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One way many homeowners have come up with the down payment to purchase their first home is by using their RRSP in order to cover all or a partial amount of that down payment. The reason for this is tax savings, as well as already having the funds put away for retirement.
That said, the federal government has come up with a new way to save for your first home purchase. It’s called the First Home Savings Account, and you can use it as a method of tax savings as well as to purchase your first home. Let’s take a look at how these two registered accounts are similar yet different.
FHSA: How It Works
The First Home Savings Account is a registered account that allows Canadians to save money as first-time home buyers to purchase or build a qualifying home. However, just like with other registered accounts, there are annual contribution limits that you need to stay within, as well as lifetime contribution limits. This is mostly due to the fact that the FHSA is a registered account and all contributions are generally tax deductible.
Currently, for the FHSA, the annual contribution limit is $8,000, and the lifetime contribution limit is $40,000. However, whenever you open an FHSA, you should claim it on your most recent income tax and benefit return so it can be registered. You’d do this even if you haven’t deposited any FHSA contributions into this account.
It’s important to keep in mind, though, that before you open a FHSA, you need to meet the requirements. These requirements are:
- You must be at least 18 years of age
- You must be under the age of 71 by the end of the same calendar year you open the account
- You must be a Canadian Resident
Plus, you and your spouse/common-law partner must not live in qualifying home that either you or your partner owns in the last 4 calendar years. As long as you meet all of these conditions, you’re then able to open the account. That said, not all financial institutions offer FHSAs, so you should check and see if they do before you book an appointment.
It’s also important to remember that while FHSA contributions are tax-deductible, only contributions made in the calendar year can be claimed for the tax year. Unlike RRSP contributions, contributions made to your FHSA from January 1 until the end of February can’t be claimed on the previous year’s income tax return.
Advantages
While the FHSA is relatively new, there are many reasons as to why it’s a great option for those looking to purchase their first home. With this account, you can grow and use your funds tax-free. In order to do so, though, you do have to verify that your funds are being used for a qualifying home purchase to ensure your withdrawals are tax-free. Plus, if you’re unable to use all of your funds, or unable to, you can transfer funds to an RRSP or RRIF instead of cashing the funds out.
Another great thing about FHSAs is that you can carry forward any available contribution room. This means if you don’t use the full $8,000 for one year, the remaining amount will be added to your $8,000 contribution room for the next year. This will continue until you’ve reached the lifetime limit or need to close the account.
When you go to use your FHSA, you don’t have to use all of your funds at the same time. You can make as many qualifying withdrawals as you like as long as they are all for the same qualifying home purchase.
Disadvantages
While the FHSA is a great tool to save for your first home, it does have some limitations. For one, FHSA can only stay open until the 15th anniversary of opening your first one. They must also be closed within one year of your first qualifying withdrawal or by the end of the year that you turn 71.
Another drawback to FHSAs is that only the account holder can deposit funds into the account. This means that you’re unable to deposit funds into your child or spouse's FHSA; you can only deposit into your own FHSA.
RRSPs: How They Work
RRSPs, also referred to as Registered Retirement Savings Plans, are registered savings accounts designed to help you save money for retirement. With RRSPs, you’re allotted an annual contribution amount. This amount changes every year and is based on your annual income amount. That said, the 2023 annual contribution amount is 18% of the income you earned in 2022 or $30,780. The lower amount is the one that applies to you.
With RRSPs, there’s no minimum age for which you can open one up. However, some financial institutions themselves do prefer you to be the age of majority before you open one. This is 18 or 19, depending on where in Canada you live.
The only stipulations when you open an RRSP are that you must be a Canadian Resident, you must have filed a tax return before, and have earned income. You can then keep an RRSP open until the end of the year you turn 71. From there, the funds need to be turned into an RRIF (Registered Retirement Income Fund). If you want to take out funds without turning them into an RRIF, then you’ll have tax consequences unless you take the funds out through the Lifetime Learning Program or the Homebuyers Program.
RRSP Homebuyers Program
The RRSP Homebuyers Program allows you to make RRSP withdrawals and use them towards the purchase of your first home without paying any taxes. However, when you use the funds from your RRSP using this program, you do have to pay them back within 15 years.
When you go to take funds from this account, you can only do so if it’s unlocked. Locked RRSPs don’t allow you to withdraw money before a certain time period. Also, you can only take up to $35,000 in tax-free withdrawals with the HBP. If you take out more, you will have to pay withholding taxes on the rest.
Before you can participate in the program, though, you must meet the following conditions:
- You must be a first-time home buyer
- You must have a written agreement to build or purchase a qualifying home
- You must be a Canadian Resident
- You must intend to live in the home as your principal place of residence within one year of building or purchasing your first home
It’s also important to note that you don’t have to start paying back the funds to your RRSP right away. You have 2 years after the year you purchase the home before you have to start paying back the funds.
Advantages
The great thing about the RRSP homebuyers plan is that if you don’t have designated funds for down payment savings but are looking to purchase a home, you have access to these funds. You have up to $35,000 to use, and you can use both yours and your spouse's for the same first home purchase. Plus, you can contribute to your spouse's RRSP as well, even opening up a spousal RRSP.
Disadvantages
While the RRSP homebuyers program is a great tool to get the funds you need to purchase your first home, there are some disadvantages as well. The main one is the fact you have to pay back the funds. You’ll have a certain amount that you’ll have to claim towards this every year. If you’re unable to make your minimum annual repayment in tax-deductible contributions, then the amount you owe will be considered taxable income, also referred to as earned income, for that year.
Using the FHSA and RRSP Together
If you hold both the FHSA and HBP, you’re able to use both the HBP and FHSA to purchase your first home. If you’re using your maximum yearly contributions, then this can give you up to $75,000 in tax-free funds towards your down payment and purchase. If your spouse or common-law partner holds the same, then that could give you up to $150,000 if the home is going to be jointly owned.
FHSAs Vs TFSAs
Due to the fact that FHSAs and TFSAs (Tax-Free Savings Accounts) are both registered accounts that hold investments, you may be wondering if they’re similar. Well, they are, and they aren’t. While both TFSAs and FHSAs have annual contribution limits, that is about where the similarities end.
FHSAs can only be opened by those saving up to purchase their first home. TFSAs can be opened by almost anyone in Canada. All you need to do is be at least 18 years of age and have a valid SIN number. They also have a much higher limit than FHSAs. For 2024, the annual limit is $7,000. If you were at least 18 in 2009, then your total limit is $81,500, and any unused contribution room can be carried forward.
Another one of the key differences between TFSAs and FHSAs is that you can withdraw funds whenever you like. Plus, any amounts that you withdraw will be added to your contribution room the following year. This means if you do have an FHSA, you can transfer money to your FHSA at any time as long as you have the available contribution room and gain the tax benefits by using the funds towards a tax deduction.
Transferring from RRSP to FHSA
When it comes to transferring money from your FHSA to your RRSP, you can do so at any time without any penalties. You can do the same when transferring from your RRSP to your FHSA. However, this does have to be a straight transfer in order for it to qualify.
In order to make a direct transfer and avoid any tax implications, you’ll have to get the bank to make the transfer instead of doing it yourself. In order to do this, you need to fill out the form RC720. Once this form is completed, the bank can make the transfer.
Final Thoughts
Even though FHSAs and RRSPs are very different registered accounts, they can both be used to help you purchase your first home. The difference between the two is that with the RRSP, you have to pay the funds back if you don’t want to pay the taxes. This isn’t the case with the FHSA. That said, though, the FHSA doesn’t allow you to put away as much as an RRSP. However, when it comes to investing with either of these accounts, there are plenty of different options available, including mutual funds and GICs.
If you’re looking for the best way to come up with a down payment for your home, it would be ideal to have both an FHSA and an RRSP. This way, no matter how much you need, you should have enough. Between the two accounts, as long as you use the maximum amounts, you can have access to up to $75,000 tax-free. If both you and your spouse were to save these amounts, it would give you up to $150,000. However, it’s always a good idea to speak to a financial advisor for investment advice on your individual situation.
