As we approach the end of 2024, it’s been over a year since the introduction of a new savings vehicle: The First Savings Account, commonly known by the acronym FHSA.
If you are not yet familial with the specifics of this savings account, our article Everything your need to know about the FHSA covers all the important details you need to know. Feel free to take a few minutes to review it and gain a better understanding of how it works and the eligibility criteria.
Today, we will focus specifically on the main advantages of contributing to it, as well as the weakness to consider.
What are the advantages of opening an FHSA?
The FHSA is undoubtedly one of the most beneficial savings options available for first-time homebuyers. If you’re planning to purchase a home, the following reasons will make it clear why you should consider opening this account without hesitation.
1. Higher withdrawal limit than the HBP
Are you familiar with the Home Buyer’s Plan (HBP)? This program lets you withdraw up to $35,000 from your RRSP to help fund your home purchase down payment. While this is a substantial amount, the FHSA offers even more!
With the FHSA, Canadian citizens can contribute up to $40,000 over the lifetime of the account.
That’s $5,000 more than the HBP, giving you extra funds for your down payment. But the benefits don’t end there.
2. Possibility of withdrawing more than $40,000
While the maximum contribution to an FHSA is $40,000, you may be able to withdraw even more if your investments grow.
The funds you deposit into the account will accumulate over time, and any interest earned can be added to your down payment. For examples, if your $40,000 investment generates $5,600 in interest, you can withdraw a total of $45,600.
3. Tax-sheltered savings
Contributing to an FHSA offers you double tax benefits. First, the deposits you make are tax-deductible, reducing your taxable income for the current year, similar to the advantage you get with an RRSP.
But that’s not all: like a TFSA, any income earned within the FHSA is tax-free. This means you won’t have to pay tax on the accumulated interest, as long as the funds are used to purchase an eligible home.
4. Many investment choices available
The investment options available in an FHSA are similar to those in an RRSP. You can invest in:
- Stocks
- Term deposits
- Mutual funds
- Exchange-traded funds
- Government or corporate bonds
Be sure to consult with your financial institution or advisor to determine which options best suit your financial goals and situation.
5. Carry-forward annual contribution limit
Each year, you can contribute up to a maximum of $8,000 to your FHSA. However, if you don’t reach this limit, the unused portion can be carried forward to the following year, much like with a TFSA or RRSP. This provides added financial flexibility.
For example, if you contribute $7,000 in 2024, you can carry forward the unused $1,000 to the 2025, allowing you to contribute $9,000 that year. Just remember, the lifetime contribution limit remains $40,000.
6. No repayment required
Unlike the Home Buyers' Plan (HBP), which requires you to repay the funds you withdraw in the future years, the FHSA has no repayment obligation. The money you withdraw from your FHSA for your home purchase does not need to be redeposited, giving you one less thing to worry about.
7. Possibility to combine FHSA with HBP
A significant advantage of the FHSA is that it can be combined with the Home Buyer’s plan (HBP), allowing you to maximize your down payment. The two programs complement each other, so using both is possible.
For example, if you have $40,000 in your FHSA and withdraw the maximum $35,000 from your RRSP under the HBP, you can access a total of $75,000 for your home purchase, plus any interest earned on your investments. If you’re purchasing with a spouse, you could double that amount!
8. Transferability to RRSP
Even if your home buying plans change, contributing to your FHSA still offers benefits. If your project doesn’t materialize, you have two options:
-
Transfer the money from your FHSA to your RRSP, tax-free, without affecting your RRSP contribution limit.
-
Withdraw the amount, but you’ll be subject to the applicable taxes.
It’s a good idea to consult with your financial planner to understand the best option for your situation.
What are the disadvantages of the FHSA?
Despite its many advantages, the FHSA also has some drawbacks.
1. Single-use account
The FHSA can only be used once in your lifetime. Once you close the account after purchasing a home, you are not able to open another one. This makes it a one-time opportunity for first-time homebuyers.
2. Limited lifespan
Another disadvantage of the FHSA is its 15-year lifespan. If you don’t purchase a home within this time frame, the account will be closed automatically.
For example, if you open an FHSA at age 18, you must use the funds by age 33, or the account will no longer be available. This creates a deadline for your home buying plans.
3. No joint account
The FHSA does not offer the option of a joint account, unlike a joint RRSP where both partners can contribute. Only the account holder can make contributions and claim tax deductions in their own name. This means that you cannot share the benefits of the FHSA with your spouse, limiting flexibility in terms of contributions.
When to withdraw your FHSA to maximize its benefits
The timing of withdrawing funds from your FHSA largely depends on your specific situation, but there are some important factors to consider.
- Are you buying an eligible home? If so, you can withdraw your funds at the time of your purchase, without any limit on the amount and without any tax consequences. There is no minimum holding period for the funds in your account, unlike the RRSP. This means you could theoretically contribute one day and withdraw the nest, as long as the funds are used for purchasing an eligible home.
- What about withdrawals within 30 days of purchasing a home? Some withdrawals made within 30 days of acquiring an eligible home may also be allowed without taxation, provided certain conditions are met.
- Are you not buying a property? If you’re not using the funds to purchase a home, you can transfer them to your RRSP or RRIF without any penalty. However, if you withdraw the funds for non-real estate purposes, the withdrawn capital will be considered income and will be taxed accordingly.
Since each situation is unique, it’s important to consult with your financial planner to get personalized advice and optimize your investment strategy.
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