While saving for a down payment can be challenging in today’s economic climate, the right tools and approach can make all the difference.
What Is the First Home Savings Account?
The first home savings account was created in 2023 to help Canadians save for the purchase of their first home. The registered account combines the benefits of a registered retirement savings plan (tax-deductible contributions) and a tax-free savings account (tax-free withdrawals). When it’s time to purchase your first home, you can withdraw the funds tax-free, thus avoiding the usual tax burden on savings withdrawals.
The account allows Canadians to contribute up to $8,000 annually, with a lifetime contribution limit of $40,000.
What Is the Home Buyers’ Plan?
The home buyers’ plan is a longstanding program designed to assist Canadians in purchasing or building a qualifying first home. It allows individuals to withdraw funds from their RRSP for this purpose. However, the amount withdrawn must be repaid to the RRSP over a 15-year period. The current withdrawal limit is $35,000 per individual or $70,000 for eligible couples.
See more: Understanding the Different Investment Vehicles Available in Canada
Although the HBP shares some similarities with the FHSA, particularly in its tax-deductible contributions, it carries specific repayment rules that the FHSA does not impose. For example, failing to repay the required amount in a given year will be considered taxable income.
Which Option Is Better for You?
Choosing between the FHSA and the HBP depends on your personal financial situation, time horizon, and goals.
The FHSA is appealing because there are no repayment obligations. Once you withdraw the funds for your first home, you won’t need to worry about repaying the amount. If repayment is not made for purchasing a home, withdrawals from the HBP will be taxed.
Another advantage of an FHSA is the tax-free withdrawals.
The FHSA allows up to $40,000 in lifetime contributions, compared to the HBP’s $35,000 limit. This means you could potentially save more for your downpayment with the FHSA. However, the HBP can provide access to more substantial funds – $70,000 for eligible couples – which can help if you need a larger immediate withdrawal.
See more: The Investor’s Guide to Registered and Non-Registered Accounts
Additionally, suppose you’ve already been contributing to an RRSP. In that case, the HBP might be a more accessible option, as you can withdraw funds directly from your existing RRSP for your home purchase.
Using FHSA & HBP Together
In some cases, using both the FHSA and the HBP together can provide an optimal savings strategy. For instance, you could contribute to the FHSA to benefit from tax-free withdrawals while also accessing funds from your RRSP through the HBP for additional support.
By combining both tools, you can maximize your savings and minimize your tax liability, ultimately helping you reach your homeownership goals faster.
Scotia iTRADE ® (Order-Execution Only) is a division of Scotia Capital Inc. (“SCI”). SCI is regulated by the Canadian Investment Regulatory Organization and is a member of the Canadian Investor Protection Fund. Scotia iTRADE does not provide investment advice or recommendations, and investors are responsible for their own investment decisions.
For more news, information, and analysis, visit the ETFs in Canada Channel.
