The First Home Savings Account (FHSA) is a game-changer for first-time homebuyers, simplifying the path to homeownership. Let’s dive into how the FHSA works, its valuable tax benefits, qualifying investments, and why it could be the right choice for achieving your homeownership goals.
Key Takeaways:
- The First Home Savings Account (FHSA) is a registered savings account that gives first-time home buyers a tax-advantaged way to save for their first home.
- Eligible Canadians can make tax-free withdrawals at any time for qualifying home purchases.
- New and experienced investors can consider diversifying their investment options with Mortgage Investment Corporations (MICs), allowing them to get consistent returns without the hassles of property management.
What is the First Home Savings Account (FHSA)?
The First Home Savings Account (FHSA) is a tax-advantaged account designed for first-time homebuyers in Canada. It allows individuals to save for their first home while enjoying tax benefits similar to those found in a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP).
With the FHSA, you can contribute up to a specific limit each year, known as the annual contribution limit. Your contributions grow tax-free, and when you withdraw funds for a qualifying home purchase, those withdrawals are also tax-free.
First Home Savings Account (FHSA) by the numbers. Illustration from Amur Capital.
Why invest in FHSA? 3 key benefits
An FHSA can be a good choice for those seeking to maximize their tax-free earnings while saving for their first home. Some of the benefits include:
- Tax-deductible contributions: Similar to RRSPs, contributions to FHSAs are tax-deductible, which means you can reduce your taxable income for the year, potentially lowering your overall tax liability.
- Tax-free growth: Any growth on the investments held within your FHSA is tax-free. You can also transfer your FHSA funds to an RRSP or a Registered Retirement Income Fund (RRIF).
- Encourages homeownership: The FHSA is specifically designed to encourage homeownership among young Canadians. By making it easier to save for a down payment, the FHSA helps individuals get into the housing market sooner. With the lifetime contribution limit of $40,000, you can effectively save for your first home over time.
How does an FHSA work?
So, how does the FHSA work? As a registered plan, the FHSA operates similarly but with specific rules and features. Here’s a breakdown of how it works.
Eligibility
To open an FHSA, you must meet certain eligibility criteria. You must be a Canadian resident and at least 18 years old. Additionally, you must be a first-time homebuyer, meaning you have not owned a home in the preceding four calendar years. If you are in a common law partnership, both partners can open an FHSA, allowing for joint savings efforts.
Types of FHSAs
In general, there are three types of FHSAs:
- Depository FHSA: opened with financial institutions and are designed to hold cash, term deposits, or guaranteed investment certificates (GICs).
- Trusted FHSA: opened and managed by a trust company that can hold qualified investments such as cash, term deposits, GICs, bonds, and mutual funds.
- Insured FHSA: annuity contracts that are made with a licensed annuity provider.
FHSA contribution and withdrawal rules
The FHSA has annual contribution limits. As of 2024, you can contribute up to $8,000 annually, with a lifetime maximum of $40,000. Similar to TFSAs and RRSPs, the unused contribution room in a given year can be carried forward to future years.
The FHSA also offers flexibility in how you contribute. You can choose to contribute regularly or make lump-sum payments. This adaptability allows you to tailor your savings plan to your financial situation.
How First Home Savings Account (FHSA) contribution room works. Illustration from Amur Capital.
Withdrawals can be tax-free when used to purchase your first home (a qualifying withdrawal). You can also make withdrawals without tax consequences in the following:
- Designated withdrawal: When you contributed too much and have an excess FHSA amount; or
- Amount otherwise included in your income: If the withdrawal is part of your taxable income, it may not be taxed again.
In all other cases, an amount withdrawn from your FHSA is subject to tax in the year the withdrawal is received.
FHSA transfers and life events
Life events can impact your FHSA. If you become a non-resident after opening an FHSA, you can still participate normally in your FHSA, except it is prohibited to make a qualifying withdrawal to build a qualifying home.
Moreover, if you have a breakdown of a common-law partner or spouse, you can also transfer funds between accounts for tax purposes.
If the funds in an FHSA are not used for purchasing a home, they can be transferred tax-free into a Registered Retirement Savings Plan (RRSP) or a Registered Retirement Income Fund (RRIF). Tax-free transfers are also allowed when:
- It is a direct transfer to another of your FHSAs; or
- It is a designated transfer.
Are my FHSA contributions tax deductible?
Yes, contributions to an FHSA are tax-deductible. This means you can deduct your contributions from your taxable income. This feature enhances the appeal of the FHSA, making it a smart choice for those looking to save for their first home.
It is important to know that not all contributions are tax-deductible. Examples of these contributions are those made during the first 60 days of the year, after the first qualifying withdrawal, and those that exceed the lifetime FHSA limit of $40,000.
Best FHSA investments to consider in 2024
When investing in your FHSA, consider various qualified investments to maximize your returns. Qualified investments are those allowed in registered accounts under the Income Tax Act.
Not all investments are created the same. So, we’ve compiled some of the best FHSA investments to consider for 2024:
Guaranteed Investment Certificates (GICs)
Guaranteed Investment Certificates (GICs) offer a secure way to grow savings. They are products that allow investors to receive guaranteed returns over a fixed period plus an agreed-upon interest. This stability is ideal for conservative investors looking to preserve capital while earning interest.
GICs are also insured by the Canada Deposit Insurance Corporation (CDIC) for up to $100,000.
Stocks/ Equities
Investing in stocks can yield higher returns. However, it comes with increased risk, as even top-performing stocks can stumble. If you are comfortable with market fluctuations, consider allocating a portion of your FHSA to equities. This can enhance your long-term growth potential.
Mutual funds
Mutual funds provide diversification. They allow you to invest in various assets managed by professionals for a fee. This option is suitable for those who prefer a hands-off approach to investing, and it can help you meet your savings goals.
Real Estate
Real estate investments can be a great way to build wealth. They can be a smart hedge against inflation, with property values and rents rising together. However, traditional real estate investing often requires a hands-on approach, including managing rentals, flipping homes, and doing renovations.
A way to passively invest in real estate is through Mortgage Investment Corporations (MICs). Simply put, a mortgage investment fund pools money from investors to invest in highly diversified mortgages. It allows investors to access the Canadian real estate market without the volatility of traditional stocks or the hassles of property management.
Comparing FHSA vs TFSA vs RRSP
Understanding the differences between the FHSA, TFSA, and RRSP’s Home Buyers’ Plan (HBP) is crucial for effective financial planning.
The Home Buyers’ Plan allows for tax-free withdrawals from an RRSP to assist with buying a qualifying home, but it requires repayment of the withdrawn amount over a 15-year period. The FHSA does not require repayment for withdrawals used for home purchases, which is a significant difference.
Both the FHSA and the RRSP HBP offer tax advantages, but the FHSA provides more flexibility without the need for repayment.
Amur Capital MICs: A simpler way to grow your FHSA savings
The First Home Savings Account (FHSA) is a powerful tool for first-time homebuyers. Its tax advantages and flexible contribution options empower individuals to save for their dream home. Whether you’re just starting your savings journey or looking to maximize your investments, the FHSA is worth considering.
At Amur Capital, we offer Mortgage Investment Corporations (MICs) to enhance your FHSA savings. Our highly diversified MICs provide a simple investment option with consistent returns.
Contact our Investor Relations to get started today.
FAQs
Is the FHSA being discontinued?
No, the FHSA is not being discontinued. The FHSA is a new initiative aimed at helping Canadians achieve homeownership.
What happens to FHSA after 15 years?
The account will be closed if you do not use your FHSA to purchase a home within 15 years. The funds will be taxed as income, meaning you must pay tax on the amount. Therefore, it’s essential to have a plan for your savings.
What is the FHSA limit for 2024?
For 2024, the annual contribution limit for the FHSA is $8,000, with a lifetime limit of $40,000. This allows you to save effectively for your first home.
