Eight important tips to get the most from your FHSA savings
As the newest entry into the Canadian landscape of government-sponsored savings and investing vehicles, the recently launched First Homebuyers Savings Account, or FHSA, is an excellent addition to the fold that already includes the widely embraced Registered Retirement Savings Plan (RRSP), the Tax-Free Savings Account (TFSA) and the Registered Education Savings Plan (RESP).
When new savings programs like the FHSA or TFSA are introduced, it can be difficult to figure them out at first, including how they function, what their features are, and what they can do to help you reach your financial and life goals. Of course, the FHSA is, like its peers, focused on providing savers with a convenient and tax-effective way of saving and investing. But what’s special about the FHSA is that it is specifically designed to help first-time homebuyers save for and grow those savings to achieve their goal of buying a home.
Important tips to help maximize your FHSA
To help ensure you are taking full advantage of the new FHSA, here are eight tips to consider:
Tip #1: You don’t necessarily have to be a first-time homebuyer to open an FHSA
Wait…you don’t? No - to the surprise of many, for the purposes of the FHSA you are eligible if you or your partner have not owned a home where you lived this year or at any time in the preceding four calendar years. So, even if you or your spouse/common-law partner have purchased a home in the past, if it did not occur in the previous four years, technically, you can both open FHSAs. You must also be a Canadian resident over the age of majority, who will not be older than the age of 71 on December 31 of the year the account is opened.
Tip #2: Maximize tax benefits
What makes the FHSA so effective for savers? The new account combines the features of a RRSP and a TFSA. It works like an RRSP when contributing, and acts like a TFSA when making withdrawals. This means contributions are tax-deductible, while qualifying withdrawals are non-taxable.
What's more, you can invest in the same sort of investments as your RRSP or TFSA, and the investment growth is tax-free. This means your money will have the opportunity to grow faster in an FHSA than it would in a traditional, taxable savings account.
Tip #3: Don’t wait to open an FHSA
As the old saying goes, sooner, rather than later, is better. You can contribute a maximum of $8,000 to your FHSA each year, up to a lifetime limit of $40,000. If you are not able to make contributions each year, you can carry forward any unused contribution room to the next year, up to a maximum of $8,000. Contribution room only starts to accumulate once you open your FHSA, so consider opening one this year, even if you don’t contribute right away.
If you contribute to your FHSA, you do not have to claim a deduction for that year. Instead, you can carry forward un-deducted contributions indefinitely and deduct them in a later year. This approach can be taken if you want access to tax-free growth immediately, but you expect to be in a higher tax bracket in a future tax year and would better benefit from a deduction then.
Tip #4: Set up automatic contributions to stay on track toward your home-owning goal
The easiest way to save is to set up a regular investment plan and…forget about it! By doing so, funds are withdrawn regularly and automatically from your account and deposited into your FHSA. Ideally, those funds are then used to purchase whatever investment solutions you have in your FHSA. This makes automatic contributions a smart way to save, but also avoids market timing by buying regularly, in turn taking advantage of market downturns to buy more, while buying less when prices are high. For more on the benefits of regular investing, check out this article.
Tip #5: Help family members purchase their first home (parent/grandparent alert!)
Even if you already have a home, the FHSA may still benefit your family members. You can gift money otherwise exposed to your higher tax rate to your children’s or grandchildren’s FHSA to help them earn tax-free investment income. You can also gift funds to your spouse/common-law partner and normal attribution rules do not apply.
Tip #6: Use your FHSA in conjunction with your Home Buyers’ Plan (HBP)
The FHSA can work together with the HBP through your RRSP to increase the amount you have available for a home down payment. Under the RRSP HBP, you can withdraw up to $35,000 from your RRSP to buy or build a home without triggering immediate tax consequences. You can make both FHSA and HBP withdrawals for the same qualifying home purchase, maximizing withdrawals up to $75,000, plus any growth in the FHSA.
Tip #7: Use your FHSA to boost your RRSP/RRIF
After 15 years of opening, or at age 71, you must close your FHSA. At this point, if you haven’t purchased a home, you can transfer assets from your FHSA to your RRSP or Registered Retirement Income Fund (RRIF) tax-free. Essentially, you can gain additional RRSP contribution room. You can also transfer any unused FHSA savings tax-free to your RRSP/RRIF.
Tip #8: Consider designating your spouse/common-law partner as the successor account holder on your FHSA
If named as the successor, your surviving spouse/common-law partner would become the new holder of the FHSA immediately upon your death, provided they meet the eligibility criteria to open an FHSA. In this case, the FHSA can maintain its tax-exempt status.
If you name anyone other than your spouse/common-law partner as the beneficiary, the funds will need to be withdrawn following your death and paid to your named beneficiary. Amounts paid to your beneficiary will be included in their income, and thus, subject to withholding tax.
Want to learn more?
Ask us today how an FHSA can help you and your family achieve your home ownership dreams.
This information is not intended as nor does it constitute tax or legal advice. Readers should consult their own lawyer, accountant or other professional advisor when planning to implement a strategy. This information is not investment advice and should be used only in conjunction with a discussion with your RBC Dominion Securities Inc. Investment Advisor. This will ensure that your own circumstances have been considered properly and that action is taken on the latest available information. The information contained herein has been obtained from sources believed to be reliable at the time obtained but neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers can guarantee its accuracy or completeness. This report is not and under no circumstances is to be construed as an offer to sell or the solicitation of an offer to buy any securities. This report is furnished on the basis and understanding that neither RBC Dominion Securities Inc. nor its employees, agents, or information suppliers is to be under any responsibility or liability whatsoever in respect thereof. The inventories of RBC Dominion Securities Inc. may from time to time include securities mentioned herein. RBC Dominion Securities Inc.* and Royal Bank of Canada are separate corporate entities which are affiliated. *Member-Canadian Investor Protection Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth Management, a business segment of Royal Bank of Canada. ® / TM Trademark(s) of Royal Bank of Canada. Used under license.