FHSA or HBP: Reasons to Prioritize the FHSA
As a result of the federal budget increasing the withdrawal amount for the Home Buyer’s Plan (HBP), some clients have asked which plan is better for younger family members: the First-Home Savings Account (FHSA) or the HBP, via the Registered Retirement Savings Plan R(RSP).
As a reminder, the FHSA is a registered account that allows tax deductible contributions and tax-free withdrawals for the purchase of a first home. Annual contributions of $8,000 to a lifetime limit of $40,000 can grow on a tax-sheltered basis. The account can remain open for 15 years. The HBP allows first-time buyers to tap their existing RRSP, subject to conditions, for a tax-free withdrawal of up to $60,000. The amount must be repaid within 15 years; otherwise, it will be considered taxable income. Until now, the repayment period began in the second year after the first withdrawal. However, the budget has proposed to temporarily defer this start by three additional years.
Simply put, the FHSA allows holders to save and grow funds, whereas the HBP acts as an interest-free loan from the RRSP. While both can be used to purchase a first home, if funds are limited, which should be prioritized?
In many cases, the FHSA may be beneficial and here are reasons why:
1. Starting early, you may be able to access a greater amount — With both the FHSA and RRSP, starting early allows greater time for funds to grow on a tax-deferred basis. Given the FHSA’s 15-year limit, if an investor opens the account at age 18, by maximizing contributions from the outset, at a five percent annual return the account could grow to over $75,000 by age 33, more than the $60,000 withdrawal limit via the HBP.
2. Greater withdrawal flexibility — Funds can be withdrawn tax free from the FHSA for the purchase of a new home. HBP withdrawals are only tax free if repaid within a certain time.
3. Unused amounts — If not used to purchase a first home, FHSA amounts can be transferred to the RRSP. This won’t affect existing RRSP contribution room and effectively increases the overall RRSP contribution room.
Of course, the choice may be impacted by various factors, such as timing. At the end of the day, both the FHSA and the HBP, through use of the RRSP, provide excellent tax-advantaged opportunities to build wealth for the purchase of a first home. Where possible, younger folks should maximize contributions to both. If you have family members needing assistance opening the FHSA, please call the office.
