Saving for your first home?

Credit to Author: Shalini Dharna| Date: Mon, 17 Jul 2023 17:36:48 +0000

Canada’s new registered plan for first time home buyers and why you should use it

In April 2023, a new registered plan called the First Home Savings Account (FHSA) was introduced in Canada. This provides the tax benefits of both a Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA) with the added benefit of being a non-repayable payment towards your first home.

The FHSA is only for first time home buyers. However, if you once owned a home but have not been in a principal residence/living with your spouse or common law partner in their principal residence for the previous five years (current plus previous four) then you may be eligible as a first time home buyer again.

FHSA Vs TFSA vs RRSP
To properly answer this, we first need to learn about these registered savings accounts, which serve as a special investment toolbox with certain tax perks associated with them.

TFSA was introduced in 2009. The main benefit of the TFSA is that the growth within the TFSA is not taxed – but there is a limit to how much you can contribute into the account.

RRSP is designed as an incentive to save for retirement. It allows you a tax deferral on your current year taxes, but when you withdraw from it you trigger a tax payable. There are two exceptions to this: the lifelong learning plan and the first
Home Buyers’ Plan.

The Home Buyers’ Plan (HBP) is the inspiration for the FHSA. The biggest grievance people had with the HBP was that, while you could contribute to your RRSP and get the tax deferral and then withdraw $35,000 from HBP to put towards
your first home, you had to pay it back over 15 years.

With the FHSA you get the best of the RRSP and TFSA. You will get the tax deferral on your current year taxes like the RRSP, tax free savings like the TFSA, and the growth within the FHSA account. But when you withdraw from the FHSA for your first home, you do not need to pay it back. So, for those with aspirations to own a home one day, the FHSA is the best of all registered accounts.

However, there is a contribution limit of $8,000 you can make per year into the FHSA, with a total lifetime limit of $40,000.

Making a registered account work for you
A common mistake many people make when working with any registered account is not working with a financial advisor to ensure the underlying funds are performing well. As I mentioned earlier, a registered account is an investment toolbox. While there are tax advantages, the ultimate goal is growth. If the underlying funds within the toolbox are not performing well, you won’t have enough money/growth to achieve your goals. What is the point of accounts offering tax-free growth if the funds aren’t growing?

What’s the right choice of registered account for you?
If you want to one day buy your own home, the FHSA is the way to go. If you do not happen to buy a home, you can transfer the money into an RRSP account with no tax consequences. Once you have maxed out your FHSA, you can contribute into the RRSP and use the HBP in addition to the FHSA towards your home down payment (but you will have to repay the HBP portion). Make sure you work closely with your financial advisor to ensure the underlying funds are performing well to give you the maximum down payment possible for your home.

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