5 strategies to make the most of your FHSA
In many ways, the tax-free first home savings account (FHSA)* can serve as a springboard to home ownership. For example, it reduces your tax bill, generates a tax-sheltered return and allows for tax-free withdrawals, subject to certain conditions. Here are some strategies to get the most out of this savings vehicle.
1. Contribute by regular instalments
You can put up to $8,000 in your FHSA each year. It can be a lot of money to pay out all at once, even for someone earning a high salary.
An effective way to do that is to make a budget based on your income and expenses and to figure out how much you want and how much you can save per month, per week or as often as possible. Set up automatic transfers so you don't have to think about how much you'll have throughout the year.
How much to contribute to the FHSA each week or month
You can contribute a maximum of $8,000 per year to your FHSA, with and up to a total of $40,000 in your lifetime.
Contributions will depend on when you want to buy your home: | To reach the lifetime contribution limit, invest this amount WEEKLY: | To reach the lifetime contribution limit, invest this amount MONTHLY: |
In 5 years | $153.84 | $666.66 |
In 10 years | $76.92 | $333.33 |
In 15 years | $51.28 | $222.22 |
Catch up on unused FHSA contribution room
You can open an FHSA as early as 18, but your ability to save will probably increase based on your career. You also have flexibility to adjust your contributions based on your income.
More specifically, at the end of the year, any unused contribution room can be carried forward to the following year. You can never contribute more than $16,000 in a year, that is $8,000 in contribution room for the current year and $8,000 in unused contribution room.
Let's take a look at the example of Sacha:
· Sacha contributes $3,000 to an FHSA.
· The following year, their contribution room is $13,000 ($5,000 unused and $8,000 in new contribution room).
· Thanks to a promotion, Sacha is able to double their automatic transfers and contribute $6,000 to the FHSA.
The following year, they have $15,000 in contribution room ($7,000 unused and $8,000 in new contribution room).
2. Invest your tax refund in your FHSA
FHSA contributions are tax deductible, just like contributions from a registered retirement savings plan (RRSP). If taxes are deducted directly from your pay throughout the year, you could get a refund when you file your tax return.
Consider investing the extra money in your FHSA to maximize its value. You can catch up on your unused contribution room or get a head start on your current-year contributions.
Let's take a look at the example of Sacha:
Because of their $6,000 FHSA contribution, Sacha will receive a $2,000 tax refund. If they contribute this amount to their FHSA, they'll have reached 25% of the contribution room for the new year.
3. Defer income deductions at the right time
You could contribute to your FHSA this year, but save more tax by deferring the deduction to a year when earn more. This decision could be beneficial if you're in school or at the start of your career and expect to earn more income in the near future.
Check with your accountant to see if this strategy is right for you.
4. Withdraw from your FHSA within the prescribed timeframe
To take full advantage of the FHSA, you must purchase your first home no later than December 31 of the fifteenth year after the account was opened. For example, if you open an FHSA at 18 and start contributing right away, you have until the year you turn 33 to make a withdrawal.
If you don't make a qualifying withdrawal to purchase your first home, the FHSA must be closed on December 31 of the fifteenth anniversary of the date it was opened.
The accumulated amounts are then cashed out and added to taxable income or transferred to a registered retirement savings plan (RRSP), with no impact on contribution room.
However, this means you'll no longer have access to the major benefits of the FHSA: tax-free withdrawals for the purchase of a qualifying property, with no repayment required.
5. Transfer money from an RRSP to an FHSA
Usually, the money you withdraw from your RRSP is added to your taxable income. However, there are some exceptions. For example, the Home Buyers' Plan (HBP) allows you to withdraw up to $60,000 tax-free to buy a qualifying home. Under the HBP, if you withdraw money from your RRSP between January 1, 2022, and December 31, 2025, the repayment period would start in the fifth year following the withdrawal, over a maximum period of 15 years.
If you're planning to buy your first home in the very short term but don't have enough cash to use up all your FHSA, you can use the amount already accumulated in your RRSP, if applicable. This type of transfer is non-taxable and will not allow you to claim a new deduction. Plus, you won't be able to recover your RRSP contribution room.
Withdrawing from the FHSA is also tax-free when buying your first qualifying home, but there's no refund or maximum amount applicable.
HBP and FHSA: A winning combination
These 2 plans can be used simultaneously. Maximizing both can help you save more than $100,000 per person: $60,000 from the HBP and $40,000 in contributions to the FHSA—on top of gains! This could mean a 20% down payment on a $500,000 property.
Good to know: This way, each partner in a couple can contribute to the down payment.*
Speak to your advisor about setting up investment strategies that meet your needs.
* Terms and conditions apply.