Preparing Your Financial Future - First Home Savings Account

Introduction

As a Realtor, I often come across close friends and family who mention that they would love to use my services if they were in a stronger financial situation, but that the current market conditions have turned home ownership into an unrealistic goal.

To me, that statement is fair enough. After all, the current interest rates set by the Bank of Canada are currently set at 5% (The worst we've seen in 22 years.)

This fact alone creates a high barrier of entry for many people.?

But as a financial expert, if you were to ask me to break down the real reason that I believe a significant portion of our population is being forced to funnel their hard-earned money into rent payments year after year, I would personally chalk it up to lack of awareness rather than an inherent inability to reach their financial goals.?

After all, these tools and strategies are never discussed in our education system, which makes this sort of knowledge extremely valuable to the average person. The fact of it is that our community needs this information, and I'm excited to share it with you.

Lets go over everything you need to know about the First Home Savings Account (FHSA).?

In my opinion, if you have yet to purchase your first property, (but intend on doing so within the next 15 years,) this is a must-have in your investor portfolio.

This unique savings account is the first of its kind in Canada. It was officially introduced by the CRA to Canadian financial institutions in April 2023 to address the increasing concern of inaccessibility to the housing market. (CRA link included at the bottom)

Like any good savings vehicle, it's got a few moving parts to it.?

Let's break them down.

1. What's In It For You?

The first thing you're likely wanting to understand is: "What are the benefits of having a FHSA?"

This account comes with two powerful benefits that work in tandem to create an ideal environment to grow savings toward your first home.

Benefit #1: Tax-Free Savings

The First Home Savings Account offers Tax-Free growth, just like a traditional Tax-Free Savings Account.

A savvy investor knows that sources offering tax-free growth are sources that should be prioritized.?

You will have peace of mind knowing that the amount shown in your account is the amount that you actually get to use. That's a win!

Benefit #2: Deposits are Tax-Deductible

In addition to being able to grow savings in a tax-free environment, this account offers benefits in reducing your existing taxable income as well.

That's right. If you deposit $500 to your FHSA, that allows you to claim a $500 deduction on your annual taxable income during tax season.

Maxing out this account annually allows you to benefit from a higher income while remaining in lower tax brackets, which if used well, increases the amount you can contribute to your savings even further.?

2. How Does the Growth Happen?

Generally, your money will grow in 2 ways. Passively through the funds that define your FHSA, and compounding. Let me explain.

Passively through Segregated Funds within the account:?

It's my understanding that there are a few different versions of the FHSA, but the most common versions will utilize segregated funds to grow your contributions.

Essentially, each institution will have access to different segregated funds. You can think of these funds as "packages" of stocks, which effectively define the success of your FHSA. Each Segregated Fund is made up of different stocks that appeal to various types of buyers.?

For example, a popular Segregated Fund is known as the US DAQ. If you were to research the specifics of that fund, you would see that it is made up of many stocks.

The vast majority of them are U.S.-based, and mostly vested in the Technology sector. Stocks held include Microsoft, Google, Amazon, etc. The overall risk level of this fund is Moderately High to High. This means that this fund would appeal to people with a higher risk tolerance looking to diversify their portfolio into U.S.-based tech companies.?

However, the beautiful thing is that your FHSA can be made up of MULTIPLE segregated funds, meaning that your experienced Financial Advisor will be able to understand your investment needs and build your account accordingly based on your specific situation.

Whether you prefer a risky portfolio or a more conservative one, your FHSA can be built to support your needs.

(My contact info will be at the bottom, I'm happy to assist!)

Compounding?

In addition to passive growth through your invested funds, your contract will also specify a compounding frequency. This will create a great stream of growth for your funds to accelerate your timeline.

3. The Contribution Limit

Those of you who have previous experience with investing likely know that accounts with significant tax advantages have contribution limits or limits to the amount of money that you can deposit.?

In the case of this account, it works like this:

Starting on the day your FHSA is open, and every following year on Jan 1, account holders are granted $8000 of contribution room to put towards their home.

Unused contribution room will carry over to following years, with a maximum of $16,000 contribution room available to an account holder at any one time.

There is also a lifetime contribution limit of $40,000. Those who fully fund their FHSA will reach the lifetime limit within 5 years and will have remaining years to allow their fully funded account to grow.?

If you contribute over your annual limit, you will be required to pay 1% per month on the excess until you withdraw or transfer it to a compatible account, such as an RRSP.

4. Who Can Use This?

To qualify for an FHSA, you must meet the following requirements:

1. You must at least 18 years of age
2. You can be no older than 71 by December 31st of any given year that the account is active
3. You must be a resident of Canada
4. You must be a First Time Home Buyer
5. You may not, at any time in the current calendar year before the account is opened or at any time in the previous four calendar years, lived in a qualifying home as your principal place of residence that was owned or jointly owned by you or your spouse.?

5. Do These Savings NEED To Go Toward My Home?

The simple answer to that question is no, but they definitely SHOULD.

Essentially, account holders have a few options when they wish to withdraw.

Withdraw for First Home?

This is the intended use of the account.

You must have a written agreement to buy or build a qualifying home with the acquisition or construction completion date of the qualifying home before October 1 of the year following the date of the withdrawal

Non-Qualifying Withdraw

Withdraws for any non-qualifying reasons will be added to your annual taxable income.

Move to RRSP or RRIF

Finally, if you decide that you don't want to / can not use these funds for your first home, you may transfer the funds to a registered RRSP or RRIF with no penalties.?

Conclusion

That covers this edition of Preparing Your Financial Future. It is my hope that you leave this article further informed!?

(Feel free to leave a like if learned a thing or two!)

In Summary, the First Home Savings Account is a powerful tool that comes with tax advantages exclusive to First Time Home Buyers.?

In my opinion, if you have any plans to become a homeowner, this is a tool you should have under your belt.

If you're looking for professional financial guidance, including assistance in setting up your FHSA, my contact info is listed below!

Looking for more info??

CRA Info Page: Canada Revenue Agency: FHSA Information

Contact Me:

Call or Text: (778)-240-4724

Email: [email protected]

Follow my Socials:

Instagram: @emilio.lombana

TikTok: @Emilio.lombana

Looking for more info?

CRA Info Page: https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/first-home-savings-account.html