For many Canadians, buying a home will likely be the most expensive purchase they ever make.
Depending on the price of the home you're hoping to buy, you could be looking at a down payment of 5%, 10% or even 20% or more.
But wait. Don't forget to factor in other costs, including land transfer taxes, lawyer fees, home insurance, an inspection and more. Depending on where you live, and the type of property you're eyeing, those costs can add up quickly.
While following a budget can be a helpful place to start your savings journey, it's equally important to think about how you're saving, especially if you're aiming to eventually purchase a home.
If you're thinking about buying a home, you may want to start by asking yourself if you are making the most of the registered accounts available to you.
There are a number of registered savings plans available to Canadians, but two common accounts are: the Tax-Free Savings Account (TFSA), and the Registered Retirement Savings Plan (RRSP). And new for 2023, was the First Home Savings Account (FHSA).
Generally, these registered savings plans let your money grow tax-free or tax-deferred, and within these plans you may have the ability to hold investments such as guaranteed investment certificates (GICs) and Mutual Funds.
Customers are now able to open an FHSA at TD. Since this registered account is still relatively new, we wanted to help you get a better understanding of how the FHSA works, and how it could help you save for your first home.
An FHSA combines some of the features of an RRSP and a TFSA. Like an RRSP, contributions are generally tax-deductible. Similar to TFSA withdrawals, when a qualifying withdrawal is made from an FHSA to purchase a qualifying home, the amount withdrawn, including any income or gain, is not taxable.
But before we get too far into the details of the FHSA, here's a quick refresher on TFSAs and RRSPs.
Remind me, what is a TFSA?
TFSAs allow you to grow your money tax-free within the account on qualified investments, meaning you aren't taxed on interest earned, dividends or capital gains (subject to restrictions, please visit TD.com to learn more) provided you don't exceed your annual contribution limit. Also, you can make a qualifying withdraw of your funds at any time, tax-free.
Generally, within most TFSAs, you can save or invest your money (think: guaranteed investment certificates or GICs, Mutual Funds, and cash). TFSAs that are opened with TD Direct Investing can also include stocks and bonds (to learn more, please visit TD Direct Investing).
The Government of Canada sets the annual maximum limits for TFSA contributions yearly. For 2024, the maximum contribution limit is $7,000. The current lifetime contribution limit adds up to $95,000, provided you meet certain criteria. To learn more about TFSAs and contribution limits, please view this TD Stories article.
Wait, what’s the difference between a TFSA and a RRSP?
An RRSP is designed primarily to help you save money for retirement. Eligible RRSP contributions are tax-deductible, meaning that the amount of money you contribute in one year is generally deductible on your tax return for that year, potentially reducing the total amount of taxes you pay that year.
When you contribute money to an RRSP, your funds are also "tax-advantaged," meaning you will not be taxed on the money you put into an RRSP until you withdraw it. Any eligible investment income earned on investments held within an RRSP grow tax-deferred, as long as the money remains within the RRSP, until it's withdrawn.
While an RRSP is primarily designed to help Canadians save for retirement, the funds can be accessed earlier in some situations, such as through the Home Buyers' Plan.
Under the Home Buyers' Plan, you can withdraw up to $35,000 from your RRSP to put towards the purchase or building of a qualifying home for yourself or a related person with a disability, tax-free[1].
Once withdrawn, you are required to recontribute the funds back to your RRSP within 15 years. If you and your spouse both have RRSPs, you can each withdraw up to $35,000 from your individual RRSPs, for a total of up to $70,000 towards the purchase of your qualifying home. To learn more about the details of the Home Buyers' Plan, please consult TD.com.
Okay, so where does the First Home Savings Account fit in?
An FHSA blends many of the features of an RRSP with those of a TFSA.
Within your FHSA, you can hold many of the same types of investments as you would in a TFSA or RRSP, including cash, Mutual Funds, and GICs.
Like an RRSP, contributions will generally be tax-deductible, meaning they could potentially reduce the amount of tax you pay when it's time to file your income taxes. Similar to TFSA withdrawals, when a qualifying withdrawal is made from your FHSA to purchase a qualifying home, the amount withdrawn, including any income or gain, is not-taxable.[2]
To be eligible to open a FHSA, you need to be a Canadian resident, 18 years or older, and a first-time home buyer.[3] In the context of opening an FHSA, an individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the account is opened, or at any time in the preceding four years, they or their spouse or common-law partner did not live in and own or jointly own a qualifying home.
Just like a TFSA, an FHSA has an annual contribution limit. For the FHSA, that annual contribution limit is $8,000. You can only carry forward a maximum of $8,000 in unused contribution room to the following year for a maximum yearly contribution of $16,000.[4] [5]
For instance, if you contributed $5,000 to your FHSA in Year One, in Year Two, you could contribute up to $11,000 ($8,000 yearly contribution limit for Year Two + the remaining $3,000 from Year One).
Over the lifetime of the FHSA, you can contribute up to a total of $40,000.
Your FHSA can stay open a maximum of 15 years**, with a few conditions. The account can stay open until the end of the year you turn 71, or the end of the year following the year in which you make a qualifying withdrawal from the account for your first home purchase, whichever comes first.
How could all this help me save up for a home?
By using the above-mentioned registered accounts to save for your first home, you may be able to make use of the tax-related advantages each account offers.
Let’s say you and your partner want to buy a qualifying home together in the next eight years. If each of you opens an FHSA, and you are each able to maximize your FHSA contributions, you would be able to contribute $40,000 each, or a combined $80,000. How much you have in the end would be based on your investment strategy, which means the actual amount you end up with might be more or less than $80,000.
In addition, if you each withdrew $35,000 from your individual RRSPs – the maximum available amount under the Home Buyers' Plan – that could bring you another $70,000 closer to use towards the purchase of a qualifying home.
Finally, you could each withdraw any amount from your respective TFSAs tax-free, too, depending on the type of investments held in your TFSA, and provided you have the funds to do so. For instance, if you and your spouse could each withdraw $25,000 from your respective TFSAs, that's another $50,000.
If you have questions about how to save for your first home or anything else, consider speaking to a TD Personal Banker. Find one near you.
And when you’re ready to start looking for your first home, consider speaking to a TD Mortgage Specialist to learn about mortgages at TD so you can be prepared for the next stage of your journey.
* In certain provinces and territories, the legal age at which an individual can enter into a contract including opening a FHSA is 19. You must be at the age of majority in your province of residence and provide a valid Social Insurance Number (SIN).
** Based on the date on which the first FHSA is opened.
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