Canadians now have access to a new savings and investment account to help them prepare for their first home: the First Home Savings Account (FHSA). While the account's primary purpose is to assist Canadians in achieving their dream of homeownership, it can also serve as a valuable retirement tool with proper planning. In this blog, we'll delve into what an FHSA is and how this account works.
An FHSA is a newly established registered savings plan designed to facilitate Canadians' entry into the housing market. Funds in the account can be used exclusively for purchasing a housing unit located within Canada.
What sets the FHSA apart is that it combines features of both an RRSP (Registered Retirement Savings Plan) and a TFSA (Tax-Free Savings Account).
Contributions to the FHSA offer a tax deduction that can be applied against your income, akin to an RRSP contribution.
Like any registered plan, money invested in the FHSA can be allocated to various assets such as stocks, bonds, GICs, etc. Importantly, any income or gains generated within the account are not subject to taxation.
You can withdraw funds from your FHSA without tax liability, provided the withdrawn funds are earmarked for purchasing a qualifying home.
To be eligible for an FHSA, you must meet the following criteria:
• Be a Canadian resident.
• A first-time home buyer
• Be at least 18 years old, although specific age requirements may vary depending on the type of FHSA and your province or territory of residence.
• Not more than 71 years of age on December 31 of the year the account is opened.
The FHSA defines a "first-time" homebuyer as someone who, along with their spouse/common-law partner, has not lived in a qualifying home as their principal residence within the current calendar year before the account's opening or at any time during the preceding four calendar years.
If eligible, you can contribute or transfer up to $8,000 annually into an FHSA, with a maximum lifetime contribution of $40,000. If you contribute less than the $8,000 annual limit, any unused room is carried forward to the following year, up to a maximum of $8,000. This means the total maximum contribution room, including past contributions, can be up to $16,000 annually.
Once an FHSA is opened, the account holder has 15 years to purchase a home or until age 71 to withdraw funds with no tax consequences.
If the individual does not utilize the funds in their FHSA within this timeframe, they have two options:
• Option 1: Transfer the entire balance of the funds into their RRSP on a tax-deferred basis (without affecting RRSP contribution room) or RRIF.
• Option 2: Withdraw funds and pay the required taxes.
Because funds can be transferred to an RRSP on a tax-deferred basis, young Canadians considering saving in an RRSP and an FHSA may find the latter more appealing.
This approach allows them to benefit from an income deduction while retaining flexibility. If they buy a home, they won't be obligated to repay the funds over a specified period (as required by the RRSP Home Buyers' Plan).
Moreover, if the FHSA funds remain unused, they can still be transferred into an RRSP for retirement purposes.
For young professionals deciding between an RRSP and a First Home Savings Account, the FHSA typically emerges as a more flexible and advantageous option in almost every scenario.
In conclusion, the FHSA is a remarkable financial tool that not only paves the way for Canadians to achieve their homeownership dreams but also offers a versatile approach to retirement planning. So whether you're a first-time homebuyer or a young professional planning for the future, the FHSA stands out as a promising choice.
- Brandt Butt, Associate Portfolio Manager/Investment Advisor, CIM®
Brandt is a Portfolio Manager/Investment Advisor and part of an award-winning team at Endeavour Wealth Management with iA Private Wealth. Brandt’s focus is working with incorporated physicians and dentists between the ages of 35-45 who are looking to set themselves up on the right financial path in hopes of reaching a point where they are choosing to work, instead of having to.
This information has been prepared by Brandt Butt who is a Investment Advisor/Portfolio Manager for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained here in may not apply to all types of investors. The Investment Advisor/Portfolio Manager can open accounts only in the provinces in which they are registered.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
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