For many families, the dream of homeownership seems to be feeling more and more out of reach. But, with strategic planning and the creative use of financial tools like the new First Home Savings Account (FHSA), turning this dream into reality becomes not only feasible but also financially savvy.
In this blog post, I'll explore the benefits of the FHSA program and demonstrate how it can help you save $44,000 in just 5 years by using only $26,000 of your own money.
Yes - that's right.
You can accumulate $44,000 of savings in your FHSA by contributing only $26,000 of your own money - so where does the remaining $18,000 come from? Read on to find out!
Understanding the First Home Savings Account Program
The FHSA program is designed to provide aspiring homeowners with a powerful financial tool to accumulate savings efficiently.
Here are the key tax benefits that make FHSA an attractive option:
1. Tax Deductions on Contributions
Individuals can deduct their contributions to the FHSA from their taxable income (and this is one of the ways that we accumulate the remaining $18,000 - more on that to come)
2. Tax-Free Earnings
Any earnings generated within the FHSA are tax-free, allowing you to keep more money in your pocket and to grow your money faster compared to traditional savings accounts.
3. Tax-Free Withdrawals
Withdrawals from the FHSA are tax-free when used for eligible home purchases.
So how can you Save $44K in 5 Years in your FHSA?
Let's review a practical example to demonstrate how the FHSA can help you achieve substantial savings with minimal out-of-pocket contributions.
First, let's assume you have an annual household income of $150,000.
Year 1 If you contribute the maximum amount to your FHSA in year 1 (which is $8,000), you will see a tax return of approximately $3474 the following year as a result of the tax deduction benefit we reviewed earlier. You can save the $8,000 by setting aside $666/month for 1 year.
Let's now assume that you invest the $8,000 into an investment that yields a conservative 5% annual return.
This will look something like this:
| Year 1 |
Out of Pocket Contribution | $8,000 |
Annual Contribution to FHSA | $8,000 |
Interest Income from FHSA investment (5%) | $0 |
Tax Return Expected | $3474 |
Total FHSA Contribution | $8,000 |
Year 2
Assuming you contribute the maximum amount to your FHSA in Year 2 as well.
But this time, you're going to take the $3474 that you saw from your tax return, and then contribute only $4576 out of pocket. This can be accumulated by saving $377/month for the year.
Let's see how this looks:
| Year 1 | Year 2 |
Out of Pocket Contribution | $8,000 | $4526 |
Annual Contribution to FHSA | $8,000 | $8,000 (includes $3474 from tax return) |
Interest Income from FHSA investment (5%) | $0 | $400 |
Tax Return Expected | $3474 | $3474 |
Total FHSA Contribution | $8,000 | $16,400 |
Now you have $16,400 in your FHSA after 2 years, of which you only contributed $12,526 out of pocket! The remaining $3874 came from your tax return plus the interest accrued on your initial $8,000.
Let's expand this table to 5 years to show you exactly how you can accumulate $44,000 by contributing only $26,104 out of pocket.
| Year 1 | Year 2 | Year 3 | Year 4 | Year 5 |
Out of Pocket Contribution (annual) | $8,000 | $4526 | $4526 | $4526 | $4526 |
Annual Contribution to FHSA | $8000 | $8000 | $8000 | $8000 | $8000 |
Interest Income from FHSA investment (5%) | $0 | $400 | $820 | $1261 | $1724 |
Tax Return Expected | $3474 | $3474 | $3474 | $3474 | $3474 |
Total FHSA Contribution | $8000 | $16,400 | $25,220 | $34,481 | $44,205 |
Out of Pocket Contribution (accumulated) | $8,000 | $12,526 | $17,052 | $21,578 | $26,104 |
Interest Invested (accumulated) | $0 | $400 | $1220 | $2481 | $4205 |
Tax Return Invested (accumulated) | $0 | $3474 | $6948 | $10,422 | $13,896 |
Let's talk about it.
I've added 3 rows at the bottom to show the accumulation of 3 things:
Your out of pocket contribution
The interest returns from the money contributed to the FHSA
The tax return re-investment
By year 5, you can see that you contributed $26,104 out of pocket, $4,205 was produced from the interest on your investment and a whopping $13,896 came from the tax returns that you received as a result of contributing to the FHSA in the first place.
By following this pattern, you are able to make $18,101.05 worth of contributions to your FHSA by contributing only $26,401 of your own money.
That's equal to 68% of your contribution!
Oh - and a little icing on the cake - the tax return that you receive after year 5 isn't even accounted for here. So you have another $3474 that you can use towards purchasing your home!
How much of a home can you buy with $44,000 down payment?
With $44,000 down payment, and $150,000 annual income, you could be approved for a home worth $650,000.
At the end of the day...
Used efficiently and with intent, the First Home Savings Account can be a a great tool to help move you forward to owning your own home. It's unique combination of tax benefits and investment growth makes it a valuable program for first time home buyers.
Have a question about the First Home Savings Account? Drop it in the comments below.
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