The First Home Savings Account (FHSA) is a program implemented in 2023 to help Canadians save for their first home. Similar to the RRSP, FHSAs are tax decuctible, and you don’t pay any tax on the growth. Due to the tax savings, FHSA are a very powerful tool to quickly save for your first home. That said, they are only available to qualifying first time home buyers. Check the government’s website to see if you qualify for this program.
Just like other registered accounts, FHSAs come with tax benefits, but they also have restrictions. In this article I am going to cover:
- FHSA Contributions
- Withdrawing from a FHSA
- Maximizing Usage of FHSAs
FHSA Contributions
Similar to other types of registered accounts, First Home Savings Accounts can be seen as a bucket to hold assets (stocks, bonds, GICs, cash, etc.). You can have any number of FHSAs open, so long as your total contributions do not exceed the contribution limit. As with RRSPs, FHSAs are tax dedcutible. This means that any contributions are seen as a deduction from your income. So if you made $60,000 in income, but contributed $5,000 to an FHSA, you will be taxed as if you make $55,000. This tax deduction is a really powerful tool for saving, as it means you can used those saved taxes to accelerate your savings.
Contributing to an FHSA
First Home Savings Account contributions are tax decutible, but you may be thinking, “my employer takes the tax off my paycheck, how can I get this un-taxed money into my FHSAs?” Similar to RRSPs, any contibutions you make into an FHSA can be claimed when you file your taxes. Any tax you paid on the contribution will be returned to you in the form of a tax return.
FHSAs can also have direct transfers made from RRSPs (and vice-versa) without any immediate tax consequences, so long as it’s a direct transfer and it doesn’t exceed your contribution room. This is done through your financial institution and requires you to fill out a form.
FHSAs may sound very similar to RRSPs, and though they are both tax-deductible, there are two key differences to call out:
- Employers can contribute directly to your RRSP, without taking off the income tax. As of this writing, I have not seen employers offer the same option for FHSAs. This may change in the future, so keep an eye out for this option.
- FHSAs follow the calendar year. This means that a contribution made any time in 2024 would be considered in the 2024 tax year. RRSPs have the two month grace period, meaning contributions made before March 1st can be claimed for the previous year. FHSAs do not have this grace period.
Contribution Limits
First Home Savings Accounts have a contribution limit of $8,000 in the year they are opened, and a lifetime limit of $40,000. This contribution limit includes both deposits and transfers from other registered accounts. So if you transferred $4,000 from your RRSP into your FHSA, you only have $4,000 more in contribution room in your first year.
Similar to other registered accounts, overcontributions are taxed at a rate of 1% per month on the over-contribution. That penalty will add up really quickly, so be sure to keep an eye on your contribution room. You can find this on your notice of assessment.
Withdrawing from a FHSA
With First Home Savings Accounts, there are three ways that money can be taken out from a FHSA:
- A qualifying withdrawal
- A designated withdrawal/transfer
- Treating it as income
FHSAs must also be closed in the year of the earliest of the following events: the 15th anniversary of opening your first FHSA, you turn 71 years of age, or the year following your first qualifying withdrawal.
Qualifying Withdrawals
Qualifying withdrawals are withdrawals that are used to purchase a home. Now there are a number of criteria to meet, but the gist is that:
- You qualify of as a first time home buyer
- You have a written agreement to build/buy a home, with acquisition/construction completion before October 1st of the following year.
- You intend to occupy the home as your primary residence within one year of building/acquiring it
When you meet the necessary criteria you are able to withdraw everything from your First Home Savings Accounts without paying any tax. This of course is the ideal way to withdraw from your FHSAs (and the whole point of opening an FHSA in the first place). Unless extreme circumstances occur, this is the route I’d take.
Designated Withdrawals/Transfers
Designated withdrawals/transfers allows you to withdraw or transfer any money that had previously been contributed/transferred into your First Home Savings Accounts without any taxation.
The way I’m interpreting the governments definition is that you can withdraw up to the amount that you deposited, and you can transfer out the amount you transferred in. So if you deposited $10,000, you can withdraw that same amount without taxation. Similarly if you transferred $5,000 from your RRSPs, you can transfer that $5,000 back into your RRSP (so long as you don’t exceed your contributions).
However I don’t think you can transfer out money that you deposited. So in the above example where you deposited $10,000 and transferred in $5,000, you can’t withdraw $12,000, since only $10,000 was deposited. Even though there’s $15,000 in the account. Similarly you cannot transfer out $7,000 since you only transferred in $5,000. That said, I am not a financial professional so I recommend you speak to your accountant about the specifics.
Withdrawing as Income
The last option is to withdraw from your First Home Savings Accounts as income. If you couldn’t withdraw for a home purchase, and you’ve already maximized your designated withdrawals/transfers, any further withdrawals would be treated as taxable income.
This could result in a hefty tax bill, especially if it was all withdrawn in one year. Let’s imagine you maxed out your FHSA ($40,000), and over a few years it doubled to $80,000. The initial $40,000 could be withdrawn as a designated withdrawal, but the remaining $40,000 would be taxed at your marginal rate. And adding an additional $40,000 of income in a single year would result in a significant tax bill. As such, I’d avoid this wherever possible, taking the qualifying withdrawal route.
Maximizing Usage of FHSAs
To get the most out of your First Home Savings Accounts, there a few things I would suggest:
The first tip I have applies to all registed accounts, but is worth repeating: Invest the money, and give it as much time as possible to compound. Having your money in cash will not result in any growth, so it’s important to invest your FHSA funds – how you invest depends on your personal risk tolerance and desires. As with any investments, compounding can be super powerful, so long as it has time to work it’s magic. Getting money invested early and letting it grow for as long as possible is key.
The second tip I’d have with regards to allocating your savings is to prioritize the FHSA over the RRSP. This isn’t to say that you should completely ignore your RRSP. But the FHSA has the same advantage of being tax-deductible, but has less restrictions/considerations than your RRSP. Namely there’s no need to pay back any funds used to purchase a house (unlike the Home Buyer’s Plan), and there’s no tax bill at the back-end (unlike RRSPs, where you’ll pay the tax in retirement). For these reasons I’d allocate more of my money to FHSAs than RRSPs until I’ve maxed out my FHSA.
Lastly, the key with these tax deductible accounts (FHSAs, RRSPs), is to re-invest your tax return. Contributing to these accounts reduces your taxable income, and typically results in a sizeable tax return. From a wealth building standpoint, spending this tax return in frivolous ways does you no favours. Instead, you should re-invest it to allow you to save for your first home faster. Thus helping you build your long-term wealth.
Conclusion
In conclusion, the First Home Savings Account is a great tool for Canadians to save for their first home. As with other registered accounts, the advantages that come with this program come with some restrictions, so it’s important to be aware of them. I will definitely be taking advantage of the FHSA for my first home, and I hope I’ve given you the tools to get started as well.
Looking to learn more about registered accounts? See my article:
Wondering where to put your money first? Here’s my recommendations: