Beyond its benefits in supporting the purchase of a first home, the First Home Savings Account (FHSA) offers a compelling opportunity for investors to transfer wealth to the next generation or potentially increase their retirement nest egg — but planning ahead is important.
What is the FHSA? The FHSA is a tax-advantaged registered account intended for the purchase of a first home. Eligible Canadian residents ages 18 or older who are first-time home buyers can contribute up to $8,000 per year, to a lifetime maximum of $40,000, and grow these funds. Contributions are tax deductible, similar to the Registered Retirement Savings Plan (RRSP), and withdrawals are tax free, similar to the Tax-Free Savings Account (TFSA) if used to purchase a first home. The FHSA must generally be closed after 15 years or the year after the first qualifying withdrawal is made or the holder reaches age 71.
The High-Net-Worth Investor Opportunity: Beyond the prospect of supporting young folks to purchase a first home, the FHSA may also provide opportunities for HNW investors:
• A potential intergenerational wealth transfer tool;
• For those who haven’t owned a home over the past four years, a potential tax-advantaged way to supplement retirement savings.
Many parents and grandparents choose to gift funds to future generations to help cover large expenses such as an education or a first home purchase. Some HNW investors support a child’s education through the RESP but stop contributions around age 17 when the Canada Education Savings Grants cease. The opportunity to then gift funds to a child to contribute to their own FHSA, which can begin at age 18, may be compelling (keeping in mind the loss of control with gifted funds). If the FHSA was opened at age 18, it would need to be closed in the calendar year after the child turns 33. By some accounts, this is the average age of a first-time home buyer.1
For HNW renters, the FHSA provides an opportunity for tax-deductible contributions and tax-deferred growth. While the account would need to be closed by age 71 (if the 15-year limit isn’t reached), the holder could transfer any amounts to their RRSP/RRIF without affecting any existing contribution room.
The Importance of Planning Ahead: Since the FHSA can remain active for a maximum of 15 years once it is opened, here are some ways to potentially maximize the growth opportunity:
Start early — If the holder intends to purchase a first home, keep in mind that the FHSA must be closed in the year after making the first qualifying withdrawal, so the account’s life may be shortened. As such, helping a child to open it closer to age 18 may be beneficial to allow for compounded growth over the longest period possible.
Maximize contributions from the onset — Consider making full contributions at the start of each year to maximize the growth potential. Although unused portions of the annual contribution limit carry forward, the carry forward is limited to $8,000 each year.
Consider the way that funds are invested — The FHSA offers a substantial tax-advantaged opportunity to grow funds. As such, we believe that investing funds in quality securities has the potential to provide meaningful growth and return potential.
The Compelling Outcome: By maximizing contributions from the onset, assuming a five percent annual rate of return, the account could grow to over $75,000 by the end of 15 years, and this doesn’t include the tax benefit from the initial contributions!
A substantial down payment — If both first-time buyers, a couple could each access the FHSA alongside the Home Buyers’ Plan (HBP). The HBP allows first-time buyers to withdraw up to $35,000 from the RRSP, subject to repayment in 15 years and other conditions. Together, this could provide a substantial down payment — using the example above, over $220,000.
Increase retirement savings — If the holder decides not to purchase a home, the FHSA can be transferred to the holder’s RRSP/RRIF without affecting the available contribution room.
Defer the tax benefit — Generally, contribution amounts not claimed as a deduction on an income tax return in the year made can be claimed in a future year — even beyond the FHSA’s closure! If saved for future years, this may provide a substantial tax benefit when the holder’s marginal tax rate may be significantly higher.
To learn more about the FHSA, please call the office.