More and more banks and investment companies are offering the account. That's because the total contribution limit is only $40,000, and the annual maximum is $8,000. The FHSA can't keep up with the high home prices in big cities, but it's too good to pass up when saving for a down payment.
FHSAs combine the best features of tax-free savings accounts (TFSAs) and registered retirement savings plans (RRSPs).
You get tax breaks on your contributions, like an RRSP, and tax-free withdrawals when you buy a home, like a TFSA. Plus, like RRSPs and TFSAs, the investment profits earned are also tax-free.
Before the FHSA, people could choose to save for a first home through the federal Home Buyers’ Plan, where you borrow money from your RRSP or TFSA. “Now the decision is really simple,” says Natasha Knox, a certified financial planner at Alaphia Financial Wellness. “Use the FHSA for that purpose.”
The FHSA is available to people who did not own a home in the year before opening the account or in the previous four years. You do not qualify if your spouse or common-law partner owned a home during that period. An FHSA must be closed after 15 years or by the end of the year in which you turn 71. If you do not end up buying a home, you can roll over the savings into an RRSP or registered retirement income fund without any tax consequences and without affecting your normal RRSP contributions.
If you want to withdraw money from an FHSA for purposes other than buying a home, the funds are added to your income and taxed accordingly.
One aspect of this account that requires some thought is how you plan your contributions. An 18-year-old consumer will likely benefit little from the tax benefits associated with an FHSA.
Also, it will likely take that consumer more than 15 years to save for a home in expensive cities like Vancouver and Toronto. In these inflationary times, finding money to contribute to an FHSA can be a very difficult task for young people. Parents and grandparents, you can help them by gifting money without tax consequences to you or the recipient.
Eligible investments for an FHSA include the same options as for a TFSA or RRSP. These include stocks, bonds, ETFs, mutual funds, and covered investment certificates.
In other words, an FHSA is unlikely to be enough to save for a home in Toronto or Vancouver.
The average home price in these cities on the secondary markets is over $1 million and requires at least a 20% down payment. You can use the tax benefits of FHSA contributions and add those funds to an RRSP or TFSA as additional savings for a down payment.
Olga Balaur