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Not all of the details surrounding FHSAs have been ironed out yet. The federal government plans to release more information in the near future, as it works with financial institutions to make the accounts available to the public next year. However, based on the info revealed in the 2022 budget, here’s what you need to know.

What is the first home savings account?

When the first home savings account officially launches in 2023, it will allow Canadians who are 18 or older and haven’t owned a home in the current calendar year, or in the previous four calendar years, to save up to a total of $40,000 towards the purchase of a home.

Jessica Moorhouse, a millennial money expert and host of the More Money podcast, says the FHSA combines elements of the tax-free savings account (TFSA) and registered retirement savings plan (RRSP), allowing account holders to store cash, stocks, bonds, mutual funds or ETFs. “However, it is specifically for home buying—and specifically for buying your first home.”

What is the FHSA contribution limit?

FHSA account holders can contribute up to $8,000 a year, while earning a tax deduction on the contributions, like with an RRSP. Plus, any money withdrawn from an FHSA—as well as any investment growth in the account—is not taxed, like with a TFSA, as long as it is used toward the cost of a first home.

Account holders have 15 years from the time they open the FHSA to spend the money on their first home. If they don’t spend the money within that time frame, the account must be closed and the money transferred to an RRSP or a registered retirement income fund (RRIF). Alternatively, account holders can still withdraw the funds from their FHSA at that time, but, if the funds are not used to purchase a home, they become taxable.

“The clock is ticking once you open up that account and start saving,” Moorhouse says. “You really have some strict guidelines to adhere to.”

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Unused FHSA contribution room can carry forward to the following year, up to a maximum of $8,000. For example, if you contribute $5,000 one year, you would be allowed to contribute up to $11,000 the following year ($8,000 plus the $3,000 from the previous year).

Moorhouse recommends FHSA holders use the account for passive investments, like index ETFs, rather than just holding cash. Someone who contributes $8,000 to the account every year will reach the maximum lifetime limit in five years, leaving them with only 10 years to grow that money, before it needs to be transferred or withdrawn. The money saved is “not going to do a heck of a lot just sitting in cash with inflation at 6.7% [in May],” Moorhouse says.

Choosing between the FHSA or the Home Buyers’ Plan

Canadians already have access to the Home Buyers’ Plan, a program that allows first-time home buyers to unlock up to $35,000 from their RRSP account, tax-free, and then pay back the withdrawn funds within 15 years. Unfortunately, there’s a catch—you can’t use both the FHSA and the Home Buyer’s Plan at once.

Which should you choose? Moorhouse says it depends on whether you already have money socked away in your RRSP. With the Home Buyers’ Plan, she says, a homebuyer can lean on their retirement savings to pull out money for their first home without losing room in their RRSPs. “You’re basically just borrowing from yourself—and paying yourself back in the future,” Moorhouse says.

The FHSA might be a better bet than an RRSP if you plan on buying a home but think you might change your mind in the future. That’s because you can ultimately decide to transfer money saved in your FHSA to your RRSP without affecting your contribution room in the latter. Once withdrawn from the RRSP, however, the money would be taxed in the usual manner.

Will FHSAs make home ownership more affordable?

In its most recent budget, the federal government announced different measures aimed at making housing more affordable in Canada. As one of them, the FHSA could help prospective home buyers save up for their first house without using the money saved in their RRSPs or TFSAs.

Moorhouse has her doubts, however, that it’ll actually address the root of Canada’s housing problem. “You’re not addressing the core issue—which is availability. There’s not a lot of housing and it’s going to take decades for us to catch up to the demand for housing,” she says. “Housing is still so incredibly expensive.”.

Rather, Moorhouse views the FHSA as a measure taken by the federal government to appease Canadians worried about home prices. “We’re just creating this new, complicated tax-efficient account just for the purpose of home buying,” she says.

Bottom line

Once available, the FHSA will offer first-time home buyers one more way to save for a home—which, in light of Canada’s exceedingly high real estate prices, is never a bad thing. More details about the FHSA rules are expected in the near future. In the meantime, first-time home buyers should begin exploring how they might be able to optimize their savings using all the tools available to them.

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