Posted on Monday 25 October 2021
Ask any homeowner about their first experience buying a home, and most of them are bound to sum it up in one word: “Stressful,” or “Complicated.” A bigger majority might even add another dreaded word: “Expensive.”
All those descriptors are true, especially in a housing market that has seen intense swings due to the pandemic. Across Canada, home prices are rising to unprecedented levels. The average price of a home in April 2021 was $716,000, which marks an increase of more than 31 percent from 2020. That’s a huge increase – and as home prices rise, putting together a down payment becomes harder and harder.
Are you in the market to buy your first home? You may be in luck – the Canadian government just proposed a new savings vehicle that might help you save up for a down payment sooner! In the sections below, we’ll walk you through the new tax free home savings account to help you decide if it’s really useful.
The Tax Free First Home Savings Account is designed to make owning a home more accessible for young, first-time home buyers. In fact, this savings account is only available for first-time home buyers who are under the age of 40 (here’s looking at you, millennials).
This savings plan lets you put away up to $40,000 to purchase a home. What’s great about the tax free home savings account is that you can withdraw it and put it towards your home purchase at any time, without having to pay any tax penalties.
Even better, you can deduct any money that you send to the home savings account from your taxes, which means it won’t be counted on your annual income. And your money will compound and grow, making it possible to save even more than what you might put away in a standard savings account. Savings is way better then getting payday loans in Kitchener. Unless you really need one.
So, let’s recap: when you put away money in the Tax Free First Home Savings Account, you’ll be getting a leg up on your home savings by putting money in a tax-advantaged account. Not only does it compound and grow over time, but it also doesn’t count against you during tax season, and you won’t be hit with extra taxes when you withdraw.
For young first-time buyers who are struggling to come up with a savings plan for their down payment, it’s hard to deny that the Tax Free First Home Savings Account is a great option. If you are working, you can also get a one month payday loan and add more to this account.
All magic comes with a price, dearie – and in some ways, that’s just as true for tax free savings as it is for fairytale characters.
If it ends up coming to fruition, using the Tax Free First Home Savings Account could be a useful tool if you’re at the right age for it. Any withdrawals you make before you hit the big 4-0 will be tax-free (as long as you put the funds toward a home purchase, of course). But what happens once you turn 40?
Well, you can still keep your money in the home savings account, but it will cost you. Any money left in the Tax Free First Home Savings account will automatically convert to an RRSP (Registered Retirement Savings Plan). It’s still a great way to save money and invest in your retirement future, but it’s worth mentioning that any withdrawals will be taxed.
So if you start putting money away in a Tax Free First Home Savings account when you’re, say, 30 years old, you’ll be much better positioned than if you start when you’re 38 years old. At that point, you might as well just open up another savings account entirely...
...Which leads us to a pretty good argument that the Tax Free First Home Savings Account isn’t really needed in the first place. Did you know that you can already use an RRSP to take out up to $35,000 without tax penalties? And an RRSP gives you the same benefit of being able to deduct your contributions during tax season, so it’s really the same win-win situation that you’d get with the Tax Free First Home Savings Account.
Of course, the difference is in the numbers – the proposed Tax Free First Home Savings Account lets you withdraw up to $40,000, while the limits for an RRSP cut off $5,000 earlier. Still, when it comes to buying a home, $5,000 is just a drop in the bucket, and it probably would not be a big-enough difference to deter first-time home buyers from opening an account.
If the Tax Free First Home Savings Account gets passed, there’s no denying that it could be a great way for young first-time homeowners to build up their cash reserve and be better prepared all-around for the costs of buying a home.
And because a Tax Free First Home Savings Account can be combined with a Tax Free Savings Account (TFSA) or an RRSP, you can really maximize your money’s ability to grow. (Assuming, of course, that you’ve got enough cash flow to contribute to more than one account, or that you’re starting early enough to really make multiple investments worthwhile.)
Should you open a Tax Free First Home Savings Account? If you’re in your twenties or early thirties and want to start saving up for a house, go for it – contribute as much as you can, and let your money grow over time.
For those who are getting close to 40, however, you might want to opt for another kind of savings vehicle. If your Tax Free Home Savings Account is going to convert to an RRSP in a few years anyway, you might as well save yourself the trouble and go straight to an account that isn’t limited by age, like a TFSA or an RRSP.