First-time homebuyers can now take advantage of an extra downpayment savings tool as of April 3rd, 2023 in the form of the First Home Savings Account (FHSA) courtesy of the federal government.
The FHSA combines the benefits of both a registered retirement savings plan (RRSP) and tax-free savings account (TFSA). Contributions to an FHSA are tax-deductible, like with an RRSP and withdrawals are non-taxable, similar to a TFSA. And because the FHSA is completely tax-free, the account allows for tax-free growth while being held in the account (similar to both RRSPs and TFSAs).
The program allows contributions of $8,000 a year for five years for a lifetime maximum contribution amount of $40,000. It’s, therefore, best suited for people looking to buy a home a few years down the road.
You can’t carry forward any unused contributions like you can with your RRSP or TFSA nor are you required to repay the funds you withdraw. But, since the savings are meant specifically for buying a first home, any amount withdrawn for another purpose will be taxed, similar to an RRSP.
It’s beneficial to put your first $8,000 of savings every year towards an FHSA and then contribute any additional savings you may have into an RRSP or TFSA.
This savings tool is also a great way for parents who are planning to gift a down payment towards their children’s first home to provide $8,000 annually to grow their kid’s FHSA and help them take advantage of a tax deduction.
Once you’ve made a withdrawal, you’ll be required to close your FHSA within a year. And if you don’t use the funds for a first home purchase within 15 years of opening an account, you’ll be required to close it, transfer the money to an RRSP or registered retirement income fund, or withdraw it as taxable income.
Have questions about your down payment options? Answers are a call or email away!