5 Things Every Canadian Doctor Should Know About The New FHSA
Here, I’ll set the stage for you.
You’ve just finished your residency, maybe in the past couple months, and in the process your income has also increased significantly.
As you’re making a good pay cheque now, you start thinking about buying your first house. You’ve also heard about the new First Home Savings Account (FHSA) from the federal government and you’re wondering how that will affect your decision.
Here are 5 ways the new FHSA program might impact you as a Canadian doctor buying their first house:
The FHSA doesn’t deduct at source.
This is really important for you as a new doctor. Because of your tax bracket, approximately every second dollar of marginal income you make will be getting taxed. But the FHSA protects 100% of the contributed amount from income tax.
The FHSA grows tax free.
Once you have your contribution in the FHSA account you can invest it like you would any other investment. You can buy stocks or bonds and they will grow tax-free, just like they would with a TFSA.
The FHSA works alongside RRSPs.
You can use an FHSA alongside an RRSP and they don’t conflict at any point. This means that you can still use the First Home Buyers Incentive (FTHBI) that your RRSP offers while also using your FHSA. An FHSA also doesn’t take up any contribution room from your RRSP.
You don’t have to pay back an FHSA.
While the FSHA works like an RRSP in many ways, the biggest difference is that you don’t have to “pay it back” when you buy a home with its funds. In contrast, the RRSP’s FTHBI requires that you recontribute any money you use over the course of a given time period.
Like any tax shelter, the FSHA has its limits.
You can contribute $8,000 per year to your FHSA, up to a total of $40,000. You then have 15 years, from your first contribution, to buy a home with that money. If you don’t, those funds then revert to your RRSP.
Doing the math on an FHSA
What does this all mean for you? If we do back-of-the-napkin math, we can pretty easily get to $20,000 or even $30,000 in extra cash towards your next home purchase.
If you max out your FHSA each year for the next 5 years, that’s $40,000 in your account. That’s also $40,000 you didn’t pay income tax on. Then consider that each year that accumulated money is gaining returns, depending on interest rates, how the stock market is doing, and what your portfolio consists of.
Finally, if you decide that 5 years is too long to wait to buy a house. Or that you actually don’t want to buy a house after all, the FHSA is basically risk-free. Either you simply use your funds early or let the account revert to your RRSP. No penalties either way.
Ready to set up your own FHSA?
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