A First Home Savings Account should be on every first-time buyer's holiday wish list

Introduced in April 2023, the First Home Savings Account (FHSA) is a game-changer for Canadians looking to save for their first home.

Combining the best features of an RRSP and TFSA, this account offers tax benefits and investment opportunities tailored to first-time buyers.

Here’s why every aspiring homeowner should consider opening one—and how to maximize its potential.

What is the FHSA?

The FHSA allows first-time buyers to contribute up to $8,000 annually, with a lifetime cap of $40,000. Contributions reduce your taxable income, similar to RRSPs, while withdrawals for a qualifying home purchase are tax-free, just like a TFSA.

The tax advantages alone can make a significant difference. For example, if you’re in the highest tax bracket, an $8,000 contribution could yield a tax refund of nearly $4,000.

Who should open an FHSA?

While the FHSA offers tremendous benefits, it’s not for everyone. Here are some guidelines to help you decide:

• High income: If you’re in a higher tax bracket, the immediate tax deduction makes contributing a no-brainer. Contribute before year-end to claim this year’s tax refund.
• Modest income or limited funds: If your taxable income is low or money is tight, open an FHSA now to start the clock on contribution room. However, delay contributing until your income or financial situation improves.
• Uncertain timing for homeownership: Even if you’re unsure about buying a home soon, the FHSA is worth considering. Funds grow tax-free, and unused amounts can be transferred to your RRSP without affecting RRSP contribution room.

Maximizing FHSA contributions and refunds

Carrying forward contribution room
Unused contribution room carries forward to the next year, up to $8,000. For example, if you open an account this month and don’t contribute in 2024, you can contribute $16,000 in 2025. However, only contributions made within a calendar year qualify for that year’s tax refund.

Timing for double refunds
Opening an FHSA in December and contributing $8,000 allows you to claim this year’s tax deduction. If you contribute another $8,000 in January, you can claim a second deduction in the following tax year. High-income couples leveraging this strategy could receive roughly $12,000 to $16,000 in refunds over two years.

How the FHSA works with partners and family

• Joint home purchases: Even if one spouse or partner isn’t on the mortgage, both can contribute to separate FHSAs as long as they meet CRA’s rules for legal ownership.
• Gifting: Contributions can be funded by a gift from anyone, but the withdrawal must come from the FHSA holder’s bank account.

Investment strategies for your FHSA

Keep it low-risk
If you plan to buy a home within five years, prioritize safety. Conservative pundits often recommend avoiding stocks completely to protect your principal from market volatility.

That is solid advice, but for those willing to take on slightly more risk, you could consider an ETF investing in Canadian bank stocks or a broad-based index fund like the Dow Jones Industrial Average (DJIA). For most, it’s wiser to stick to these options:

• High-interest savings accounts: Virtually risk-free with moderate returns.
• Mutual fund-style investment savings accounts: Low-cost and CDIC-protected.
• GICs and ETFs: Suitable for medium-term growth with minimal risk.

Long-term growth
Not planning to buy soon? Use the FHSA to build wealth. Contribute annually up to $40,000, and let your investments grow tax-free. If homeownership isn’t in the cards, you can transfer the balance to your RRSP without penalty.

FHSA rules you need to know

• Account closure and withdrawal: After your first withdrawal, you must close the account by the end of the following year.
• Qualifying home purchases: Funds must be used for a principal residence. The home must meet CRA’s criteria, and you must live there within one year of purchase.
• No accumulating contribution room: Unused contribution room doesn’t stack endlessly, unlike a TFSA. It’s capped at $8,000 annually.

Unique FHSA strategies

RRSP transfers
You can transfer RRSP funds into an FHSA, but this won’t yield an additional tax deduction. However, this strategy is excellent for individuals with limited RRSP room or large pensions.

Use it as a long-term savings tool
Even if you don’t buy a home, the FHSA can be an effective way to save. By contributing $8,000 annually, you can reach the $40,000 lifetime maximum in five years. The funds can then be transferred to your RRSP for continued tax-deferred growth.

Steps to get started with a FHSA

1. Open an account: Choose a provider that suits your needs.
2. Choose investments: Focus on safe, low-cost options, especially if you plan to buy within five years.
3. Contribute strategically: Time contributions to maximize tax benefits and refund opportunities.

The bottom line

The FHSA is one of the most effective tools for first-time buyers, offering tax savings, investment growth, and flexibility.

Whether you’re planning to buy soon or just starting your savings journey, the FHSA provides a clear path toward homeownership. If you’re unsure how to make the most of it, ask a financial professional.

Source: Canadian Mortgage Trends