This month, we are exploring the new First Home Savings Account (FHSA) which is designed to help Canadians save for their first home in a tax-efficient way. At RBC, we are eager to help our clients achieve the "first home milestone" and are excited to offer the FHSA.
As an overview, an FHSA allows you to save up to $8,000 per year (to a lifetime maximum of $40,000) and shares beneficial features with both TFSA and RRSP. As with a TFSA, you typically do not pay taxes on growth earned within an FHSA, and withdrawals are tax free (as long as the funds are used towards a qualifying home purchase). FHSA is similar to RRSP in that contributions can be deducted against your taxable income which can help reduce your tax bill. As an added bonus, investors are able to combine withdrawals from both their FHSA and their RRSP (following the existing rules under the Home Buyer’s Plan) when making a home purchase.
To better understand how an FHSA could be used depending on a client’s unique set of goals and circumstances, we explore a couple of potential scenarios below:
Scenario 1: FHSA can be an effective tool for those just starting their investing journey unsure of when they will be purchasing a home
Shelly is a recent graduate and has landed her first full time job earning $60,000 annually. At present, she is renting an apartment with two of her friends, and although she worries about affordability of the housing market, she aspires to own her own home one day. While Shelly is relatively new to investing, she has already set up pre-authorized TFSA contributions to help save for her other goals.
Shelly has managed her expenses well, and with the launch of the FHSA, has decided to open and begin funding an account to help her save towards a future home purchase. Since Shelly has just started her career, she assumes her annual income will grow substantially in the future. A benefit of the FHSA is that she can utilize her contributions against income earned in future years, unlocking additional tax savings by claiming the income deduction when she’s in a higher tax bracket.
If after 15 years (the maximum amount of time you can save within an FHSA) Shelly doesn’t withdraw the FHSA funds for a qualified home purchase, she can still transfer the funds tax-free to her RRSP. If this occurs, Shelly’s investments will have already grown tax-free in the FHSA, and will continue to do so until they are withdrawn from her RRSP/RRIF (likely several decades away).The benefits of tax deferral, especially over a long investment time horizon, can be incredibly significant and Shelly will be able to enjoy these benefits by taking advantage of the FHSA.
Scenario 2: FHSA can be an effective tool for those who are planning on purchasing a home in the near future
Roger and his wife Jean earn a combined salary of $180,000 and have rented the same apartment for the past 5 years. They both make monthly contributions to their RRSP and top up whenever they receive their annual bonuses. Having been diligent with their savings, this strategy has allowed each of them to save $75,000 in their RRSP.
After several years of renting and saving, Roger and Jean are seriously considering purchasing their first home in the next few years. Now that FHSA is available, they both decide to open an account and re-allocate some of their savings.
Eventually, when Roger and Jean find a home to buy, they will be able to withdraw from their RRSPs tax-free under the Home Buyers Plan (HBP). Additionally, they will also be able to withdraw from their FHSAs where unlike the HBP withdrawal1, the FHSA funds do not need to be repaid.
To demonstrate how useful the FHSA can be, let’s assume that Roger and Jean maximize their contributions over the next 5 years and each earn $7,2152 within their FHSAs. At this point, if they buy their first home, they could have $164,430 combined from their HBP withdrawals and FHSAs to use towards their purchase.
|FHSA Contributions over 5 years||$40,000||$40,000|
|Earnings within the FHSA||$7,215||$7,215|
The FHSA provides great savings opportunities, but every individual’s situation is unique. If you are wondering if the FHSA is right for you, or which registered plan(s) is best suited to your goals, our Portfolio Advisors are happy to share their advice. When opening your FHSA, you’ll answer a few simple questions online and get matched to a portfolio that is best suited to your personal goals and financial objectives. Plus, once your account is open, we’ll manage your portfolio for you - so you can spend your time on other things (like picking the perfect paint colour for your dream kitchen).
For additional information on this new account type, including details on eligibility, contributions and transfers, you can also explore: FHSA: 9 Questions Answered About the New First Home Savings Account.