What to Know about the Tax-Free First Home Savings Account
New tax shelters are being introduced as part of the federal government’s housing plan in the 2022 budget, the details of which have been outlined in the discussions surrounding the Tax-Free First Home Savings Account.
If you’re curious to learn more about it, we've compiled everything you need to know in this handy guide.
What Is the Tax-Free First Home Savings Account?
The government is introducing a new policy aimed at supporting first-home buyers in the next federal budget. The Tax-Free First Home Savings Account will be available this year to make home-buying easier for Canadians.
You may be able to already use the tax-free savings account (TFSA) and registered retirement savings plan (RRSP). The same limits for your RRSP apply for your FHSA, with one exception: contributions are tax-deductible, saving you money on your income tax.
You will not have to pay income tax on any investment earnings you earn within your FHSA. You also do not have to report your investment earnings.
How Will This Help First-Time Home Buyers?
It will provide another savings vehicle to help first-time home buyers save for their down payment.
If you are able to contribute the maximum amount each year, those savings can add up fairly quickly over the years. The government estimates that a couple who maxes out their contributions will have accumulated $100,000 by the time they hit 33 years old.
Contributions are made with after-tax dollars, and earnings accumulate on a tax-free basis.
How Can You Qualify for This Program?
First-time home buyers are eligible for a TFSA, as long as they have never owned a home. To qualify, you must be a resident of Canada for income tax purposes, 18 years old or older, and not a trust.
You will be able to use the FHSA if you are a first-time home buyer. This means you can use the account to help you come up with the funds for your down payment.
Tips for Saving for Your FHSA Downpayment:
1) Start Saving Early
Make sure to start your contributions as soon as possible. Those early years will give you the chance to save a significant portion of your down payment.
Maximize the tax-free contribution, and put away money all year long. Start from January and contribute to your TFSA every month.
2) Prioritize Your FHSA Over Your RRSP
As your FHSA is tax-free and your RRSP is not, this should naturally be your first line of savings. If your employer offers matching contributions, make those contributions to your TFSA and RRSP first.
3) Invest Wisely
If you have extra money left over, it’s important to spread out your investments. Holding all of your investments in one place, such as a TFSA that isn’t doing well, can be damaging to your savings.
Stick to investing in funds, stocks, bonds, and other investments that are likely to increase, not drop, in the near future.
THE BOTTOM LINE
If you are a first-time home buyer and could use some help with your down payment, the Tax-Free First Home Savings Account will be a valuable tool that can be used to help you save up for that first home.
The FHSA can be beneficial for first-time homebuyers in Canada. Do you want to learn more about mortgage financing in Canada? Level Up Mortgages supports homebuyers and homeowners in attaining success in their mortgage journey with mortgage strategy, digital mortgage education, and introductions to all the other experts you need to succeed in home buying and your personal finance.
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