Not all of the details surrounding FHSAs have been ironed out yet. The federal government plans to release more information in the near future, as it works with financial institutions to make the accounts available to the public next year. However, based on the info revealed in the 2022 budget, here’s what you need to know.
What is the first home savings account?
When the first home savings account officially launches in 2023, it will allow Canadians who are 18 or older and haven’t owned a home in the current calendar year, or in the previous four calendar years, to save up to a total of $40,000 towards the purchase of a home.
Jessica Moorhouse, a millennial money expert and host of the More Money podcast, says the FHSA combines elements of the tax-free savings account (TFSA) and registered retirement savings plan (RRSP), allowing account holders to store cash, stocks, bonds, mutual funds or ETFs. “However, it is specifically for home buying—and specifically for buying your first home.”
What is the FHSA contribution limit?
FHSA account holders can contribute up to $8,000 a year, while earning a tax deduction on the contributions, like with an RRSP. Plus, any money withdrawn from an FHSA—as well as any investment growth in the account—is not taxed, like with a TFSA, as long as it is used toward the cost of a first home.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 they don’t spend the money within that time frame, the account must be closed and the money transferred to an RRSP or a 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 up that account and start saving,” Moorhouse says. “You really have some strict guidelines to adhere to.”
How can first-time buyers take advantage of the FHSA?
Anyone using an FHSA should be prepared to sock away as much money as possible from the moment they open the account, according to Moorhouse. Account holders who don’t hit their maximum annual contribution limit of $8,000 cannot roll it over to the following year. “You just lose that space,” she says. “If you’re going to use this account, you want to make sure that you can max it out every single 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 every year will reach the maximum lifetime limit in five years, leaving them with only 10 years to grow that money, before it needs to be transferred or withdrawn. The money saved is “not going to do a heck of a lot just sitting in cash with inflation [currently] at 6.7%,” Moorhouse says.
Brennan Doherty
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