The First-Time Homebuyer Savings Plan (FHSP) was launched in 2015 with much fanfare by Virginia’s General Assembly, banks, and Realtor community.This plan lets Virginia residents set aside funds towards a down payment and closing costs for their first home. The benefit? Earnings from the account escape Virginia income taxes.
Sounds nice, doesn’t it? Yes, until you peak behind the curtain. Here are 5 reasons to avoid opening a FHSP account:
- It’s high risk. Like most tax-favored accounts, the FHSP has penalties for certain withdrawals. In this case, all the funds must be used for the purchase of a first-time buyer’s home. If the funds are used for anything other than “allowable” costs of the purchase, the earnings are subject to penalties.
- It’s low reward. Example: a $10,000 account earns 1% ($100). Since the state tax rate is 5.75%, they will only save $5.75 in taxes. (The income from the FHSP is still subject to federal income taxes.)
- It’s complicated. The 8-page guidelines for using a FHSP include eligibility rules, account set-up instructions, definitions, limits and explanations. It’s a lot of details for an account with so little benefit.
- It’s unnecessary. From my experience as a Realtor, most people either 1) are not first-time homebuyers and can’t benefit from this account, or 2) are first-time homebuyers but don’t have money to fund one and won’t benefit from the tax savings.
- It’s a boondoggle. Virginia residents paid to research, create and roll out the FHSP. Salaries for people to create a website, write the program’s description, identify industry organizations, companies and people to provide input into the program (and accumulate their contact information), draft program guidelines, solicit feedback for the program, finalize the guidelines…You get the picture.
Don’t get me wrong; saving money for home buying is very important! But this can be accomplished by simply setting up a separate savings or investment account and systematically contributing to it. Jumping through hoops to “designate” the account as a FHSP will limit access to your money—with few tax benefits.