Nearly a year ago, a new savings vehicle came into effect: the First Home Savings Account, better known by the acronym FHSA.
Not yet familiar with the specifics of this savings account? Our article, "The FHSA for buying your first property" outlines all the important details you need to know about it. Feel free to take a few minutes to review it to better understand its operation and eligibility criteria.
Today, we will specifically present the main advantages of contributing to it, as well as the weaknesses to consider.
What are the advantages of opening a FHSA?
FHSA is certainly one of the most advantageous savings vehicles on the market for first-time buyers looking to save for a home purchase. If you also have plans to become a homeowner, the following reasons will convince you to open this type of account without delay.
1. Higher withdrawal limit than HBP
Have you heard of the Home Buyers' Plan (HBP)? This program allows you to withdraw up to $35,000 from your RRSP for the down payment required for the purchase of your home. This is a significant amount, but FHSA does even better!
This savings account allows Canadian citizens to contribute up to $40,000. This is the maximum lifetime limit you can deposit into your account.
So, you can use $5,000 more for your down payment than with the HBP. But the advantage doesn't stop there.
2. Possibility of withdrawing more than $40,000
The maximum you can contribute to a FHSA is $40,000. However, it is possible to withdraw a higher amount if you invest the deposited money.
Deposits made to your account will grow over time, and the interest accumulated in the account can be used as an additional amount for your down payment. Thus, if the $40,000 invested has generated $5,600 in interest, you can withdraw the entire $45,600.
3. Tax-sheltered savings
Contributing to a FHSA allows you to benefit from double tax advantages. First, the deposits made are tax-deductible, reducing your taxable income for the current year. This brings you the same tax deduction advantage as contributing to your RRSP.
But there's more: like in a TFSA, the income generated in your FHSA is not taxable. So, you won't have to pay tax on the accumulated interest, provided, of course, that the funds are indeed used to purchase an eligible home.
4. Many investment choices available
The financial products in which you can invest in your tax-free savings account for the purchase of a first home are the same as for an RRSP. This includes:
- Stocks;
- Term deposits;
- Mutual funds;
- Exchange-traded funds;
- Government or corporate bonds.
Consult your financial institution or financial security advisor to find out which options would be best for your situation.
5. Carry-forward annual contribution limit
Each year, you can contribute to your FHSA up to a maximum of $8,000. However, if you do not reach this amount, the unused portion will be carried forward to the next year, as with the TFSA and RRSP. This offers interesting financial flexibility.
For example, if you contribute $7,000 to your savings account in 2024 out of the $8,000 annual limit, you can add the unused $1,000 to the next year. In 2025, you can therefore contribute a maximum of $9,000.
You still need to respect the lifetime contribution limit of $40,000.
6. No repayment required
Unlike the Home Buyers' Plan, which requires repayment of withdrawals made in subsequent years, FHSA does not require any repayment. The money withdrawn from the account for the purchase of your home does not need to be redeposited.
7. Possibility to combine FHSA with HBP
Another major advantage of FHSA is the possibility of combining it with the HBP. One does not prevent the other. You could thus maximize the amount of your down payment by taking advantage of both programs.
If you have $40,000 in your FHSA and withdraw the maximum $35,000 from your RRSP, you have a hefty sum of $75,000 that you can use to buy your property, not to mention the interest generated by your investments. And if you buy with your spouse, you could double that amount!
8. Transferability to RRSP
Although you plan to buy a property in the coming years, you never know what the future holds. If your project doesn't materialize, contributing to your FHSA will still be beneficial.
Two options will then be available to you:
- Transfer the money from your FHSA to your RRSP, tax-free, without losing the maximum RRSP contribution you are entitled to.
- Withdraw the amount, but pay the applicable tax.
Feel free to discuss with your financial planner for more information on these two options.
What are the disadvantages of FHSA?
Despite all its advantages, the tax-free savings account for the purchase of a first home also has some weaknesses.
1. Single-use allowed
FHSA can only be used once in your lifetime. Once your account is closed, it is therefore impossible to open another one.
2. Limited lifespan
Another drawback of this savings account is its lifespan, limited to 15 years. If you plan to acquire a first property, you must therefore realize your project within this timeframe, otherwise, the account will be closed automatically.
Thus, if you open a FHSA when you are 18 years old, you must use the funds no later than when you are 33 years old.
3. No joint account
FHSA does not have an equivalent to a joint RRSP, which allows funds to be deposited into your spouse's Registered Retirement Savings Plan. Only the account holder can contribute and claim tax deductions in their name.
When to withdraw your FHSA to take advantage of its benefits?
The timing of withdrawing funds from your FHSA depends mainly on your situation. However, some factors are worth considering.
Are you buying an eligible home? You can then withdraw your funds at the time of your purchase, without any limit on the amount and without tax consequences.
There is also no minimum holding period for holding the funds in your account, unlike the RRSP. This means that it is theoretically possible to contribute one day and withdraw for your purchase the next day.
Some withdrawals made within 30 days of acquiring an eligible home may also be allowed without taxation, under certain conditions.
Are you not buying a property? You can transfer the funds from your FHSA to your RRSP or RRIF without penalty.
It is also possible to withdraw the funds for use in projects other than real estate acquisition, but the withdrawn capital will then be considered as income and taxed.
In any case, remember that your situation is unique. To get personalized advice and maximize your investment strategy, talk to your financial planner.
Looking to buy your first home in Quebec?
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