Should You Have a Savings Account for Your First Home Buyer?
If you are planning to buy a home in the next few years, you may want to consider depositing your down payment into a First Home Buyer Savings Account (FHSA). Several states currently sponsor the FHSA and differ from basic savings accounts in that they can save you thousands of dollars in tax deductions. They do have a contribution limit, however, and the money in these accounts must be used to buy a home, so you have to be pretty damn sure you’re going to buy a home. Here’s a look to see if these accounts are worth.
What is the FHSA?
To encourage home ownership – especially for young people struggling to pay off student loans – some states offer savings accounts that must be used to pay the costs of buying a home. The advantage is that a certain amount of your total contributions for a specific year can be deducted from your taxable income. The non-taxable portion of your contributions varies by state, but is usually around $ 2,500-5,000 (however, you will pay taxes on contributions in excess of this amount). However, the funds in this account must be used to buy a home in the state sponsoring the account, otherwise there will be a penalty for withdrawing funds – sort of like the 529 plan for homes.
Currently, only Alabama, Colorado, Idaho, Minnesota, Mississippi, Montana, Oregon, and Virginia offer the FHSA, although legislation is either planned or discussed in Louisiana, Massachusetts, Michigan, Missouri, Nebraska, New Jersey, New York, and Pennsylvania.
The potential tax savings vary greatly from state to state. For example, the Minnesota FHSA only allows for the deduction of interest and dividends received from an account that is capped at $ 50,000 for individuals. Oregon’s plan , by comparison, allows you to deduct $ 5,000 in contributions annually from your taxes for an account that is phased out for individuals after $ 104,000.
How to know if the FHSA is right for you
Because each state has different rules regarding bill caps, tax deductions, account contribution limits, and withdrawal penalties, you’ll want to do your own research and make sure the FHSA benefits make sense to you. For starters, the Value Penguin has a diagram that violates every state’s plan .
Another issue is how long you really want to use these accounts. As we discussed earlier , when you’re ready to buy a home, it’s a good idea to keep your down payment in an accessible and safe place, usually in a savings account. The downside is that interest rates are ultra-low, usually around 0.6%.
For this reason, you may be better off increasing your down payment as long as possible by placing it in an investment account such as an IRA, as they have yields closer to 10% (this is of course not always guaranteed). When you are actually shopping for a home over the course of a year, then you might consider using an FHSA account. The advantage is that if your home buying quest takes longer than expected – a day, 12-18 months – you will at least get some kind of tax deduction for keeping your money on the FHSA and not on the baseline. savings account.
Bottom line
The FHSA can definitely save you several thousand dollars in taxes a year as long as you keep your home, but you need to be sure to buy a home in the state that sponsors your plan.
In addition, there are some opportunity costs to consider as this money can grow faster if it is deposited in an investment account. Of course, investment accounts carry more risk than savings accounts, so you’ll have to judge which one is better based on your risk tolerance . This is why it is recommended that you consult with a financial advisor or CPA before you decide what to do with your down payment.