Supercharge Your Home Savings: A Guide to the First Home Savings Account

The journey towards buying your first home is an exciting time but it requires extensive financial planning. With inflation and home prices rising fast, saving for a down payment can become a challenge.  When it comes to saving for your first home, the First Home Savings Account can lend you an extra hand and get to owning your first home sooner.

 In this blog post, we will walk you through everything you need to know about starting your first home savings account in Canada.

What is the First Home Savings Account?

As of April 1st, 2023,  Canadians 18 years of age and older who are preparing to purchase their first home now have the ability to enroll in a tax-free First-Home Savings Account (FHSA). It was first introduced in the federal government’s 2022 budget and is a combination of a Tax-Free Savings Account and a Registered Retirement Savings Plan, by allowing you to make tax-deductible contributions and tax-free withdrawals.

Am I eligible for the FHSA?

In order for you to be eligible for the FHSA and open an account, you must be at least 18 years or older, a Canadian resident, and you must be a first-time homebuyer. To more clearly define a first time homebuyer, you must not have lived in a home that you or your spouse/partner have owned in the current or previous 4 calendar years. Please note, you can only contribute to your own FHSA and cannot add to your partners or common-law partners account.

How does a First Home Savings Account work?

As an eligible homebuyer, you can contribute a maximum of $8,000 annually to your FHSA, up to a total of $40,000. When you withdraw from the account, all funds are tax-free, helping you avoid any additional taxes on the withdrawn amount. If you don’t reach your annual limit, you have the option to carry-over the remaining amount to next year, maxed at $8,000.  Even if you opened multiple different FHSA accounts, the contribution limit remains the same and you can’t exceed $8,000 annually or $40,000 lifetime. If you are familiar with a general Tax Free Savings Account, the first home savings account works the same way, a 1% tax is applied on all contributions that exceed the limitations until the excess amount no longer exists on the account. A FHSA can be used for a maximum of 15 years and stay open until the last day of your 71st year, whichever comes first.

What happens when I want to withdraw money from my account?

 When you are ready to withdraw your funds, it is tax-free and quite simple. You have the option to make tax-free withdrawals in a single transaction or multiple withdrawals, depending on your needs..However, specific criteria must be met before accessing and withdrawing the funds. These include being a first time home buyer, having a written agreement to buy or build a home before October 1st following the date of the withdrawal, not acquiring  the home qualification more than 30 days before withdrawal, you must intend to occupy the property as your primary residence, and you must fill out s RC725 Request to withdraw form.

It is your responsibility to ensure you meet the criteria and conditions to make a qualifying withdrawal. If you try to do so without ensuring that you meet every condition, your withdrawal will be treated as a taxable withdrawal and you will have to include it as income on your income tax for the year received.

What are the benefits of a FHSA?

There are several advantages for opening a First Home Savings Account when you are an aspiring homeowner. A First Home Savings Account merges the concepts of Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP) into one account. Any contribution you make into the account is tax-deductible, like an RRSP. In addition, any withdrawal you make from the account is non-taxable, like a TFSA. If you don’t use your savings before the time frame, you can transfer funds into a RRSP. No taxes will be imposed and it won’t affect your RRSP limit. You can use the funds to contribute towards you down payment.

Key Takeaways

The First Home Savings Account (FHSA) gives Canadian home buyers the ability to accumulate funds for the first home while enjoying tax free withdrawal advantages. If you meet the eligibility criteria, you can contribute up to $8,00 annually,with a lifetime maximum of  $40,000 towards a down payment for your first home.When the time comes to buy or build your home, you can withdraw the funds tax-free. Remember, The funds in your FHSA must be used within 15 years of opening, or before you turn 71, whichever comes first.  It is crucial to understand that the purpose of these funds is solely for purchasing your first home, and using it for other purposes will result in tax implications.

So, are you ready to navigate the world of real estate in London, ON? Don’t forget to join the Locorum community today and start earning rewards on your home purchase. You're not just buying a home; you're investing in your future. Let Locorum and the Santa Sells Houses Real Estate Team help you make the most of it.