If you’re looking to buy your first home, you know that it can be hard to afford. That’s why the federal government introduced a new registered plan that can help. The Tax-free First Home Savings Account (FHSA) is designed to help you to set aside money to buy your first home. It can work especially well for younger people who are striving to come up with a down payment in a challenging housing market and a climate of high inflation and rising interest rates.

How does it work?

The FHSA allows you to enter the housing market with a savings account that combines the best aspects of two other registered plans: the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). Since it's geared towards home savings, it doesn't replace either of these plans, but it serves serve as another means of reaching your home buying goal.

To be eligible for a FHSA, you need to be a Canadian resident between the ages of 18 and 71 or the age of majority in your province and, of course, be a first-time home buyer. You and your partner can also combine FHSAs.

Putting money into your FHSA

Your contributions can be tax-deductible, just like they are with an RRSP. And, when you make a qualified withdrawal toward your home, it is tax-free, like a TFSA. With an FHSA, the money you’re saving grows with interest and you’re also saving on taxes, so it’s a win-win.

Contributions can be up to $8,000 a year for up to 15 years, which means, in total, you can save up to $40,000 for a down payment on your first home.

What if you don’t save as much as you are allowed each year? Don’t worry. You can carry over the unused room to the next year. Let’s say you save $5,000 this year. The following year, you could contribute up to $11,000.

You can invest the money that you put into your account in GICs, mutual funds*, exchange-traded funds (ETFs), stocks* and other qualifying investment items.

Taking money out of your FHSA

There are rules governing withdrawals and they are tied to a timeline. To withdraw funds without taxes on the money you’ve saved, you need a written agreement to buy or build a home before Oct. 1 of the year after you withdraw the money, and you must close the account that year. Then you must occupy your home within a year of the purchase.

When you use the money towards your home purchase, the funds that you withdraw don’t need to be repaid. If you decide not to use that money on your first home, you could transfer it to an RRSP (although you will be taxed when you withdraw from that RRSP later).

What about the HBP?

There is one more plan you may want to consider for your first-home buying journey.

The Home Buyers’ Plan (HBP) allows you to take up to $35,000 from your RRSP and put it toward a down payment for buying or building a home. As with the FHSA, there are tax implications to consider.

The loan isn’t considered income and won’t be taxed but only if you return the amount into your RRSP within 15 years. Just like the FHSA, the HBP requires you to be a first-time home buyer. Or the home can be for someone with a disability, which could be you or a relative.

The HBP might suit you better if you already have funds in your RSP and you are working towards a shorter timeline to buy. The FHSA works best for longer-term saving. Regardless, if you have the financial capability to do so, you can use both the FHSA and the HBP to buy your first home.

Comparing the plans

If you think the FHSA might be right for you or want advice on how to save for your first home and which plan might be a good fit, talk with a Servus advisor.

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*Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Mutual funds, other securities and related financial planning services are offered through Credential Securities. Credential Securities is a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Financial planning services are only available from advisors who hold a financial planning accreditation through applicable regulatory authorities.

The information contained in this article was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds and other securities.