Understanding the FHSA & TFSA Contribution Rooms: One Key Difference that can help you save on taxes.

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If you're looking to save for your first home, you might be considering the First Home Savings Account (FHSA), a new registered savings plan that provides both tax-deductible contributions and tax-free withdrawals. While it shares some similarities with the Tax-Free Savings Account (TFSA), there’s a crucial difference in how contribution room is handled. Understanding this difference is key to maximizing the benefits of your FHSA, especially if you are not yet ready to purchase your first home.

The FHSA: Contribution Room Starts When You Open the Account

One of the most important things to know about the FHSA is that your contribution room is based on when you open the account, not when you become eligible to do so.

For example, let’s say you become eligible to open an FHSA in 2023, but you don’t open the account until 2024. Your contribution room for 2024 would be $8,000, not $16,000. In other words, the contribution room does not carry forward from the year you became eligible. You can only carry forward unused contribution room from the year you actually open your account.

Why This Matters

The key takeaway is that to maximize your FHSA contribution room, you should open your account as soon as you're eligible—regardless of whether or not you have the funds to deposit. By doing so, you'll ensure that you don’t miss out on potential contribution room that could be carried forward into future years.

Opening your FHSA early allows you to take full advantage of the available room for every year you’re eligible. For instance, if you open your FHSA in 2024, your contribution limit for 2024 is $8,000. In 2025, you’ll have another $8,000 in contribution room, and any unused room from 2024 will carry forward.

How Does This Differ from the TFSA?

The TFSA, on the other hand, works differently. With the TFSA, contribution room accumulates starting from the year you become eligible to open the account, not from the year you actually open it. So, if you were eligible to open a TFSA in 2022 but didn't, your contribution room from 2022 would still be available to you in 2023 and beyond.

This means that with the TFSA, the sooner you open the account after becoming eligible, the better, but you're not penalized for waiting. Your contribution room accumulates retroactively from your eligibility date. The FHSA, however, requires you to act quickly to avoid losing out on contribution room from years when you were eligible but hadn’t yet opened the account.

Key Takeaways

• FHSA: Contribution room starts accumulating from the year you open the account, not when you become eligible. If you delay opening your account, you lose out on contribution room for that year.

• TFSA: Contribution room starts accumulating the year you're eligible, even if you don’t open the account right away.

  
  

If you’re planning to use the FHSA to save for your first home, it's essential to understand this distinction and act swiftly. Open your account as soon as you’re eligible to ensure you don’t miss out on valuable contribution room. Whether you’re ready to contribute right away or not, getting your FHSA up and running is a smart step toward building savings for your future home.