How to take advantage of the first housing savings account
All of the details surrounding the FHSAs have yet to be ironed out. The federal government plans to release more information in the near future as it works with financial institutions to make the accounts publicly available next year. However, based on the information revealed in the 2022 budget, here’s what you need to know.
What is the first housing savings account?
When the first home savings account officially launches in 2023, it will allow Canadians 18 years of age or older who have not owned a home in the current calendar year or the previous four calendar years save up to $40,000 for the purchase of a home.
Jessica Moorhouse, millennial money expert and host of the More Money podcast, explains that FHSA combines elements of the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), allowing holders account to store cash, stocks, bonds, mutual funds or ETFs. “However, it’s specifically for buying a home – and specifically for buying your first residence.”
What is the FHSA contribution limit?
FHSA account holders can contribute up to $8,000 per year, while receiving a tax deduction on contributions, similar to an RRSP. Additionally, any money withdrawn from an FHSA, as well as any investment growth in the account, is not taxed, as with a TFSA, as long as it is used towards the cost of a first home.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 he doesn’t spend the money within that time, the account must be closed and the money transferred to an RRSP or 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 this account and start saving,” says Moorhouse. “You really have strict guidelines to follow.”
How can first-time buyers benefit from the FHSA?
According to Moorhouse, anyone using an FHSA should be prepared to save as much money as possible as soon as they open the account. Account holders who do not reach their maximum annual contribution limit of $8,000 cannot carry it over to the next year. “You just lost that space,” she said. “If you’re going to use this account, you want to make sure you can max it out every year.”
She also 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 each year will reach the maximum lifetime limit in five years, giving them only 10 years to grow that money, before it needs to be transferred or withdrawn. The money saved “isn’t going to do much, just stay in cash with inflation [currently] at 6.7%,” says Moorhouse.