The Tax-Free First Home Savings Account (FHSA) is a federal initiative from Canada created to help Canadians in purchasing their first home more easily. People can save up to $40,000 in taxes with this initiative, which can be used to buy a single-family home. The annual contribution cap is set at $8,000. For example, if you make a $5,000 contribution in a year, the upcoming year you will have $11,000 available. In addition, the carry-forward option was added as a new alternative.
The FHSA was launched by the Canadian government in early 2022. Contributions would be tax-deductible in the same way as a Registered Retirement Savings Plan (RRSP), and withdrawals for a home purchase would be exempt from tax, similar to a tax-free savings account (TFSA).
Here’s a simple guide on how to open an FHSA and who can benefit the most from this option.
Citizens who can use this option
This option is for people who live in Canada, so opening an FHSA Canada-wide is very simple. You can just visit your local bank or credit union. However, in order to open this account, you must first understand and learn all of the requirements.
To open an FHSA you must be a Canadian citizen and at least 18 years old. Furthermore, immigrants can open an FHSA as long as they are Canadian residents. A person must also be a first-time homebuyer to become eligible to open an account. This means that if you have owned a home in the year prior to opening the account, or in the four years preceding it, you automatically become ineligible. Also, you have to be younger than 71 years.
How does the process of FHSA work?
You can create an FHSA by combining elements from the Home Buyer’s Plan, a TFSA, and an RRSP. Contributions to the FHSA are tax deductible. This allows you to lower your taxable income when filing your tax return. The FHSA withdrawals used to purchase a home are tax-free as opposed to the RRSP withdrawals. In addition, investment income (if used to buy a home) is not taxable.
The annual contribution to the purchase of a home is essentially a tax deduction from your income tax, which can help you get into a lower tax bracket. If your FHSA withdrawals aren’t used to buy a home, you won’t have to pay taxes on them. You can withdraw tax-free from your FHSA only if the funds are used to purchase a home. You must also use the FHSA funds to buy a home within 15 years of opening it. The funds will be moved to your Registered Retirement Income Fund. This allows you to begin saving for retirement.
You can transfer funds from your FHSA
Before the age of 71, you can transfer funds from your FHSA to your RRSP. Even if you have an unused contribution room, you can make the transfers. FHSA transfers do not count against your RRSP contribution limit, so don’t be discouraged if your RRSP is full. The lifetime contribution limit of $40,000 and the annual contribution limit of $8,000 would remain in effect. If you received the contribution tax deduction when you first contributed to an RRSP, it would not apply to you.
A better alternative than HBP
The Home Buyers Plan (HBP) allows you to withdraw up to $35,000, but you must repay these funds. The FHSA, on the other hand, allows you to contribute up to $40,000 without having to repay it. If you decide to purchase a family home, the best way to do so is to fund your FHSA. Following the completion of your FHSA, your next best option is to fund your TFSA.
The government recently proposed that first-time homebuyers could take advantage of both the FHSA and the HBP. You can transfer your RRSP to your FHSA at any time. This could be an excellent way to assist people in saving for retirement. If necessary, people with defined-contribution pensions could transfer funds to their FHSA.
Final thoughts
If you decide to purchase a home, opening an FHSA is a great option. The FHSA is an excellent account for saving for a down payment on a home. It allows first-time homebuyers to save money on income taxes while also funding their down payment. However, due to the fact that it has specific deadlines that can affect your savings strategy, careful planning is required.
