New savings tool combining RRSP and TFSA benefits 'no silver bullet' but a step in right direction for clients
As the target implementation date for the First Home Savings Account fast approaches, one financial planner says the soon-to-be-available tool is already figuring prominently in client conversations.
“For most of the younger demographic we serve, I would say homeownership is one of the primary significant goals in financial planning,” says Erik Wachman, financial planning advisor at WWH Financial Group with Assante Financial Management. “We’re located in Mississauga within the GTA, so home prices are quite high, as you can imagine.”
By Wachman’s estimates, the average price his clients can expect to pay for a home is close to a million dollars, implying a 20% deposit of $200,000. The FHSA has a lifetime contribution limit of $40,000, with a maximum annual contribution limit of $8,000 a year.
A young couple pooling their resources to buy a home and pouring all they can into the FHSA could, therefore, amass $80,000 in five years – not counting potential investment growth – which means they would have to dip into other accounts and assets to make up the remaining $120,000.
The target date for FHSAs is the end of April, but based on conversations with colleagues and other sources, Wachman estimates the accounts will be available to be opened by financial institutions in May or June. But even now, he and other fellow planners are educating clients about the FHSA’s features and benefits.
While the tradeoffs of the FHSA will vary from case to case, Wachman says having an extra tax-advantaged tool to complement the RRSP Homebuyers Plan’s $35,000 limit and their TFSA will almost certainly be beneficial.
“Is it a silver bullet? No, but it does open up some planning opportunities,” he says. “There’s no perfect answer, but we can help clients in that young stage navigate all these different factors and find the most financially beneficial strategy for them.”
Like an RRSP, contributions into the FHSA are deductible from taxes owed on income, and the deductions can be carried forward. And similar to a TFSA, qualifying withdrawals to purchase a first home would be non-taxable, though they do not need to be repaid unlike withdrawals under the RRSP First Time Home Buyers’ Plan.
“Some of our aspiring homeowner clients have already started saving for a home. In that case, it’s about showing them how we can use this as a complement when they already have some savings in their RRSP or TFSA,” he says. “We might also have some potential clients that haven’t yet started to save, and they’re being introduced to this for the first time.”
The journey to homeownership, Wachman stresses, isn’t the same for all clients. Those who already have a large amount set aside could hold the keys to their own residence in as little as 12 months. Couples who pool their incomes can expect to get their dream home more quickly than someone who’s saving solo. For a new saver living in their own apartment, rent can be a considerable hurdle to overcome.
A big part of the FHSA decision, Wachman adds, depends on the client’s income. Someone who’s a student, for example, might have $8,000 on hand, but they could also be making just $20,000 a year. Because their tax refund will be relatively minor, it might make more planning sense to build up their TFSA first, until they get to the point where their FHSA contribution would actually lead to a meaningful refund.
And in most cases, homeownership isn’t the only planning goal. For many clients, Wachman says, weddings are the first significant expense milestone, followed by homeownership, then parenthood.
“All those different life events require a significant amount of financial capital,” he says. “If you’re focused exclusively on saving for a home and have nothing left available for a wedding ring or a deposit for a wedding venue, for example, that can limit your options.
“Financial planning is all about providing insightful information to help individuals make the best financial decisions given their circumstances. The FHSA is a great tool that individuals can use to achieve their financial goals,” Wachman says. “All individuals that qualify should consider opening a FHSA and discuss with a financial planner to see how this new savings tool can fit into their financial picture.”