Are you thinking about buying your first home soon? With the housing market starting to stabilize and prices on the rise, now might be the perfect time to make your move. The good news is that the Canadian government has introduced a new program to help first-time homebuyers save for their dream home - the First Home Savings Account (FHSA).
What is the FHSA?
The FHSA is a registered plan that allows you to save up to $40,000 in a tax-free account for your first home purchase. You can contribute up to $8,000 per year and deduct your contributions from your taxable income, similar to an RRSP. Any interest earned inside the plan is tax-free, and when you are ready to buy your first home, you can withdraw your savings tax-free, like a TFSA.
FHSA vs. RRSP
The FHSA is similar to an RRSP in that you can deduct your contributions from your taxable income, but there are some key differences. Withdrawals from the FHSA for your first home purchase are tax-free, whereas RRSP withdrawals are taxable (unless you use the HPB, see below). RRSPs have no lifetime limit, but have an annual contribution limit of 18% of income or $30,780 ( as of 2023). FHSA has an annual limit of $8,000 and a lifetime limit of $40,000.
FHSA and HBP
The FHSA can also complement the existing Home Buyers' Plan (HBP), which allows you to withdraw up to $35,000 from your RRSPs to buy or build a qualifying home. The HBP requires repayment over 15 years, while the FHSA does not require repayment.By using both programs together, you can boost your savings and reduce your taxes.
To be eligible for the FHSA, you must meet the following conditions:
You must be a resident of Canada and at least 18 years old.
You must not have owned a home or lived in a home owned by your spouse or common-law partner in the past four years.
You must have a written agreement to buy or build a qualifying home for yourself or for a related person with a disability.
You must intend to occupy the qualifying home as your principal residence within one year of buying or building it.
More conditions may apply
If you're a first-time homebuyer who is looking to save for your dream home, the FHSA is a great option to consider. With a higher contribution limit than an RRSP and tax-free withdrawals, the FHSA can help you save more and pay less in taxes. Additionally, by using the FHSA in combination with the HBP, you can further boost your savings and reduce your taxes.
Remember, the FHSA is just one option available to first-time homebuyers. It's important to do your research and speak with a financial advisor to determine which savings strategy is best for you.