Ashleay: Welcome to iA Financial Group’s “In Your Interest!” podcast. My name is Ashleay, and this week we’re taking a tour of the new TFSA Savings Plan with Michael Amo, Director of Sales at iA, and, as always, my colleague Sébastien Mc Mahon. Michael is actually joining us remotely from Ontario. Welcome, Sébastien, and welcome Michael.
Michael: Thank you. Thanks for including me.
Sébastien: Yeah, welcome, Michael; it’s great to have you.
Michael: Thank you; great to be here.
Ashleay: So let’s get started. Affordable housing has become a major concern in Canada, especially in big cities and for young people looking to buy their first home. In fact, we recently did a podcast on the real estate market. We dove into the question, is Canada in a real estate bubble? I invite you to listen to the episode from September 25, if you haven’t already. While we don’t necessarily consider ourselves in a real estate bubble in Canada, there is a concern regarding access to homeownership for young people and non-homeowners. Demographic growth resulting from immigration has an impact on the Canadian economy and, combined with inflation, it can impact our ability to access homeownership. That’s why the federal government launched the FHSA.
Sébastien: Right. Michael, we’ve known each other for a year or so now and, because it’s a new product, I know that you answer a lot of questions about the FHSA. In light of that, we thought maybe today a frequently asked questions on the FHSA would be in order. So thank you for being here with us.
Michael: Glad to be here. Thank you.
Ashleay: So, Michael, could you give our listeners a simple summary of the TFSA and the FHSA?
Michael: Yeah, I’m a big fan of the TFSA and now I’m a big fan of the FHSA. I love all these acronyms, but anyway… TFSA stands for a Tax-free Savings Account, and it’s actually a savings plan that allows invested funds to grow tax free. It’s ideal for saving for either short-, medium- or long-term projects such as a trip, perhaps you’re purchasing a second property or first property, or an emergency fund, which we always recommend you have at least three months of income in an emergency fund.
From my own personal experience—as the father of four daughters—I’ve used the TFSA to set aside funds for two of my daughters to pay for their weddings (one’s already done and another one’s coming up soon). So I use the TFSA to allow my savings to grow in there tax free and just kind of set them aside where they remain until needed for that specific purpose. And then more recently, since I’m retiring at the end of the year and because I just turned 65—although I look about 40— I decided to take my wife, and my daughters and their husbands down to Vegas for a week just to celebrate the fact that I’ve made it to 65. And then I’m going to retire. So we use the TFSA just for that single purpose: to set it aside for a trip.
I love it because it all grows tax free, it’s highly accessible, etc. But what’s even better is that they’ve now come out with this First Home Savings Account—the FHSA—which is pretty well designed, specifically to help future homeowners save for the purchase of a first home. It combines the advantage of an RRSP and those of a TFSA, allowing you to deduct your contributions from your taxable income and generating tax-free returns.
To go over some of the basics of the FHSA: You have a contribution limit of $8,000 per year with a lifetime contribution limit of $40,000 per person; the maximum participation is 15 years or up to age 71; and, again, the beauty is that withdrawals made for the purchase of a first home are not taxable, under certain conditions.
So again, I have a personal situation here with my third daughter, who, with her husband, has been looking to save for a home for the past year. He works for TD Bank—which I don’t hold against him—and he is adamant about saving money for their home. In the Toronto area, it’s very expensive, even renting homes isn’t cheap. So they’ve been working hard at that. Taking advantage of the FHSA is an excellent opportunity for them.
I also love the fact that it’s got the feel of an RRSP: You’re allowed to deduct your contributions from your annual taxable income. So I think it’s a great product and I’m glad to see it’s coming aboard because I think it’ll help a lot of Canadians going forward.
Sébastien: Congrats on all the great projects that you have there: your daughters’ weddings, retirement, all these important steps in your life. I’d like to ask a question that I personally have. It says “first home” savings account: So, is it only for the first home that you’ll purchase in your entire life, or how does that work?
Michael: Yeah, it’s specifically for the purchase of your first home. It’s geared to allow you to have the funds and use those funds to purchase the first home.
Sébastien: Okay. But, hypothetically, let’s say someone’s 45 and, you know, they just, I don’t know, went through a dramatic life event, you know, maybe they separated, had to sell the house, and now they’re living in an apartment. And, let’s say, five to ten years later they want to purchase a new home, can they use the FHSA then?
Michael: Yes, as long as they have not owned a home where they’ve lived at any time in the year the account was opened or during the previous four calendar years—at that point in time, they can use the FHSA again to purchase a home.
Sébastien: Oh, interesting.
Ashleay: And speaking of separations, what are the rules regarding common-law partners?
Michael: Good question. If your spouse is a homeowner, you cannot open an FHSA, as it requires that neither you nor your spouse own or have owned a home in Canada in the past five years. However, if you open an FHSA before becoming the spouse of a homeowner, you can contribute to your FHSA and use it to purchase your first home. So there are some spousal rules here.
Ashleay: I see. And earlier you said that the FHSA combines the advantages of an RRSP with those of a TFSA. Why is that?
Michael: Well, the returns are tax sheltered like the TFSA and RRSP, and withdrawals are non-taxable like the TFSA, but only if you use the withdrawal to purchase a first home or make a transfer to an RRSP or TFSA. And the big point here is that contributions are tax-deductible like an RRSP. And I love that combination.
Ashleay: Yeah, absolutely. And is it possible to transfer funds from a TFSA to an FHSA?
Michael: Absolutely. It’s possible to transfer your savings for the purpose of acquiring a first eligible property, while keeping in mind that you have to stay within the maximum annual contribution limit of $8,000. Also, I’d like to mention that you can contribute a single year of unused contributions.
So this product is, I think, out around November 13th. So if someone opens their FHSA in 2023, but they do not intend to contribute this year, they can use their $8,000 in 2024. Meaning, they could contribute up to $16,000 in 2024.
Ashleay: Okay. So it’s possible to transfer funds from a TFSA to an FHSA. Is it the same with an RRSP?
Michael: Yeah, it’s very similar. Tax-free transfers from an RRSP to an FHSA will be allowed—subject, of course, to compliance with their annual contribution limit of $8,000 for the FHSA, as well as any other rules governing eligible investments. However, transfers from an RRSP to an FHSA will not be tax deductible and will not restore contribution room to your RRSP.
Sébastien: And we can’t always plan so far ahead. Let’s say you plan to buy a house in the coming years, but you know, you’re priced out of the market or something happens and you don’t buy a property, then what happens with the money you invested into the product?
Michael: Well, if you don’t buy a property, that’s unfortunate. But these things happen. If you don’t buy a property, you can transfer the money you’ve saved directly into your RRSP or a RRIF. However, keep in mind there’s no penalty or tax at that time of the transfer. However, remember that once it’s in an RRSP or RRIF, those funds will be taxable at the time of the withdrawal, according to the tax rules. So it goes into your income as a taxable item.
Sébastien: You mentioned the RRIF, can you explain what that means?
Michael: That’s the Registered Retirement Income Fund. So at age 71 you have to settle your RRSPs and then start to take out at least a minimum income from the RRIF, or you can take more than the minimum, but you must take a minimum income from the RRIF amount. And that goes in as part of your taxable income.
Ashleay: Okay. And can the FHSA and the RRSP be combined to purchase a first home?
Michael: Yeah, that’s the beauty of it. It’s possible to combine contributions and returns from your FHSA, with up to the $35,000 from your RRSP to purchase your first home in Canada. Yeah, so you can combine them.
Ashleay: Yeah. And so among the TFSA, FHSA or RRSP, what do we prefer?
Michael: Yeah, I think it really boils down to what your needs and objectives are, what stage of life you’re in, etc. They’re all excellent vehicles and I always say that the government doesn’t give us many opportunities to take advantage of things, so jump aboard with the TFSA, the FHSA and others like RESPs for education and RRSPs for retirement planning. So all these opportunities that the government finally gives us, allows us to focus on some specific needs and goals that we may have. So if you’re between 20 and 40, you may be trying to save for your first home and should take advantage of the FHSA; and if you’ve got four daughters and have a lot of weddings coming up, be sure to make use of a TFSA; and if you have any money left over for retirement, then put it into an RRSP. I love all those opportunities and Canadians don’t take advantage of enough of them. I realize that not everybody’s got tons of money to throw around, but focus on the things you’re trying to solve down the road and use these vehicles that our friend, the government, provides.
Sébastien: And in this podcast, we’re always encouraging people to save more. When it comes to choosing between these three products here, I mean, looking at this from a consumer point of view, it’s important to talk to your financial advisor to make sure that you save with the right tool. But these are three solid options.
Michael: For sure, for sure.
Ashleay: Yeah. Thank you so much, Michael, for enlightening us on the subject. And also thanks to you, Sébastien. And to our listeners, talk to you all next week!
Sébastien: Thank you. Thanks again.
Michael: Hey, thanks.
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