It’s time to set up your FHSA

Have you ever owned a home before? If not, you, for once, have an advantage over those who have.

It’s time to do something about that advantage, and save yourself a ton of income tax!

It’s time to open up your FHSA. Though there are still two months before you hit the 2023 deadline, who gets any of that kind of stuff done in December? And it costs nothing. So, let’s get onto it.

What’s the FHSA? you ask. Well, I could simply refer you back to my April 4 post. But here’s an overview.

The FHSA (First Home Savings Account) is a program that combines the best of an RRSP and a TFSA, to help you save up for your first home. With an RRSP, you get to set aside money without paying taxes on it now, paying them when you take it out (presumably when you retire). The TFSA allows you to put funds that you’ve already paid taxes on into a registered savings account, but then there is no further tax on any of the gains made in the fund, and no tax when you withdraw the funds.

With the FHSA, you don’t pay taxes at either end–so long as you take the money out of the FHSA to buy a first home.

It’s only open to those who have never owned a home before, or, not within the last five years, subject to certain restrictions. And, it’s not for investors because you must then live in the home for which you have withdrawn the funds. Also, the fund has a maximum lifespan of 15 years, or until you reach age 71, at which time you must withdraw the funds.

So, if you can even imagine buying a home within the next 15 years—and it doesn’t need to be a single-family home with a yard and a picket fence, even a small condo will qualify—you need to start now.

But, you protest, It’s been a tough year. I’ve barely kept my head above water; how can I find any excess funds to put into an FHSA?

Good question! But there’s a better answer. Because, even if you have nothing to put into it now, you’re still way ahead by opening the account and leaving it at $0.

Let me explain.

You’re allowed to put a maximum of $8000 into the account in any one year. And a maximum of $40,000 over its fifteen year lifespan. So, it will take a minimum of 5 years to reach the maximum. For most, it will likely take longer, as they won’t have $8000 to contribute every year.

But, here’s the little goody that the government threw in to make it important to start as soon as possible, even if you have nothing to put into it: For any year after you open the account that you don’t put in the maximum, you can carry over any previous year’s “unused” allocation.

So, if you open it up in 2023 but put nothing in, it means you can put in up to $16,000 next year, or $24,000 in 2025, and so on. By the fifth year, you’ve created an available limit of $40,000, even if you never put in a penny. (BTW, you can transfer RRSP’s into the FHSA, as well.)

Let’s say you come into some money in year 5 (or 6 or 8 or 14). Maybe you get an inheritance of $50,000 and you say, “I’m going to stick that into a new home.”

Well, guess what! If you had opened up an FHSA at least five years earlier, you could immediately stick $40,000 of that into the FHSA, tax-free, paying taxes on only the other $10,000 that doesn’t qualify, and immediately purchase the home.

If you waited until you had money—year 5—before opening up an FHSA, how much could you put into it to save taxes on? Only $8,000. You’d be paying taxes on $32,000 that you didn’t need to. Depending on your tax rate, you could be giving $6000 or $9000 or $15,000 of those $32,000 to the taxman, instead of putting them into the home you want to buy.

Those wasted tax dollars might even prevent you from getting the home you want to.

Okay, that’s a bit of an extreme example but I’m sure you get the picture. Create the room now so that you don’t limit your options later!

What’s the down side of opening the account now if you never use it? Nothing (at least, nothing that I can think of.) So what!– if it expires 15 years (or age 71) never having been used?

What’s to gain if you never put a dime in? A little bit of financial education and experience, that’s what, which is always a good thing if you want to get ahead financially (see my book Money Habits for Success.

What if you put some money in along the way but never enough for the purchase of your first home? Well, you then have two options: You can withdraw the funds, close down the FHSA and pay the taxes then (having deferred your taxes for up to 15 years–not a bad bargain).

Or, you can put those funds into an RRSP, if you’re not yet 71, and defer the taxes until retirement. Or, if you have reached the 71-year age limit, you can convert them into an RRIF (as you would do had they been in an RRSP).

For those who’d like to learn more, here are two links:

Ron’s April 4 post

The TFSA Explained