#MakeItMakeSense is a series from The Star that breaks down personal finance issues to help young Canadians gain more confidence and understanding when it comes to financial literacy.
Earlier this month, the federal government announced its 2022 budget, which included the introduction of a first Tax-Free Home Ownership Savings Account (TFFHSA), which is expected to be implemented in 2023.
For young Canadians, the thought of buying a home is daunting as house prices continue to soar. For the first time in February, the average selling price of a single-detached home in Toronto topped the $2 million mark. Royal LePage also recently revised its annual Canadian forecast upwards to 15%, from 10.5% nationally.
So how will this new account work and help young Canadians who want to become homeowners? We enlisted money expert Jessica Moorhouse to #MakeItMakeSense and break down the details.
What is a TFFHSA and how will it work?
The TFFHSA shares similarities with the Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), says Moorhouse.
Under this account, Canadians can save a maximum of $8,000 per year over five years for a total of $40,000, but Moorhouse notes there is a strict structure.
In a TFSA or an RRSP, if you do not contribute all of your contribution room, it is simply transferred and accumulates. However, with the TFFHSA, Moorhouse says “if you don’t use it, you lose it”.
“If you only contribute $7,000 the first year (when the maximum is $8,000), you don’t get that extra $1,000 contribution the following year,” she explained.
“$8,000 is a lot of money. What if you can’t reach that specific amount each year? Then you will not be able to reach this maximum.
Moorhouse also points out that, like when you contribute to accounts like a TFSA, you should always track your contributions so you don’t accidentally overcontribute.
“This (TFFHSA) is also one of those accounts that you don’t want to mess up because they have this strict $8,000 per year maximum policy,” she said.
Who can open an account?
TFFHSA is eligible for Canadian residents who are at least 18 years old.
Those wishing to open an account cannot have owned a home at any time during the year the account was opened or in the previous four calendar years, Moorhouse says.
“You can only use it to buy the primary residence of the house you’re going to live in, not an investment property,” Moorhouse said.
When these accounts become available in 2023, Moorhouse says they should be accessible through your bank and other institutions.
What are the benefits of TFFHSA?
Contributions to a TFFHSA, similar to an RRSP, are tax deductible, Moorhouse says.
Plus, like a TFSA, when the funds in the account accumulate and grow, you don’t have to pay tax on that growth and income, she adds.
Moorhouse explains that through accounts like an RRSP, if you make a withdrawal to buy a home, you’ll have to pay that money back in the future. In comparison, under the TFFHSA, once you’ve made a withdrawal, you don’t have to worry about repaying those funds, which is another plus.
Once you’ve made a withdrawal to buy a home using your TFFHSA, Moorhouse says you must close your account within one year of your first withdrawal.
“If you don’t use the funds in your account for the purchase of a first home within 15 years, you must close this account and pay taxes or you can transfer these funds to your RRSP, only if you have RRSP contribution room available,” she explains.
Will it make a difference for young people saving for housing?
“It won’t affect house prices, it just gives you a way to save more money and save on income tax, but really it only helps people who already have money,” Moorhouse said.
“How many young people have $8,000 a year just to contribute to this plan? »
Moorhouse points out that many young people already have trouble understanding RRSPs and TFSAs, and adding this account can only add to the confusion.
“We already have an RRSP. We must already have TFSAs. Most people don’t even use them to the max to use them for their home. So why do you think another account is going to help?” she said.
“The problem is that housing is too expensive and there is not enough inventory.”
Additional Tips for TFFHSA and Other Accounts
“Early in your career and in your adult life, it’s so hard to predict what you’ll want in five or ten years…so things like a TFSA or an RRSP give you options and flexibility” , said Moorhouse.
For example, if you opened one of these accounts with the intention of saving for a house, but later changed your mind – choosing to continue renting – it is easier to change the purpose of the account for another purpose, such as retirement savings, she explains.
By comparison, under the TFFHSA, Moorhouse notes that this account locks your money specifically for buying a home. Any withdrawals from that account not used for a home will be taxed, she adds.
“You want to have that flexibility in your twenties to decide, ‘Do I want to change cities?’ “Maybe I want to change my mind about home ownership,” she said.
Have a question or scenario you’d like to see covered? Contact Madi by email email@example.com and we’re going to #MakeItMakeSense.
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