Heading into the end of the calendar year, it’s important to get your ducks in a row to utilize the full potential of your registered accounts. With the addition of the First Home Savings Account (FHSA) to the list of registered accounts available to investors, there's more considerations for someone looking to contribute before the end of the year. Many factors should be taken into account to maximize your tax-savings and benefits and I’m going to give an overview of the key features for each account to help you make a well-informed decision.
First Home Savings Account
Yes, I know I’ve written about FHSA’s multiple times now, but there are lots of questions about the account because it’s still so new. The simplest explanation I can give to describe an FHSA, is that it’s what would happen if a TFSA & RRSP had a baby. For someone familiar with how TFSA’s & RRSP’s work, this explanation makes sense because it combines features of both accounts into one. With that said, the FHSA is only targeting a specific demographic of people who qualify as First Time Home Buyers and must be closed after 15 years from the date opened, or when a qualifying withdrawal is made. This means that it’s important to consider if you see yourself purchasing a home in the next 15 years after opening an account. If you do not end up purchasing a home after 15 years, then you can make a direct transfer to your RRSP, which DOES NOT impact your taxable income or unused RRSP deduction room. The amount transferred will be subject to normal RRSP rules, meaning that you will lose the ability to make a tax-free withdrawal.
Gifting money to a family member: This is an effective way to help your kids or other family members to save money for a house, but only the account holder can use the contributions to claim a tax deduction. The transferor will NOT be able to claim FHSA contributions on behalf of the account holder, so there are no tax benefits for the transferor. This rule also applies to spouses or common-law partners, but with that said if both you and your spouse qualify as a First-Time Home Buyer, then both of you can open an account and make contributions for a future home purchase.
Registered Retirement Savings Plan
Most investors use RRSPs to deduct contributions from their taxable income, and defer paying tax on that income until a later date, usually at a lower Marginal Tax Rate (MTR). For high income earners, it’s essential to utilize your RRSP contribution room because it defers paying tax at a high MTR, until later in life when you’re not at your highest earning potential, allowing you to pay less tax on amounts withdrawn.
Contribution Rules: Contributions to an RRSP is based on the lesser of 18% of your previous year’s income and the current fixed contribution limit; $30,780 for 2023. Any unused amounts from previous years can be carried forward, and there is no lifetime contribution limit. In the year you turn 71 years old, your RRSP must be converted to a RRIF, which will require minimum withdrawals be taken every year, and prohibits further contributions being made.
Utilizing the Home Buyers Plan (HBP): A tax-free withdrawal can be made from your RRSP up to $35K to purchase a home, but the full amount of the withdrawal must be paid back into your RRSP within 15 years. Since the FHSA has rolled out, no changes have been made to the HBP, so you can use amounts accumulated in your FHSA in conjunction with a HBP withdrawal from your RRSP.
Tax-Free Savings Account
Similar to an FHSA, withdrawals from your TFSA can be made tax-free (hence the name of the account). The additional benefits of a TFSA is that there are no restrictions for making tax-free withdrawals. You can have a TFSA open from the time you turn 18 until you pass away, and every year you will accumulate contribution room. This makes a TFSA powerful for long-term asset accumulation, and tax-free withdrawals. Unlike the FHSA & RRSP, contributions CANNOT be used to reduce taxable income for that year, meaning you’re using after-tax income to contribute.
Contributions & Withdrawals: In 2023, a max of $6,500 can be contributed, which is added on to previous year’s unused contribution room. On January 1st every year more contribution room gets added, and in 2024 $7,000 will be available in additional room. You can make a tax-free withdrawal at any time, and any withdrawal will proportionately increase contribution room for the year following the withdrawal. This provides a significant amount of flexibility for investors to withdraw as needed with no affects on taxable income, while holding the ability to contribute amounts withdrawn at a later date.
Summary
Deciding which account is the best option for your savings depends on your objectives, income levels and personal circumstances. Those looking to reduce their taxable income and save for a future home purchase should consider opening an FHSA, but if your primary objective is long-term asset accumulation and you’re in a low tax-bracket, then considering a TFSA may be the best option. Everyone’s financial circumstances are unique and speaking with an advisor can provide significant value for those deciding which account will provide the greatest benefits.
If you have any questions, please don’t hesitate to contact us, and I hope everyone has a great holiday season and a happy new year!
Dom
Source: Government of Canada (2023). Savings and Pension Plans.
iA Private Wealth Inc. is a member of the Canadian Investor Protection Funds and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.
This information has been prepared by Mike Holyk who is a Senior Investment Advisor for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.