Canadians can shield their money from taxes through various registered accounts. Two popular options that offer tax-free growth are the Tax-Free Savings Account (TFSA) and First Home Savings Account (FHSA).
For aspiring home buyers, the FHSA is generally more advantageous than the TFSA because it is designed specifically for homeownership. It can help you build your down payment for a first home faster. Like the Registered Retirement Savings Plan (RRSP), FHSA contributions are tax-deductible.
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Unique registered account
The FHSA is unique because it combines the best features of both the RRSP and TFSA. FHSA contributions reduce taxable income, while qualifying withdrawals are tax-free. Withdrawals for anything other than buying a home are considered taxable income.
Every prospective homebuyer should know the specific rules before opening an FHSA. The annual limit is $8,000 per calendar year (not indexed to inflation), with a lifetime limit of $40,000. Your contribution room starts accumulating on account opening day.
Ideally, you should max out the FHSA in five years, though there’s no set timeline. You can contribute for up to 15 years or until the year you turn 71, as long as you don’t exceed the total lifetime limit. You must close the account by December 31 of the year you turn 71.
Any unused room carried forward from earlier years is capped at $8,000. However, you can contribute up to $16,000 in a year. You also don’t need to return or pay back withdrawals for a qualifying home purchase.
Unused FHSA
If you decide not to buy a house anymore, you can transfer FHSA funds to the RRSP without affecting contribution limits. The rationale is that both are pre-tax accounts, unlike the TFSA, enabling the Canada Revenue Agency (CRA) to track tax payments.
If you prefer a TFSA over the RRSP, you must cash out the entire FHSA balance (taxable income) before depositing it to your TFSA. The same rule applies to money left after a home purchase. Make sure you have available TFSA contribution room to accommodate the funds.
Strong investment choice
Interest, capital gains, and investment income earned inside the FHSA and TFSA are tax-free. But outside of buying a home, the TFSA is far superior to the FHSA for its unmatched structural flexibility. You can keep the TFSA for life and use it to meet short- and long-term financial goals, including retirement.
Bank of Nova Scotia (TSX: BNS) is a strong investment choice to align with a short (FHSA) and long (TFSA) investment time horizon and strategy. The $158.3 billion bank wins out for dividend consistency and longevity. This Big Bank stock has been sharing a portion of its earnings with shareholders for 194 years.
With BNS, you can build your down payment tax-free in an FHSA while preserving capital without taking on high risk. In a TFSA, you can reinvest the quarterly dividends for years to capitalize on tax-free growth. BNS trades at $126.03 per share, up 29.6% year-to-date and is outperforming the TSX (+12.5%). If you invest today, the dividend yield is 3.6%.
Set your priorities
Prospective homebuyers can accelerate down payment growth and maximize tax savings by prioritizing the FHSA. Once you buy a home, you can focus on the TFSA for long-term flexibility and continued wealth building.
