If you’re looking to buy your first home in the coming years, I have great news for you! The federal government released its 2022 federal budget and having more affordable housing was high on its agenda. And, drum roll, please…They announced a brand new tax-free savings account for first-time home buyers to help them save their down payment in advance of their purchase.
So, what does this mean for you? Let’s dive in.
Must Know Facts About The New First-Home Savings Account
What kind of savings account is it?
A first home savings account (FHSA) is a registered plan allowing you, as a prospective first-time home buyer, to save for your first home tax-free (up to certain limits) and you will be able to open this FHSA starting April 1, 2023.
The new policy will allow new home buyers to save up to $40,000 on a tax-free basis. The annual maximum contribution to the account is $8,000 per year.
It’s tax-free coming in, and tax-free coming out!
How does that benefit a first-time home buyer?
This savings account is similar to a Registered Retirement Savings Plan (RRSP) by allowing the contributions to be tax-deductible. Every dollar you put into the new savings account (within your specified contribution limit) reduces your earned income for that year. Which means you don’t pay as much income tax. It actually reduces the amount of tax you end up paying throughout the year and is very beneficial if you are currently in a high tax bracket. Because the growth of your account is sheltered from tax, you don’t have to pay taxes on the interests, the dividends, or the capital gains from your investments either.
Where can you add savings too after you max out your FHSA?
Similar to an FHSA is a Tax-Free Savings Account (TFSA). Allowing you to withdraw money at any time and it still gives you a tax-free advantage. You put your money into the account, and it grows over time. It’s considered tax-free because any of the money you take out is exempted from taxes. For example, if you work at your job and take $200 from your paycheck and put it into a TFSA, your employer would have already deducted the tax you would have to pay to the government for you. So, you have already paid tax on that $200 you put into your account. But, if you leave that $200 in your TFSA account for 5 years and over that 5 years you make $25 in interest, you don’t pay tax on the $25 it made in interest. And, when you take the money out of that account you don’t pay any fees or taxes on it at that point either.
This new savings account — The FHSA — combines all the good traits of an RRSP and a TFSA, making it a VERY strong tax-savings program, that I recommend you take advantage of as a first-time home buyer.
Want to take advantage of the new tax-free home savings account?
Although this one account won’t allow you to save up the full 20% down payment on a home in a short period of time, this is still a great way to save up while taking advantage of all the benefits. If you’re able to save up more than $8,000 per year (the max of this account), then I recommend opening up a tax-free savings account (TFSA) to put any extra income off to the side to be used as part of your down payment as well.
To be eligible, you must be a resident of Canada who is at least 18 years old, and you must prove that you haven’t owned a home or lived in a home owned by your spouse or common-law partner in the four preceding calendar years.
Now, before you immediately take advantage of this offer, it’s a good idea to talk to a reputable financial advisor, like myself, to make sure it’s right for you – especially since it’s brand new. I can help you develop a game plan to save up for your very first home, get approved for the mortgage you need, and get the keys to your dream house in no time! Give me a call at 705-315-0516 or sign up for a free consultation today to get started!