Savings

Nine Strategies for Using a First Home Savings Account

You may recall that the 2022 federal budget introduced a new type of registered savings plan, called the First Tax-Free Home Savings Account (FHSA). On August 9, the government released a bill for FHSAs that expands federal budget rules. You will find an excellent summary of these rules at canada.ca (enter “FHSA” in the search field).

Today I want to share specific strategies to consider once FHSAs become available in 2023.

Accounts

1. Open an FHSA as soon as possible. If you qualify, you will receive $8,000 in contribution room each year, up to a lifetime maximum of $40,000, and you can carry over unused contribution room. But the deferral margin does not accrue until you open an FHSA. If, for example, FHSAs can be opened in 2023 but you wait until 2024, you can only contribute $8,000 that year. If, however, you open your account in 2023 but don’t contribute until 2024, you can contribute up to $16,000 in the first year.

2. Choose FHSA instead of HBP. You will not be able to use the FHSA and the Home Buyers’ Plan to buy the same house. My preference would be to use the FHSA instead because you can accumulate more for a down payment, and the HBP requires you to repay the monies to your RRSP. Finally, the FHSA offers a tax deduction and the ability to save beyond your RRSP limits, while the RAP simply uses RRSP assets to help buy a home.

Contributions

3. Make contributions early. A down payment for a house can be a lot of money. So get your FHSA working for you as soon as possible to allow for plan growth.

4. Contribute to an FHSA before your RRSP. If you don’t have the funds to contribute to both an FHSA and an RRSP, consider using the FHSA first, even if buying a home is only one possibility and not a certitude. If you contribute, say, $40,000 to your RRSP and that increases over time, you may want to transfer those funds to your FHSA so you can make tax-free withdrawals to buy a home. But you can only transfer $40,000 tax-free because anything over that will be taxable if you transfer it. On the other hand, if you contribute $40,000 to your FHSA instead, the original amount plus growth can all be withdrawn tax-free to buy a home. Also, if you first contribute to your RRSP and then transfer funds to your FHSA, you will not get your RRSP contribution room back, whereas contributing to an FHSA can be in addition to the RRSP contribution room You have.

5. Contribute even if you’re not sure about buying. You can contribute to an FHSA, and if you eventually decide not to buy a home, you can transfer those funds to your RRSP or RRIF. This does not deplete any of your RRSP contribution room, so these funds can be considered additional long-term RRSP savings, even if you choose to continue renting instead.

6. Give your spouse or adult children funds to contribute. If your spouse or adult children are eligible to contribute to an FHSA but don’t have the money, consider giving them money for the contributions, if you can. The attribution rules will not apply to income earned in the FHSA. It could save you and your spouse up to $80,000 in FHSA to help with a home purchase and could help a child buy a first home.

seven. Borrowing to contribute can make sense. You might consider borrowing to invest in your FHSA. This will only make sense if the rate of return on your FHSA is greater than the interest rate you are paying on the loan. You will not be able to deduct the interest on your loan.

8. Consider an in-kind contribution. If you don’t have the funds to contribute, but you have non-registered investments, consider making in-kind investments. If the assets you contribute have appreciated in value, you may pay tax on a capital gain, but the FHSA contribution deduction will offset that taxable amount.

9. Defer the deduction if it saves more tax. You will be entitled to a tax deduction for your FHSA contributions, but if you expect your income to be higher in the year or two after your contribution, you can defer your deduction and claim it in a future year. You will save more tax if you claim the deduction while in a higher tax bracket.

I’ll end this conversation next time with more ideas related to withdrawals, investing your FHSA dollars, and some nuance around those plans.

Tim Cestnick, FCPA, FCA, CPA(IL), CFP, TEP, is an author and co-founder and CEO of Our Family Office Inc. He can be reached at [email protected].