RRSP vs. TFSA vs. FHSA: Breaking down the options for buying your first home

Many ACU members are familiar with their options when saving for a down payment. Tax Free Savings Accounts (TFSAs) offer shelter from taxes on growth, while a Registered Retirement Savings Plan (RRSP) offers tax-deductible contributions.

But there’s another option specifically aimed at helping Canadians save for a down payment on a home.

Proposed in 2022 by the federal government as part of its budget, the First Home Savings Account (FHSA) is a new, tax-advantaged way for Canadians to keep more of their hard-earned money when saving for a down payment for their ‘first’ home. (Canadian residents between 18 and 71 are considered first-time buyers if they have not lived in a home they owned or co-owned in the year in which they open the account, or in the preceding four years.)

ACU offers FHSAs to its members, and according to Wealth Advisor Jesse Funk, there’s no better way to save for a down payment. He adds that Aviso Financial Inc., the provider of mutual funds for ACU members, also offers the FHSA account for investors with a longer FHSA investment time horizon.

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Read on to learn more about how ACU can help you navigate your savings options—and how an FHSA stacks up against the rest.

TFSA, RRSP, FHSA—which is best?

There are a few ways to save for a down payment. So how does an FHSA fit in?

Until recently, the most common ways Canadians were saving for the down payment on their first home were through TFSAs and the Home Buyers’ Plan, a method of borrowing against your own RRSP.

While saving for a down payment through a TFSA or RRSP offers benefits, Jesse says an FHSA is basically the best of both worlds.

“An FHSA is like a combo of an RRSP and a TFSA,” explains Jesse. “Similar to an RRSP, contributions to your FHSA are tax deductible, reducing your taxable income. Also like an RRSP, you don’t have to claim those deductions in the year in which you make the contributions.

“The growth on your FHSA will also compound tax-free, and when you withdraw to purchase your first home, you can do so tax-free as well, just like a TFSA,” he continues.

When compared to both a TFSA and an RRSP, an FHSA allows you to hold onto more of your savings, bringing your dream of home ownership one step closer.

How does an FHSA work?

While the FHSA is a great way to save for a down payment, there are some rules attached. For example, the maximum you can contribute to an FHSA over your lifetime is $40,000, and the most you can contribute to your account in a single year is $8,000.

Once you have money in your FHSA, your money can grow tax-free, even beyond the maximum contributions of $40,000.

However, note that your account has a shelf life. After 15 years, your FHSA must be closed and the money must either be used to purchase a home or transferred to an RRSP or Registered Retirement Income Fund (RRIF). If you withdraw the funds outright (without using them to purchase a first home or transferring them to an RRSP or RRIF), they would become taxable income.

What if I can’t max out my FHSA this year?

Not to worry. Even if you have less than $8,000 to contribute this year, Jesse still recommends you open an FHSA sooner rather than later. Why? With an FHSA, you can carry forward (up to a maximum of $8,000.00) your unused contribution capacity starting from the year you opened an account.

“Even if you had only $4,000 to contribute this year, you could open an FHSA and then carry forward the remaining $4,000 of unused capacity into the next year,” Jesse explains. “Then you would have room to contribute $12,000 that next year—all tax-deductible.”

An FHSA is a great way to save

TFSAs, RRSPs and FHSAs are not mutually exclusive when it comes to saving for a down payment, and all can work together with any number of financial instruments offered by ACU. However, Jesse advises if you’re looking to save for a home, you can’t do much better than an FHSA.

“Given the choice between the three, I definitely recommend the FHSA,” he says. “There’s really no downside, even after the 15-year allowable life of an FHSA. If you haven’t bought a home, you can still transfer those assets to other accounts like an RRSP or a RRIF.”

Start saving today

It may surprise you that if you’re not intending to buy a home now or in the near future, according to Jesse, it’s still worth it to open an FHSA if you fit the criteria.

“Even if you’re not a prospective homebuyer, there aren’t many reasons not to open up an FHSA,” Jesse said. “If you never buy a home, you can still take advantage of what the FHSA offers in terms of tax-sheltered savings and deductibility of contributions.”

Open an FHSA today and start reaping the benefits now and into the future.
Make an appointment with ACU and get started. That’s money doing more^TM.

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