Episode 63 – What is Canada’s New Tax-Free First Home Savings Plan?
Have you heard about the Tax-Free First Home Savings Account? It’s a new plan that will help first-time home buyers save for purchasing their first home!
– A Teenager looking to get ahead
– A parent looking to help out your children
– Hoping to buy a home in the next few years
This new account will help you get closer to your goals! Join me on Heart of Your Money Podcast as I explain this new account and what exactly you can do with it!
Hey there, welcome back to episode 63. Today, I’m gonna give you the low down on the new home savings account the federal government has started. It is meant to help people save for their first house, which is especially needed right now because the average house and the mortgage approval process seems like the hardest and the most expensive it has ever been.
I do worry about a generation coming up and having the ability to buy a house. So, I guess the federal government has had the same worry, and they’ve started a new account. It’s called the Tax-Free First Home Savings Account. Not to be confused with a Tax-Free Savings Account.
This new incentive it’s going to be a great place to save for adult children or grandchildren. Currently, there’s already a program and it’s called the Home Buyers Program, and it’ll stay. It’s an option. You can use one of, one of these two incentives. The Home Buyers Program is where you save in your RSP and then borrow from it interest-free. Payments have to be returned back into the RSP. So that’s that other program.
This new one, the Tax-Free Home Savings Account, is different. It combines two of the best features of our other most popular registered accounts in Canada. And that’s the Tax-Free Savings Account and the RSP. It’s like a combination of the two. The bonus from the TFSA that this new program uses is that the contributions, as well as the investment gains, will remain tax-free and like the RSP, our contributions in this new home savings account, they are tax-deductible and lower your taxable income.
So that’s a win right there at tax time while you’re saving. In all, If you are a first-time home buyer, you’ll be able to contribute up to $40,000 in this new incentive. And then put that towards the purchase of a house.
The maximum annual contribution limit is $8,000. So the idea is that you save $8,000 a year, and then you max it. Canadians will be able to open an account starting in 2023. And the government has stated that this will, so when you put in there, you’re gonna be able to use a slip to help reduce your taxable income at tax time. Pretty darn good. I like that.
Now, this is the part I don’t like is that if you don’t make the full $8,000 contribution limit in one year, you are unable to carry forward your unused contribution to future years. So in, in an RSP, a TFSA, you can always save up that unused. In this one, you can’t. So you really, when you jump in, and you start saving in this, you really gotta stay focused.
It can be opened and have a timeline of up to 15 years from your first contribution. And then after that, has to be withdrawn. The one part that I really wanted to see was, okay, so use this program, you use this savings tool, this first home savings account. What happens if you decide to not buy a house or you don’t need it to use it towards a house?
At least you can transmit it to your RSP if you have room. Or you can just withdraw and then pay tax on it. So at least you still have access to this. Interesting, though, the government is not allowing you to use both programs, meaning the home buyers plan and this new tax house savings account.
So you have to decide which one you’re gonna use. I wonder, and I’m hoping, this is me crossing my fingers right now, you can’t see- I’m hoping in the future the government will open it up so we can use both, especially as house prices continue to go up over time. It’d be nice to access both, but we’ll see.
I like this new program. It gives another option. And I know that for my adult daughters, we’ll be looking at it because neither have enough RSP room. They’ve been students this whole time and so they haven’t accumulated any RSP room to be able to use the home buyers program as a vehicle for squirreling away house savings. I’m not sure, but I think for them at this time, this new account might be a great place for us to be saving.
This is an idea out here for any grandparents that find themselves fortunate enough to have some extra savings and wanna help. I recommend two things. Two takeaways for grandparents today is that the first is I recommend adding to your grandchildren’s education savings funds, and that’s from birth until age 18. So if you’ve got a little bit of extra, it can be monthly, it can be a Christmas gift helping your children save for their children’s education.
Then the other place that I think is okay, so you’re saving for their education savings fund, they turn 18 and generally, you stop. I’m suggesting that you now continue on that savings if, of course, if you have the room in your own cash flow. Then at 18, you stop the education savings, and you replace it now and adding to this Tax-Free First Home Savings Account for them. And of course, communicating in a family decision, but if you’ve already got the cash flow going and saving for their education, now, just turn it into this Tax-Free First Home Savings Account because they’re gonna need as much help.
So that’s if that’s important to you and you’ve got the extra cash flow as a grandparent.
That’s it. That was my big takeaway. If you still have any questions about this new program, it starts in 2023. Just send me a note. Thanks. Until next week, take care.