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What is the FHSA and who is it for? What are the benefits? How do you invest in it? You’ll want to stick around until the very end of the video, as I share my best FHSA tips & tricks.
Full Transcript
Hey everybody in this video, I'm going to go over the newest way for Canadians to save towards the purchase of their first home, the First Home Savings Account or FHSA. In this video, we'll go over what it is, who it's for, as well as its benefits. And you'll want to stick around till the end because I'll reveal some lesser known tips and tricks to maximize the amount of money that you can save in the first home savings account. So you definitely don't want to miss out on that. So let's get started.
Let's start by talking about what the FHSA is and who it's for. The FHSA or First Home Savings Account is a registered savings plan for Canadians to save towards buying their first home. It combines the best of both worlds when it comes to the RSP and the TFSA. Now I'm just going to give you a bit of a silly example here, but just bear with me for a second, it's a good way to illustrate exactly the benefits of the FHSA.
Imagine the RSP and TFSA got married and they had a baby together. That is the FHSA in a nutshell, it takes the benefit of the RSP the tax deduction that you can claim with that. And unlike the RRSP, and similar to the TFSA. When you withdraw funds from the first home savings account, you don't have to pay any income tax, you're able to withdraw it tax free. So that's how it combines the best of both worlds. Now, before opening a first home savings account, it's important to make sure that you qualify.
There are three important things to be aware of. The first one is you have to be a resident of Canada. The second thing is that you have to be at least 18 years of age and under age 71. And the third thing is you have to qualify as a first-time homebuyer and that's where it can get a little tricky. Now in order to be considered a first-time homebuyer under the FHSA, neither you nor your spouse could have lived in a property that you've owned in the year that the F HSA was opened or any of the previous four calendar years. Now, if both you and your spouse or common law partner are first time homebuyers, it's nice and straightforward. But if one of you is a homeowner and the other isn't, that's where it can get a bit confusing.
Now let's say for example, you move in with your common law partner and your common law partner is a homeowner and lives at the property and you move into the property by moving into the property and claiming it as your primary residence, you can no longer participate in the first home savings account, so it's important to be aware of that.
Also similar to the RSP homebuyers plan, it's possible to be a property owner and still participate in the first home savings account. As long as it's not a property that you live at. The most common example of that is a rental property. Some people choose to buy a rental property, and then they rent or perhaps live with their parents. In that instance, as long as you've never occupied the property as your primary residence. Even if you own a rental property, you can still qualify for the first home savings account as long as you meet the other qualifying criteria.
Now let's talk about the benefits of the first home savings account. As mentioned earlier, the first home savings account combines the best of both worlds when it comes to the RSP and TFSA. Similar to an RSP. When you contribute money to the first home savings account, you get a tax refund from the government. Similar to both the RSP and TFSA. Your money grows tax free inside the F HSA. And similar to the Tax Free Savings Account, when you withdraw the money from the first home savings account. You don't have to pay any income tax on it.
Now a huge benefit that the RRSP homebuyer plan shares with the first home savings account is that you're able to make tax free withdrawals from both accounts towards the purchase of your first property. But the first home saving His count is more flexible. What I mean by that is with the RSP homebuyer plan, you're required to pay back the money that you borrow in up to 15 years, or else you'll lose the RSP room forever, and you'll have to pay tax on the money. But there's no such obligation with the first home savings account. And I think that makes a ton of sense. Because when you're buying your first home, most Canadians are pretty cash strapped, you're not at your peak earning years. And those can be the most expensive years of your life, especially when you're buying your first property. And maybe you're getting married and starting a family. Those years after buying the home can be very expensive. So I think that's a huge benefit that the first home savings account has that the RSP homebuyer plan does not end.
Next, let's talk about basics of the first home savings account. With the first home savings account, you're able to contribute up to $8,000 per year with a lifetime contribution limit of $40,000. That means if you contributed the $8,000 a year for five straight years, you could maximise the contribution limit, meaning that you would have $40,000 in the account to grow from there towards the purchase of your first home.
Here's a quick tip with the first home savings account, it can be a good idea to open a first home savings account a year before you're able to start contributing money. The reason for that is that you're able to carry forward contribution room for one year, meaning you can carry forward $8,000. Let's say you skipped making a contribution one year and you opened it sooner than you're able to save. That means if you're able to, let's say save $16,000, because you have the $8,000 from a previous year, you're able to contribute $16,000 In one year, your normal contribution of $8,000 plus the carry forward of $8,000 to $16,000 in total.
But unlike the RSP, you're not able to carry forward contribution room indefinitely. So that's something important to be aware of, you can only do it for a single year. And also you have to use the funds for the first home savings account within 15 years.
Now let's talk about the elephant in the room the actual name of the first home that savings account. Now I'm not the biggest fan of the name, it borrows from the Tax Free Savings Account, they both have savings account at the end. And that name is really misleading, in my opinion, a better name would be tax free investment account, because it's not just a savings account, you can hold a lot more than simply savings. And if you're not planning to buy a property for many years, and you're just getting started sooner, and you're not planning to perhaps buy a house for three, four or five years, you can make your money grow a lot quicker by investing in something besides just a simple savings account.
Now being a registered account, there are limitations in terms of what you can invest in the first home savings account. But you're essentially able to invest in a lot of the same things as you can with the Tax Free Savings Account as well as the RSP. So you can invest in stuff like mutual funds, index funds, exchange-traded funds, as well as stocks and bonds. And that's really how you can grow your money. Like I mentioned earlier, if you're not planning to buy a home for a few years now if you're planning to only buy a home and maybe a year or two, then maybe it's a good idea to stick with something safe like a savings account or a GIC. But like I said, if you're not planning to buy a home for three to five years, that's when you can invest in this stuff like I mentioned, index funds and ETFs and mutual funds and really help grow your money even more so that.
Another cool tip is you can actually use the RSP homebuyer plan and the first home savings account together. It's not one or the other. Now the first home savings count is clearly superior to the RSP homebuyer plan. But if you're looking to put down a substantial amount of money on a property, then it can be beneficial to use both accounts there. So with the RSP homebuyer plan, you can withdraw up to $35,000 towards the purchase of your first home. And with the first home savings account, you can withdraw the $40,000 you initially contributed plus all the growth that's a key point that many of you People mess with the RSP homebuyer plan, you're only able to withdraw 35,000. But let's say that you contributed $40,000 to the first home savings account, and your money grew by $10,000. So now you have $50,000 in the account there. So that means that you'd have $50,000, you could take out of the account, plus the $35,000. So that's $85,000.
And let's say you're buying with a partner, spouse or common law partner. And they also have money in their RSP that they're taking out under the first time homebuyer plan, and they also have a first home savings account. That means just to make the example simple, we could just do $85,000 times two, and that will be $170,000, you can potentially put towards the downpayment of your first home. So that is a cool tip that you may not be aware of is that you can actually transfer money from your RRSP to the first home savings account.
Now if you're doing that, just make sure that you don't contribute more than the annual contribution limit of $8,000. So you don't want to transfer more than $8,000 over and that's everything you need to know about the first home savings account. If you enjoyed this video, please like share and subscribe. It really means a lot it makes a huge difference.
And if you have any questions, please comment down below. And if you found this video helpful, you'll be excited to know that I've created a free guide that summarizes the key benefits of the first home savings account. To obtain a free copy. Please email me at Sean@burnyourmortgage.ca Thanks for watching.