The new FHSA is a great way to save for a home
There’s a new account coming to town and you should welcome it with open arms.
The First Home Savings Account (FHSA) is expected to be available on April 1, 2023. For anyone who is planning on buying a first home – or even just thinking about it – this account is a welcome addition to the family of registered accounts.
Let’s get an important detail out of the way: although it’s a “first home” savings account, you can use it if you haven’t owned or lived in a primary residence in the prior four years. For example, if you sold your house more than five years ago and didn’t live in your spouse’s home over those five years, you qualify as a first time home buyer. Owning a property you don’t live in, like a house or condo you rent out, is ok - as long as it’s not the house you live in, you qualify to open this account.
Who would use this account?
The FHSA good for anyone who is even considering buying a home at some point in the next 15 years. You don’t need to be committed to buying a house and you don’t need to be earning a ton of money to make it worthwhile. Although the account benefits most people, it is especially useful for people who have maxed out their RRSP contribution room.
What makes this account so great?
The FHSA has inherited the best features of two of its other registered account family members, the RRSP and the TFSA. You get a tax deduction when you put money in (like the RRSP), but pay no tax on income earned in the account and all withdrawals are tax-free (like the TFSA). Those are the best features of the account.
Another less prominent feature is that you can get extra RRSP contribution room by contributing to this account, which is why it’s so good for people who have used up all their RRSP contribution room. More on this in a minute.
Here are the quick facts about the FHSA:
You need to buy a house within 15 years of opening the account.
You can contribute as much as $40,000 in total…
…but you can only contribute up to $16,000 in any given year.
You don’t have to deduct your contribution from your income in the year you put the money in the account – you can defer it to a year when you have more taxable income.
If you don’t buy a house, you can roll the money into an RRSP.
You and your spouse can each have an account to save towards the same house, for a total of $80,000 of down payment funds.
You can ask for a cash gift from your parents and put it into the account without any negative tax consequences for either of you (and a deduction for you).
You can use the FHSA and the Home Buyers’ Plan* together.
How to get the most out of this account
If you qualify, think about opening an account as soon as possible and putting in even a token amount of money. Why? You need to have an account open to get the annual $8,000 contribution room. Note that this differs from a TFSA: with a TFSA, you automatically get the contribution allowance (currently $6,500 a year) and it accumulates year after year, whether you have an account or not. The FHSA doesn’t have this feature.
Let’s say you’re 28 years old and you really don’t know if you’re going to buy a house. If you open an account in 2023, you can accumulate the $40,000 of contribution allowance by 2027. If you buy a house at age 33, you’ll have been able to contribute the maximum amount. But if you procrastinate because home-buying seems so far way, you won’t have as much contribution room at age 33 when the house-buying bug hits you.
There’s no downside to opening an account so you might as well hedge your bets.
What if you don’t buy a house, ever? Don’t worry – there’s no penalty if you don’t use the money for a down payment. You can simply roll the account into an RRSP.
And here’s where the extra RRSP contribution room comes in. When you transfer the FHSA money into an RRSP, it doesn’t count as an RRSP contribution, meaning your RRSP contribution limit doesn’t go down. In effect, this account gives you additional room to the tune of $40,000. So again, even if you have no plans to buy a house, open the account anyway.
RRSP or FHSA?
If you don’t have enough money to contribute to both your RRSP and a FHSA, choose the FHSA. You’ll get the same tax deduction up front but you have the optionality of the tax-free withdrawal for a down payment. Like an RRSP, you can choose to use the tax deduction later in life when your income is higher if that makes sense for you.
If you are fairly confident that you’re going to buy a house but don’t have any cash to contribute, consider transferring money from your RRSP to the FHSA. Of course, you won’t get a tax deduction for this transfer, but you will be able to benefit from the tax-free withdrawal. You are simply exchanging money in an RRSP for money in a FHSA, which gives you more options.
Not a savings account, actually
The account isn’t just a savings account – you can invest the money. Don’t settle for the measly interest rate the bank is offering on its FHSA. You can invest in GICs, mutual funds and ETFs. Be careful, though – your time horizon is really important and investing in 100% stocks is probably not a great idea. Think carefully about how to invest the money and/or talk to a financial planner, coach or advisor to learn more about appropriate investments for this money.
Let’s look at a few examples of people who can really benefit from the FHSA.
Mike is a PhD student. He receives funding to pay his living expenses, and he has some employment income from part-time work. Mike lives a low-cost life and has some extra money every month. He’s been contributing to his RRSP for years and since he’s never worked full-time, Mike’s RRSP contribution limit is low so he’s maxed it out. Ditto his TFSA. Where else can he put his money so it is tax-sheltered? Mike could open a FHSA. Even if he has no idea whether he will buy a house in the future, he could use the account as a retirement savings vehicle. If he doesn’t buy a house, it becomes retirement funds for his RRSP. As a bonus, Mike doesn’t have to use the tax deduction now –as it is, he pays almost no taxes because his funding isn’t taxable income. Instead, he can wait until he is finished his degree and gets a full-time job and then get the tax break. Bonus!
Thelma is 30 years old. She’s been working since her university graduation and has a really well-paying job. A diligent saver, Thelma has maxed out her RRSP room but would really like to lower her tax bill. Enter the FHSA. Since Thelma is a renter, she can open an account and contribute $8,000 a year to get the tax deduction in addition to her RRSP contribution deduction. If she ends up buying a house, she’ll have a nice tax-free chunk of money for a down payment. If not, she’s got a bigger retirement account.
Sam and Chris
Sam and Chris are a common-law couple saving to buy a home. Sam makes a lot more money than Chris. Sam has used up all of their RRSP contribution room. After opening an FHSA and contributing $8,000, Sam still has more money to save. Chris contributes to their RRSP because retirement planning is a top priority for them, but with a lower income, can’t come up with $8,000 for the FHSA. No problem – Sam can put $8,000 in Chris’ account. Unfortunately, Sam can’t claim the deduction, but Chris can. Then, when it comes time to buy the house, Sam and Chris can both take the funds from their FHSA for the down payment.
The FHSA is a great addition to the financial planning toolkit for almost anyone who qualifies. Keep an eye out for it and welcome it to the neighbourhood!
*The Home Buyers’ Plan is the older cousin of the FHSA. That’s the one where you can take up to $25,000 out of your RRSP to buy a house. The difference is that you have to repay the HBP by putting money back in your RRSP. The FHSA is simply an account you can deplete.