Are you a young Canadian who is looking to purchase your first home? If you are, you will definitely have some interest in the brand-new First Home Savings Account or FHSA. This registered account from the Government of Canada was launched on April 1st and will help anyone who is in the market for their first home. So exactly what is an FHSA? In this FHSA review article, we will provide you with all of the information we have on the brand-new account.
What is an FHSA?
The FHSA is intended to be a way for Canadians to save up for their new home by utilizing features of both the RRSP and the TFSA. This account will allow Canadians to contribute up to $40,000 towards the purchase of a new home.
Like the TFSA, any capital gains, dividends, or interest will be completely tax-free. On top of that, like the RRSP, any contributions made to the FHSA are tax-deductible. There is an annual contribution limit of $8,000 which can be carried over from year to year.
There are some parameters to the FHSA that must be followed for it to qualify. First, the account can only be open for a maximum of fifteen years or until the end of the year in which you turn 71. If you do not end up buying a house, you can transfer your FHSA contributions to your RRSP.
On top of that, you must be a Canadian citizen, aged 18 or older depending on the age of the majority in your Province, and of course, a first-time home buyer.
What Can I Invest in My FHSA?
You can invest in any assets that you currently can in a TFSA. With the FHSA, you have a much shorter investment timeline compared to an RRSP or TFSA. Remember that you only have fifteen years to contribute a maximum of $40,000. So the contribution size is smaller and the horizon is much shorter.
Here is a list of the assets you can buy in an FHSA:
- Stocks
- ETFs
- Mutual Funds
- Bonds
- GICs
You also have the option of holding your FHSA in cash if you do not want to invest it in the stock market. Given that this is a brand-new program, most brokerages have not posted their interest rates for holding cash.
Check Out This Article on 5 Reasons You Need an RRSP in 2023
Best FHSA Investments in Canada 2023
So what are the best investments to hold in your FHSA? These decisions are always going to depend on your personal risk tolerance and financial situation. Given that you have a shorter time horizon and want to maximize your returns, stocks can provide the highest upside.
The stock market hasn’t exactly been a safe haven these past couple of years. Holding blue-chip, high-dividend paying stocks might be the best way to ensure the highest returns. Remember, you can allow these dividends to reinvest and compound for fifteen years. Even though your contribution limit is $40,000, it does not mean your investments cannot grow to be much larger than that.
Bonds and GICs are fixed-income assets that can defend your portfolio balance. Most will provide a guaranteed return on investment, without putting your contributions at risk. The problem is, your ceiling will be capped and thus your returns will be as well.
ETFs and Mutual Funds can provide both stability and returns. Some investors are averse to paying management fees and expense ratios for owning these funds. They can provide excellent returns and reinvested dividends as well. But historically, individual stocks have outperformed these funds over most timeframes.
Want to Invest in Real Estate? Read this article: Are REITs a Good Investment?
Who is Eligible for FHSA in Canada
As we mentioned, you do have to meet certain qualifications to be eligible for an FHSA in Canada.
As of April 2023, to qualify you must:
- Be at least 18 years old or the age of majority in your Province of residence
- Also, be under the age of 71 years old
- Be a current resident of Canada
- You or your spouse cannot have lived on a property that you owned in the last five years
This all looks pretty straightforward, right? The idea is to have as many new home buyers eligible for the FHSA as possible.
What is the FHSA Contribution Limit?
The lifetime FHSA contribution limit is currently set at $40,000. There is also an annual contribution limit of $8,000. You can carry over any amount to the following year if necessary. If you could only contribute $6,000 this year, you can contribute up to $10,000 next year.
Any contributions you make to this account are tax-deductible from the current income tax year. Just as with the RRSP, this definitely provides an incentive for investors to use the FHSA.
Similarly to most other registered accounts, there is a 1% monthly penalty for over-contributing to the FHSA.
Can You Withdraw from an FHSA?
Yes, the FHSA is functionally designed to be similar to the TFSA. This means that you can deposit or withdraw funds on the go, as long as you stay within the contribution limits.
If you withdraw your FHSA funds to buy your house, it is completely tax-free. However, if you use it for any other purpose, your withdrawal will be taxed. With these types of accounts, it is likely best to just keep your funds invested if possible.
FHSA vs HBP: the Best Way to Save for Your First House
This is probably going to be the comparison that Canadians look at the most. The HBP or Homebuyer’s Plan, allows you to temporarily withdraw up to $35,000 from your RRSP. This sum can be put towards the downpayment on your first home.
The major difference between the two is that the FHSA is its own registered account. The HBP simply withdraws from your RRSP but must be repaid within 15 years. The FHSA does not ever need to be repaid.
Given the advantages of the FHSA, many Canadians will likely be switching over to the new account. Luckily for them, Canadians can use both the FHSA and the HBP together if they so desire. The maximum combined contribution would be $75,000 plus any tax-free investment gains made. If you choose to go this route, you will still have to repay your RRSP withdrawal.
FHSA vs TFSA: Which Tax-Free Account is Better?
After reading our FHSA review, you might be wondering why you shouldn’t just continue using your TFSA to save for your new home. It is a valid point, given that the lifetime contribution limit is much higher for the TFSA.
There aren’t really any other differences aside from the fact that Canadians over the age of 71 can contribute to their TFSA but not to their FHSA.
The assumption of this program is that you already have your TFSA contributions maximized. This would be the ideal situation for when you would start an FHSA.
This would allow you to use both your TFSA and FHSA towards the purchase of your first home.
Pros and Cons of an FHSA
ProsI
- Save and invest towards your first home completely tax-free
- You can hold a wide range of different investment assets
- There is no need to repay your withdrawals like with the HBP
- Contributions are tax-deductible for the current tax year
- Any unused contributions can be transferred to your RRSP
Cons
- The account can only be used for a maximum of fifteen years
- The maximum lifetime contribution is only $40,000 as of April 2023
Is the FHSA Worth it?
In our opinion, any tax-free investment growth is worth looking into. Given how difficult it is to buy real estate in some Canadian cities, we say take all of the help you can get.
The FHSA is a great addition to Canada’s portfolio of registered accounts. It allows prospective first-time home buyers to add an extra boost to their downpayment and rewards them for utilizing the account. The benefits of using the FHSA over the HBP are clear and when combined with your TFSA contributions, it can provide you with a very respectable downpayment.
If you are looking to buy your first home in the next few years then you should seriously consider starting an FHSA.
The best part about it: even if you don’t buy a house with the FHSA in the next fifteen years, you can grow your money tax-free and then contribute it to your RRSP without affecting your annual contribution limits.
We hope we were able to shed some light on the new FHSA account in Canada!
Stay Savvy!