First home savings account (FHSA)

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The First Home Savings Account (FHSA) has been an absolute game-changer for personal finance since its introduction in 2022. In the words of David Chilton (author of The Wealthy Barber) it is “the greatest deal in the history of Canadian savings”. The FHSA combines the best features of a Tax-Free Savings Account (TFSA) and a Registered Retirement Savings Plan (RRSP). Opening an account today means a start on maximizing its tax advantages while building a solid financial foundation for your future home purchase. Even if you can't fully fund the FHSA right away, delaying could mean missing out on valuable contribution room and investment growth, so it’s wise to act as soon as you’re eligible.

The FHSA is a tax-sheltered account designed to help first-time homebuyers save up to $40,000 for a down payment. 

1. Eligibility: To open a FHSA, you must be a Canadian resident aged 18 or older and a first-time home buyer (meaning you haven’t owned a home in the past four calendar years).
2. Contributions: You can contribute up to $8,000 per year, with a lifetime maximum of $40,000. Unused contribution room can be carried forward, but only up to $8,000 per year.
3. Tax Treatment: Contributions are tax-deductible, reducing your taxable income for the year of contribution, similar to an RRSP. Withdrawals for a qualifying home purchase are tax-free, much like a TFSA.
4. Investment Growth: Funds within the FHSA can be invested in a variety of assets, including stocks, bonds, mutual funds, and ETFs, allowing your savings to grow tax-free.
5. Withdrawal: To withdraw funds tax-free, you must use them for the purchase of your first home within 15 years of opening the account. If not, the funds can be transferred to an RRSP or RRIF without penalty.

The FHSA offers unique advantages that make it an essential tool for first-time homebuyers:

1. Tax-Deductible Contributions: Reduce your taxable income while saving for a home. 
2. Tax-Free Withdrawals: Use your savings plus investment gains without paying taxes when purchasing your first home.
3. Flexibility: If you don’t end up buying a home, you can roll over your FHSA funds into an RRSP or RRIF without losing the tax benefits.
4. No Repayment Obligations: Unlike the Home Buyers' Plan (HBP), withdrawals from an FHSA don’t need to be repaid.

While the FHSA is a powerful savings tool, there are key details to keep in mind:

1. Contribution Limits: Ensure you don’t exceed your annual or lifetime contribution limits to avoid penalties.
2. Qualifying Withdrawals: Funds must be used for a qualifying home purchase; otherwise, withdrawals will be taxed as income.
3. Time Limits: The FHSA must be closed within 15 years of opening, or by the end of the year you turn 71, whichever comes first.
4. Eligibility Verification: Confirm you meet the first-time home buyer criteria to avoid issues with withdrawals.
5. Investment Risks: As with any investment account, the value of your portfolio can fluctuate. Choose investments that match your risk tolerance and time horizon.

By understanding and leveraging the FHSA, you can take a significant step toward achieving home ownership. Most chartered banks and credit unions offer a choice of FHSA products with risk profiles that should match your home buying timeline. Start early, try to maximize contributions and make the most of this incredible vehicle!