Here’s why prospective first-time buyers should open a First Home Savings Account (FHSA)
What is FHSA?
The FHSA was launched earlier this year by the federal government as a new vehicle to help prospective first-time buyers save for their home purchase.
It’s unique in that it combines the benefits of a registered retirement savings plan (RRSP) and a tax-free savings account (TFSA). Like an RRSP, your contributions are tax deductible for the year in which you make them, and like a TFSA, any income, capital gains and dividends earned in the account are tax-free.
“As long as you’re taking the money out for the purposes of purchasing an eligible home, there are no tax consequences
Why you should open a FHSA before the end of the year?
The FHSA allows first-time homebuyers to contribute up to $8,000 per year up to a lifetime limit of $40,000. Any unused contribution room in a calendar year will be carried over to the following year.
For this reason, many financial advisors are suggesting that people open a FHSA account this year in order to accumulate the additional contribution room.
For those who are undecided about whether they want to purchase a home, its best that people at least open their FHSA to start accumulating the contribution room, even if they still plan to put most of their investments into a TFSA.
Then, if you decide you do want to purchase a home later on, you can transfer the money into the room you accumulated in the FHSA and get a tax receipt to deduct from your income tax.
“If you’re really on the fence, put the bulk of your savings into your TFSA, then as soon as you’re ready, you can flip it over to the FHSA,” says Gyurtis.
If you don’t end up purchasing a home, the amount in your FHSA can be transferred to your RRSP tax-free.
“The nice thing is any money that’s in that plan—let’s say you don’t buy a property—you can actually transfer that to your RRSP with no tax consequences, It won’t even affect your contribution room into your RRSP.
Alternatively, if you want to invest in an FHSA but don’t have the cash, you could consider transferring the money from your TFSA into an FHSA, and then put the money you save on taxes via a tax refund back into a TFSA.
In any case open up your FHSA so you’re getting the benefit of accumulating the contribution room.