Why you should open a First Home Savings Account before Dec. 31
What is a First Home Savings Account?
Earlier this year, the Canadian federal government introduced the First Home Savings Account (FHSA), aimed at assisting first-time homebuyers with savings.
This innovative account blends the features of a Registered Retirement Savings Plan (RRSP) and a Tax-Free Savings Account (TFSA). Contributions to the FHSA are tax-deductible, similar to an RRSP, while earnings in the form of income, capital gains, and dividends enjoy tax-free status, like a TFSA. This dual advantage makes the FHSA a unique and valuable tool for prospective homeowners.
Why should you open a FHSA before the end of the year?
The First Home Savings Account (FHSA) enables first-time homebuyers to contribute a maximum of $8,000 annually, with a total limit of $40,000 over time. Unused contribution space from one year rolls over to the next. Financial advisors recommend opening an FHSA soon to benefit from this accumulating contribution space. Doing this before the end of 2023, would now mean having $16,000 of room for 2024.
Even for those uncertain about buying a home soon, opening an FHSA can be beneficial. Additionally, transferring funds from a TFSA to an FHSA is a viable option for those lacking immediate cash, allowing them to reinvest any tax savings back into their TFSA.
How does the FHSA compare to a TFSA or a home buyers’ plan?
Individuals saving for a home down payment often weigh the First Home Savings Account (FHSA) against other options like the Tax-Free Savings Account (TFSA) or the Home Buyers’ Plan (HBP). The TFSA is particularly notable for allowing Canadians to grow their savings tax-free, with the flexibility to withdraw funds at any time for any purpose, including using it as a down payment for a property.
The main benefit of a FHSA over a TSFA is that contributions made to a FHSA are eligible for tax deductions.
Who can open a FHSA?
To qualify for opening a First Home Savings Account, an individual must be a Canadian resident, a first-time homebuyer, and aged between 18 and 71 years.
Who qualifies as a first-time homebuyer?
For opening an FHSA account, you're a first-time homebuyer if, in the current year or the past four years, you haven't lived in a home you or your spouse/common-law partner owned. For withdrawals, you qualify if you haven't owned a home during these periods, except in the 30 days before withdrawal.
How can you open a FHSA?
To open a First Home Savings Account, you should reach out to an authorized financial institution, like a bank, credit union, trust, or insurance company. Currently, over 20 financial institutions, including the major six banks, offer the FHSA.
What do you need to open your FHSA?
When setting up your First Home Savings Account with a financial institution, you'll need to provide specific information including:
Social Insurance Number
Date of birth
Any relevant documentation to confirm your eligibility as a qualifying individual
When must you close your FHSA?
The active period for your First Home Savings Account starts on the day you open it and ends on December 31 of the earliest year among the following: 15 years after the account's opening, the year you turn 71, or the year after your first eligible withdrawal.
