Group FHSA: Which investment options should you choose?
Understanding FHSA investment options
The group FHSA can be an excellent savings tool for those planning to buy their first home in Canada.
As with other registered group savings plans, there are a variety of investment options to choose from, each with their own impact on your returns. Some investments carry more risk but have the potential to earn higher returns. Others are safer, but the returns they generate are more modest and more stable.
Here’s an overview of the investment options that a group FHSA may offer:
- Investment funds: These funds offer a multitude of possibilities. Depending on your preferences and your investor profile, you can choose equity, bond or income funds, and you can even focus on specific geographical regions, management styles and risk levels.
- Guaranteed investments: These investments provide a fixed and guaranteed rate of return over a pre-set period of time, up to 10 years. They can also be used to balance a portfolio’s level of risk.
It’s important to consider your time horizon for buying your first home. For example:
- If you have some years before you plan to use your FHSA, you can afford to choose riskier investments in the early years to earn potentially higher returns because you have a longer time horizon.
- If you’re planning to buy a home sooner, you might opt for a more balanced and safer strategy to reduce your risk.
Other factors may also come into play, such as your risk tolerance and your personal goals.
Here are two scenarios:
Anna, age 27, plans to buy a home in the next five years
Anna finished school three years ago and would like to buy her first home in about five years’ time.
She has had a full-time job since she graduated, so she has been able to save a sizable sum of money toward the purchase of a home. Since she doesn’t want to buy right away, she decides to transfer money from her tax-free savings account (TFSA) to her group FHSA to take advantage of the tax deductions between now and when she purchases her home.
- She can use the savings in her TFSA to make the maximum annual contribution to her group FHSA, which is $8,000 per year. At the end of each year in which she withdraws money from her TFSA, she gets back the same amount of contribution room.
- By continuing to save her money, she estimates she’ll be able to make the maximum lifetime TFSA contribution of $40,000 in five years.
- Because she plans to buy in the next five years and is looking for stable returns, Anna chooses a conservative investment strategy that combines guaranteed investments and a conservative fund portfolio.
- In year 5, as she gets closer to her goal and will need to withdraw her money, Anna wants to reduce the risk of part of her portfolio, so she invests $10,000 in a short-term bond fund.
|
Year |
Contribution |
Rate of return |
Estimated balance |
|
1 |
$8,000 |
5.5% |
$8,440.00 |
|
2 |
$8,000 |
6.3% |
$17,475.72 |
|
3 |
$8,000 |
4.7% |
$26,673.08 |
|
4 |
$8,000 |
7.2% |
$37,169.54 |
|
5 |
$8,000 |
4.1% |
$47,021.49 |
With a total contribution of $40,000 over 5 years, Anna achieved a time-weighted return of 31.03%. She therefore earned $7,021.49 on her savings and can withdraw it tax-free toward the purchase of her house.
Tip
Anna reinvested part of the tax refund she received from her group FHSA contribution deductions. By doing this, she was able to accelerate the growth of her savings.
Jonathan, 21, plans to buy a home in ten or more years
Jonathan is 21 years old and is just finishing school. He would like to buy a home in about ten years, or a bit later.
- He works part-time and his employer offers a group retirement savings plan. He is already participating but plans to increase his contributions once he has a full-time job.
- Since he has the luxury of time, Jonathan decides on a somewhat bolder approach, allocating more of his group FHSA to equity funds to maximize his potential returns. He decides to invest in the Diversified Fund (iA), which is the default investment option in his group FHSA.
- Jonathan plans to reduce the risk level of his savings two or three years before he withdraws his money to avoid potential losses. He will do this by increasing his holdings in bonds and investing part of his portfolio in guaranteed investments.
|
Year |
Contribution |
Rate of return |
Estimated balance |
|
1 |
$1,000 |
7.4% |
$1,074.00 |
|
2 |
$2,000 |
11.5% |
$3,427.51 |
|
3 |
$2,000 |
-4.2% |
$5,199.55 |
|
4 |
$3,000 |
-2.4% |
$8,022.77 |
|
5 |
$4,000 |
6.3% |
$12,758.94 |
|
6 |
$5,000 |
12,7 % |
$20,014.32 |
|
7 |
$6,000 |
12.7% |
$28,303.59 |
|
8 |
$6,000 |
5.6% |
$36,224.59 |
|
9 |
$6,000 |
4.7% |
$44,209.14 |
|
10 |
$5,000 |
4.4% |
$51,374.34 |
Notice that Jonathan was able to increase his contributions as planned because his income went up, and he was even able to reach the maximum lifetime contribution of $40,000. He enjoyed a time-weighted return of 68.46% over 10 years and made a tax-free profit of $11,374.34 toward the purchase of his first home.
Tip
Since Jonathan didn’t pay much tax when he was a student, he carried forward his deductions to future years. That allowed him to reduce his taxable income when his salary increased. Having had a child in the meantime, this income reduction even allowed Jonathan to qualify for higher family benefits.
Do your own calculations!
With our FHSA calculator, you can select the time horizon you want and find out how much you can save toward your first home.