First-time Buyers in Colorado Can Utilize Special Savings Accounts
Colorado now has a tax-advantaged savings account designed especially for first-time homebuyers.
One of the most pressing challenges for Americans who want to purchase a home, particularly for the first time, involves coming up with a sizable cash down payment. Fortunately for those moving within Colorado and a few other states, there is a relatively new way to save up for this significant expense: a tax–advantaged savings account designed especially for first–time homebuyers.
The Colorado state legislature introduced the First–time Home Buyer Savings Account (FHSA) Tax Deduction in 2016, joining a few other states with similar provisions. As of the end of 2017, first–time buyers in Iowa, Minnesota, Mississippi, Montana and Virginia also had access to these accounts.
In general, a FHSA in Colorado allows homebuyers to contribute up to $50,000 in savings to any accredited financial institution. With interest, these accounts may grow up to $150,000 while remaining eligible for tax incentives. As long as these conditions are met and the funds are spent on a cash down payment for a first home, FHSA users can deduct the amount they earn in interest on this account from their Colorado state income taxes.
Down payment saving
Down payments are often the most significant up-front costs faced by anyone purchasing a new house using a mortgage. In most cases, buyers who want to keep monthly payments as low as possible over the life of the loan are advised to put 20 percent of the loan value down in cash. However, it–s not uncommon for buyers to put down much less — the National Association of Realtors estimated that most first–time buyers in recent years have put down payments of only 5 percent .
Using a tax–advantaged savings account to stock up for a down payment won't actually reduce that payment, but it could make it just a little easier to fit within your budget. FHSA funds can also be put toward other expenses related to a home purchase, like closing costs, home inspections, lender fees and more. An account owner can even use the funds to pay for a family member's first home purchase, if they wish.
What else to know
The only limitations are related to location and the amount you can put away each year to capture the tax benefits. Of course, Colorado FHSA funds can only be put toward eligible costs for a first–time home purchase in the state, without forfeiting the tax benefits. In addition, FHSA users are limited to annual contributions of $14,000, or $28,000 for couples filing tax returns jointly. There is not a limit on the age of the account, and it may also apply to earnings from other financial assets that can accrue capital gains, like stocks and mutual funds.
The Colorado FHSA is just one of many options available to those who are on the lookout for solutions to the down payment conundrum faced by so many hopeful homebuyers. Before opening an account, it's important to pay close attention to the qualifications and ensure you can use it in a way that's financially beneficial. In addition, don't overlook other ways to not only save up cash for a down payment, but even reduce it through special programs. The FHA is among the most well–known home loan program offering down payment assistance, but many other similar incentives exist at the state and local level in communities around the U.S.
Finally, don't hesitate to work with your local Vectra Bank or financial professional to get the most clear insight on these and other homeowner topics.