First Home Savings Account is a Cheat Code!
For anyone who already owns a home, you must be annoyed that you missed out on the First Home Savings Account (FHSA). For those of you who don’t own a home, congratulations, you now have a great cheat code.
You can now put $8000/yr into a FHSA, and $16,000 if you opened one last year. The maximum is $40,000 per person, so it will take you 5 years to fill it up. When you make a contribution to a FHSA, you will receive a T4FHSA slip that will allow you deduct that contribution from your income. Just like a RRSP.
However, unlike the RRSP, when you withdraw the assets from your FHSA to purchase a home, you don’t need to pay tax, just like a TFSA.
Wait. I get a tax deduction to contribute, then withdraw tax-free? Sign me up!
This is a fantastic plan, but you need to execute on it properly. You don’t just get room by living in Canada or paying taxes, you need to open a FHSA to start accumulating carry-forward room. This is a big deal, because this is different than what we’re used to.
The other thing to note is that even if you never plan on owning a home, you can roll your FHSA money into your RRSP at a later date. In other words, you have $40,000 more of RRSP room… like I said, cheat code.
What if you want to open one up while you are low income? That’s a great idea, you should. However, you need to be aware of what tax bracket you are in, and potentially delay taking your tax deduction until you are in a year when you are in a higher income tax bracket.
Is all of this confusing? It sure is, I don’t think the government thought this one through really well. The FHSA takes parts of plans that already exist, but then creates rules of its own that muddy the water. We also have the RRSP Home Buyer Plan and the TFSA. How do they fit in to my plan?
RRSP Home Buyer Plan
The FHSA is a tough act to follow, but the gov’t tried its best by proposing to increase the RRSP Home Buyer Plan (HBP) limit from $35,000 to $60,000.
How does the HBP work? Again, it’s a bit complicated…
First, you contribute to your RRSP, if you haven’t already. Contributions to your RRSP are tax-deductible, so remember to deduct in the most appropriate years (high income). Once you have entered an agreement to purchase a home, you can withdraw up to $60,000 from your RRSP or Spousal RRSP without having to pay tax. The catch is that you have to start paying yourself back after 2 years (Budget 2024 proposed changing this to 5 years). Once you start paying yourself back, you need to make at least the minimum repayment amount over the next 15 years until you are paid off.
DO NOT RUSH TO PAY YOUR HBP BACK. Remember that withdrawals from a RRSP are ultimately taxable, and the RRSP itself is not a flexible source of cash, so do not rush to pay your RRSP back. Pay back the minimum payments as slowly as possible, on the schedule the CRA suggests.
What if I’ve owned a home before?
If you or your spouse (common-law too) have owned a house in the last 4 years plus the current year, you are ineligible to participate in either the FHSA or the HBP.
TFSA
The TFSA is our favourite financial planning tool, because it provides flexibility and this is crucial to a financial plan. If you have lived in Canada as an adult since 2009, you would have $95,000 of TFSA room. It is never really a mistake to contribute to a TFSA, because if you need to withdraw from a TFSA, your contribution room resets the following year and you get it all back. This is a fantastic spot to park house buying funds, which can double as an emergency fund.
What order should I use them in?
You probably want to build an emergency fund of at least 6 months expenses in your TFSA, so once that’s complete, you should take the following steps:
1. Max out FHSA. You lose the ability to use the FHSA once you purchase a home, but you can accrue RRSP room over your entire working career, therefore the FHSA should be the first priority. Focus on getting $8,000 in every year.
2. Once that’s maxed out, pivot to the RRSP and try to get it up to $60,000.
3. The next step is to max out your TFSA.
4. If you manage this treble of financial planning tax optimization, your only option is to put any over-flow in a non-registered account. Here you need to be aware of what type of income you are making, since interest, dividends and capital gains are all taxed differently. Consult a CFP if you don’t understand.
Land Transfer Tax
When you are considering buying a home, do not forget about the land transfer tax, especially if you live in Toronto. The tax is significant, and it’s paid by the purchaser.
A $1,000,000 purchase will cost $24,475 in tax after the rebate for first time home buyers (source Toronto Land Transfer Tax 2024 | Ratehub.ca)
A $1,500,000 purchase will cost $44,475 in tax after the rebate for first time home buyers
Realtor Fees
Luckily, the seller pays the realtor fees, so a first time home buyer would not have to pay realtor fees
Lawyers Fees
Be prepared to pay $3000 - $5000 for a lawyer
As you can see, there is a lot to consider when purchasing your first home. Reach out to a Novel CFP here (insert link) to start taking control of this next stage in your life.