TFSA. RRSP. And now the FHSAs.
The alphabet soup of investment savings accounts for Canadians looking to buy their first home can seem daunting. Experts say each has its benefits — and limitations.
The first Tax-Free Home Savings Account (FHSA), unveiled by the federal government in its budget earlier this month, offers a new way for aspiring homeowners to put down a down payment on their first property.
Available next year, it aims to combine the advantages of the existing tax-free savings account (TFSA) and the registered retirement savings plan (RRSP).
Contributions to an FHSA will be tax deductible, similar to an RRSP. Withdrawals from an FHSA, including capital gains, to buy a home will not be taxable – like a tax-free savings account.
“It’s almost like a hybrid between the two, but on steroids,” said Tim Cestnick, tax and personal finance expert and CEO of Our Family Office Inc.
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First-time home buyers can deposit up to $8,000 into this savings account per year — unused contribution room cannot be carried over to the next year — with a lifetime cap of $40,000.
“The first home savings account will be the best plan for the majority of people,” Cestnick said.
In contrast, the RRSP Home Buyers’ Plan allows first-time buyers to put up a maximum of $35,000 for a down payment, and the withdrawal must be “paid back” within 15 years.
“You really have nothing to lose by creating one of these first housing savings accounts. Either you’re going to buy a house and you’re going to benefit from the tax-free withdrawal and the deduction you got when you invested the money – and the growth over the years – or you’re not going to use it and you go transfer it to your RRSP tax-free,” Cestnick said.
This last allowance also goes the other way, as RRSP holders can transfer money to FHSA without being taxed on the withdrawal.
While $40,000 is the maximum contribution for FHSA, this investment will likely gain in value. The account can store everything from stocks and bonds to cash and exchange-traded funds.
Even if that $40,000 doubles in value, however, the boosted buying power may not be enough to compete in white-hot housing markets like Vancouver or Toronto. Also, since contributors can only add $8,000 per year, an FHSA would not significantly fill the wallet for several years.
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But it might be of interest to young Canadians who aren’t yet planning to hit the market.
“Someone who is even 18 or 19 and starts a construction job or something that gets them right into the job market…these Canadians can actually save more money because they live maybe still being with mom and dad, they could rent for low cost,” said Leah Zlatkin, mortgage expert at LowestRates.ca.
The first real estate account also makes sense for properties that are well below the average home price in Metro Vancouver or the Greater Toronto Area _ $1.36 million and $1.30 million respectively in March _ says Sung Lee, mortgage expert at Ratesdotca.
“Where the value of homes typically exceeds $1 million, it will be difficult,” he said, noting that they require a 20% down payment.
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“But for someone looking at a property of, say, $650,000 or less, it would benefit them because you basically have to deposit 5% on the first $500,000 ($25,000) and then 10% on the balance ( $15,000). ). So if you take $40,000 – the maximum amount you could put into this account – that would equate to a purchase price of $650,000.
The FHSA and RRSP cannot be used simultaneously, he noted.
For current owners looking to increase their size, neither FHSA nor RRSP apply. Cestnick says they should consider the more flexible and versatile Tax-Free Savings Account, which allows annual contributions of up to $6,000, with carryover of unused margin.
An alternative route is to renovate the residence to increase its value, especially since the gains on the sale are tax-exempt, he noted.
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The Tax-Free Savings Account may also come into play for those with more than $8,000 to invest, with the fallout from that FHSA cap flowing into a TFSA.
“It’s a matter of priorities. If your longer-term goal is to make sure I have that retirement nest egg, you’re going to put your extra savings into an RRSP. But if your short-term goal is to get into your first home, you want to take advantage of the new savings account,” Lee said.
Potential buyers should resist any urge to pour money into these tax shelters by going into debt, Zlatkin noted.
“Maybe you actually want to pay those credit card bills, try to spend a little less on consumer goods and restaurants…and set a family budget,” she said.
“Then think about the houses.”
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