergencies.
4. Higher Returns
By investing contributions in a diversified portfolio of assets such as stocks, bonds, and mutual funds, TFHSA holders have the potential to earn higher investment returns compared to traditional savings accounts. This can accelerate the growth of savings and expedite the path to homeownership.
5. Government Incentives
Eligible TFHSA holders may qualify for additional financial assistance from government programs aimed at promoting homeownership, such as the Home Buyers’ Plan (HBP) or the First-Time Home Buyer Incentive (FTHBI). These incentives can further boost savings and make purchasing a home more attainable.
TFHSA Strategy
Let’s explore some strategies to maximize the potential of your TFHSA.
1. Diversifying Your Investment Portfolio
While TFHSAs offer tax-free growth, it’s essential to build a diversified investment portfolio to mitigate risk and maximize returns over the long term. By spreading investments across different asset classes such as stocks, bonds, and real estate investment trusts (REITs), you can capture opportunities for growth while safeguarding against market volatility.
2. Setting Clear Savings Goals
Setting clear savings goals is crucial for staying motivated and on track toward homeownership. Whether it’s saving for a down payment, covering closing costs, or building an emergency fund, breaking down your savings goals into manageable milestones can help you stay focused and measure your progress along the way.
3. Taking Advantage of Employer Matching Programs
If your employer offers a matching contribution program for retirement savings, consider directing a portion of these funds toward your TFHSA. By taking advantage of employer matching programs, you can effectively double your contributions and accelerate the growth of your TFHSA without increasing your out-of-pocket expenses.
4. Exploring Government Assistance Programs
In addition to TFHSA benefits, explore other government assistance programs designed to support first-time homebuyers. Programs such as the Home Buyers’ Plan (HBP) and the First-Time Home Buyer Incentive (FTHBI) offer additional financial support and incentives to help Canadians achieve their homeownership goals faster.
5. Monitoring and Adjusting Your Strategy
As your financial situation evolves, regularly review and adjust your TFHSA strategy to ensure it remains aligned with your goals and priorities. Whether it’s changing contribution amounts, adjusting investment allocations, or exploring new savings opportunities, staying agile and proactive can help you stay on course toward homeownership.
Conclusion
By implementing these strategies and leveraging the benefits of Tax-Free First Home Savings Accounts, you can elevate your TFHSA strategy to new heights accelerate your path to homeownership, and achieve your goals faster and more efficiently. With careful planning, disciplined saving, and strategic investing, the dream of owning your first home is well within reach.