Written By:
Sumit Walia
The First Home Savings Account (FHSA) is a registered plan designed to assist eligible Canadians in saving for their first home purchase. This tax-free investment account combines elements of both the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Contributions are tax-deductible like an RRSP, and investment growth and withdrawals are tax-free, similar to the TFSA.
The FHSA offers flexibility and potential benefits for eligible Canadians looking to buy a home in the future. In this article, we will explore the key features of the FHSA, including investment options and how to get started.
Eligible individuals can contribute up to $8,000 annually, with a lifetime limit of $40,000.
Contributions can be deducted from your taxable income, reducing your tax burden. You can also choose to claim deductions in later years when in a higher tax bracket for maximum tax savings.
FHSA funds can be withdrawn tax-free for a qualifying home purchase.
Investment growth within the account is also non-taxable, and there are no withdrawal limits.
You can carry forward up to $8,000 in unused contribution room to future years. For example, if you contribute $4,000 in 2023, the remaining $4,000 in unused contributions will increase your maximum contribution limit in 2024 to $12,000 (i.e., $4,000 + $8,000).
Similar to RRSPs and TFSAs, the FHSA allows you to hold various investments, including mutual funds, Exchange-Traded Funds, individual stocks, cash, bonds, and Guaranteed Investment Certificates (GICs).
You can open a managed or self-directed FHSA at financial institutions offering them.
Canadians can have more than one FHSA, similar to RRSPs and TFSAs. You can open a managed or self-directed FHSA at financial institutions offering them.
Asset transfers between FHSA accounts can be done without triggering taxes. However, the maximum contribution limits apply to all FHSA accounts.
The Home Buyers’ Plan (HBP) allows you to withdraw up to $35,000 from your RRSP for a qualifying home purchase. This withdrawn amount must be re-contributed to your RRSP over 15 years.
Combining funds from your FHSA and HBP can increase your down payment amount when buying a home.
If you do not use your FHSA funds to buy a home, you can transfer the money to an RRSP or RRIF on a tax-free basis.
These transfers do not affect your RRSP contribution room.
An FHSA can remain open for a maximum of 15 years or until the accountholder turns 71, whichever comes first.
Upon closing the account, the accountholder can withdraw the funds and pay taxes or transfer the funds tax-free to an RRSP or RRIF.
Over-contributing to your FHSA results in a 1% monthly penalty on the excess contribution. This penalty only ceases after withdrawing the excess contribution or accumulating additional contributions in the following year.
Qualifying homes include various types such as single-family homes, townhouses, condos, and more. However, certain arrangements that provide only a right to tenancy do not qualify.
You can give your spouse money to contribute to their FHSA, but you cannot claim a deduction on that amount. Spousal RRSP attribution rules do not apply, and income earned in the account is not taxable to you.
Unlike RRSPs, contributions made in the first 60 days of the year cannot be claimed as deductions on the previous year’s tax return. This rule does not apply to FHSAs.
The FHSA is now available through Fidelity. Consult your financial advisor for information on opening an FHSA and the types of investments you can hold within it.
Be aware of associated fees and expenses with mutual funds and ETF investments, and carefully review prospectuses before investing.
Please note that this information is for educational purposes and should not be considered financial advice.
Always conduct your research and consult with a financial advisor for personalized guidance.
The content provided on Myfinancesguru.com is information to help users become financially literate. It is neither tax nor legal advice, is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy. Tax, investment and all other decisions should be made, as appropriate, only with guidance from a qualified professional. We make no representation or warranty of any kind, either express or implied, with respect to the data provided, the timeliness thereof, the results to be obtained by the use thereof or any other matter.
