If you are dreaming of buying your first home, you may be wondering how to save enough money for a down payment. The good news is that there is a new type of registered savings plan that can help you achieve your goal faster and easier: the First Home Savings Account (FHSA).
The FHSA is a tax-advantaged plan that allows you to contribute up to $8,000 per year and up to $40,000 over your lifetime to save for your first home. You can deduct your contributions from your income tax, just like an RRSP. And you can enjoy tax-free growth and withdrawals from your FHSA, just like a TFSA.
The FHSA is designed for prospective first-time home buyers who meet certain eligibility criteria. You can open an FHSA starting April 1, 2023, and you can withdraw from it at any time to buy a qualifying home. You can also transfer funds between your FHSA and other registered plans, such as your RRSP or TFSA.
The FHSA can help you save for your first home faster by harnessing the power of compounding and tax-free saving. For example, if you contribute $8,000 per year to your FHSA for five years and earn an average annual return of 5%, you would have over $46,000 in your account by the end of the fifth year. That’s more than enough for a 10% down payment on a $400,000 home. And you would save over $9,000 in taxes compared to saving in a non-registered account.
To illustrate this point further, here is a chart with possible outcomes based on different annual returns:
The chart assumes that you contribute the maximum amount of $8,000 per year to your FHSA and that the annual return is compounded annually. The chart does not take into account any taxes or fees that may apply to your FHSA investments.
As you can see, the higher the annual return, the faster your FHSA balance grows. However, higher returns also come with higher risks and volatility. You should choose your FHSA investments based on your risk tolerance, time horizon, and financial goals.
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