Saving for your first home.
Saving for your first home is an exciting time for anyone, you are finally able to start putting money away for that first home purchase!
Here is a breakdown of the BEST ways to save money for your first home.
First Home Savings Account (FHSA):
The FHSA was introduced by the government as a way to help Canadians save their down payment faster and more tax efficiently (hard to believe right?!).
Here are the key highlights, and then we will deep dive into them.
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A new tax-advantaged account designed to help Canadians save for a down payment
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Combines the power of the TFSA and RRSP to help prospective first-time home buyers
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Contributions to the FHSA are tax deductible, while withdrawals are tax-free giving you the “best of both worlds” while investing for your home purchase
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Contribute up to $8,000 per year once opened, up to a lifetime maximum of $40,000
Firstly, lets talk about the tax deduction and how that can boost saving for your first home WAY faster. If you make $80,000 per year and contribute $8,000 into your FHSA you will get back approx $2256 in BC. Tax return calculator
This means you just increased your savings by 22%!
The tax-free withdrawal is the second beautiful thing about this account, you can withdraw the whole amount and there are no taxable events. This means you keep every penny you withdraw AND it grows tax-free!
The icing on the cake? Well, unlike your RRSP Home Buyers Plan you don’t have to contribute back into the account.
Who can open a First Home Savings Account?
To open an FHSA, you must:
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Be between the ages of 18 and 71
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Be a current tax resident of Canada
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Have not lived in a home that you or your partner owned in the current calendar year or any of the previous 4 calendar years
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Be opening the account to save for buying a qualifying home in Canada
This is easily the best option for any first-time home buyer, but what happens if you already have RRSPs going since this program is new? Simple.
Well, you can use BOTH of these accounts! Yes, both!
The RRSP homebuyer plan used to be the be-all, best way for any first-time home buyer to save. Now that it has been relegated to 2nd position, the Home Buyers Program is still a great program that offers the same benefits of having the tax deduction, unlike the FHSA you can’t only use up to $35,000 and this must be prepaid back over the next 15 years.
What happens if you don’t pay it back? The amount you were to contribute is added to your annual income and you have to pay taxes on it.
Let’s use $15,000 as an example. If someone pulled $15,000 out of their RRSP for the home buyers program, they would then have to repay $1,000 per year into the RRSP, otherwise that $1,000 is added to their annual income at tax time.