Episode #64: Everything You Need To Know About The First Home Savings Account
If you’re a Canadian looking to save money to buy your first home you’re going to want to learn about the First Home Savings Account. In today’s episode I’m going to tell you everything you need to know about this account and how you can start using one to prepare for buying your first home.
This account was just released on April 1st 2023, although the big 6 Canadian Banks don’t currently have FHSA’s available to open yet. Apparently it takes some time to set these accounts up in their systems, but the estimates are that these accounts will become available to be opened sometime around mid 2023. Keep an eye on your bank and other financial institutions so you can open one when they come available.
Eligibility
To be eligible to open your first home savings account you need to be at least 18 years old, you need to be a Canadian resident, and you must be a first time home buyer. If you own another property, even if you’re not using it as your primary residence you are not eligible for this account. You are eligible however if it has been over 4 years since you’ve owned a home.
Once you open the account you’re allowed to keep it open for 15 years, or until you turn 71, or until 1 year after you buy your first home, whichever comes first. If you don’t buy a home within this time period you have two options regarding what to do with the money you’ve saved into this account. You can either roll it over into your RRSP or RRIF account tax free, or you can withdraw the money in which case you will pay income tax on that cash.
Contribution Limits
As with other tax advantaged accounts there are contribution limits to this account too. You’re allowed to contribute up to $8,000.00 a year, the contribution room starts accumulating as soon as you open the account, and any unused contribution room rolls over into the next year. You’re allowed to contribute a maximum of $40,000.00 into this account. This doesn’t mean the account can only hold $40,000.00 though. You do have the opportunity to grow your money to a value over $40,000.00 by investing, but you’re only allowed to contribute $40,000.00 in total over the lifetime of the account
Withdrawal Rules
Just like the ‘first time home buyer’s plan’ feature of the RRSP, you absolutely do not want to withdraw the money to ‘buy a home’ before you’re actually buying the home on paper. When you withdraw the money from the account, you need to have written proof that you’re actually buying a home with the money you’re withdrawing by the absolute latest date of October 1st the following year. Otherwise you will be taxed on it and you will lose a significant portion of your money to taxes. You will also not regain the contribution room in your FHSA if you make a non-qualifying withdrawal. Don’t mess this up or it will be a costly mistake.
The FHSA Tax Advantages
So, what are the ‘tax superpowers’ that the government has given this account that’s got everyone all excited? Essentially it’s a combination of the best of both worlds of your RRSP and your TFSA. Just like your RRSP, when you contribute money to your FHSA account you will get a tax break on that money. It will lower your taxable income and you don’t have to pay income tax on the money you contribute to the account. Like the TFSA you can also withdraw the money to buy your first home completely tax free. This means as long as you’re using the money to buy your first home you never have to pay tax on that money. Finally, like both the RRSP and the TFSA, your money is allowed to be invested and to grow tax free in this account. So you don’t pay tax on the money you contribute, if that amount of money grows while it’s in the account you don’t pay tax on the growth, and when you withdraw the money you don’t pay tax on it. All in all this could be a very lucrative tax break for someone who uses this account to its full potential.
So, those are the basic facts that you need to know about the account, now let’s talk about the potential cons of the account and how to make sure you’re using it properly so you don’t make the mistake I can see a lot of people potentially making with this account.
Avoid This Investing Mistake
Next, I’m concerned about the tax free investment growth incentive that this account offers people. Don’t get me wrong, tax free investment growth is great, I love it for the RRSP and TFSA and it makes perfect sense for what these accounts are designed to do, which is investing for long term safe growth to fund your retirement. The FHSA account however is designed to function on a much shorter time horizon. It can only be open for 15 years, and I doubt most people using this account will even use it for as long as 15 years. And the problem with this tax free growth incentive is that it incentivises people to invest the money that they need to buy their first home in a fairly limited period of time, which means they’re putting that money at risk in the stock market.
If you’re long term investing in safe investment products, it’s totally safe and you won’t lose money. If you’re short term investing even in safe investment products, there’s a very real risk that you could lose money.
So, if you’re 22 and just starting your career and don’t intend to purchase a home until sometime in your 30’s by all means use this account and invest your contributions to use that tax free growth potential. If you’re hoping to buy a home in the next two years though, that money should not be invested unless you’re happy to extend your home buying plan into the future if the market takes a beating for a year or two.
Also, when you decide that this is the year you’re buying a home, the funds in your FHSA look good, your financial ducks are in a row, please for the love of god make sure you sell your investments in the account then and there. Do not hold on to them and risk potentially losing a chunk of the money you have set aside for your down payment right before you go to contract on your home.
Again, I love the tax free growth incentive, I just think that we need to do a lot more investing education to teach people how to use this tax perk safely so it doesn’t actually hinder their home buying plans. I worry that people will look at the short time horizon of the account and decide to buy riskier investments to try to maximize their money in a short period of time, or that they’ll not sell their investments in time before going to contract on a home and risk losing some of their down payment in a market correction.
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