Making the most of the new FHSA

The First Home Savings Account, or FHSA, is a new type of registered plan available to Canadians. In this episode, we’re explaining the ins and outs of the FHSA and how you might be able to take advantage of this new savings tool. 

Kingsley Chak, the Senior Vice President of Deposits, Savings and Investments at Scotiabank, is our guest. He’ll also give us a refresher on all those other savings account acronyms you’ve heard of but might not be 100% clear on. You’ll come away knowing the ABCs of TFSAs, RRSPs, RESPs and more.

Click here for the transcript.

Transcript:

Stephen Meurice: The First Home Savings Account or FHSA, is a new type of registered plan available to Canadians. That’s great news for potential home buyers. But, it’s also yet another financial acronym we need to remember.

Kingsley Chak: Yeah it’s acronym soup, right? TFSA, RESP, RRSP and now there’s FHSA.

SM: That’s our guest, Kingsley Chak. 

KC: It might seem daunting, but when you talk about all of it, it makes sense. 

SM: And that’s exactly what Kingsley’s here to do. He’s the Senior Vice President of Deposits, Savings and Investments at Scotiabank. So he's the perfect person to explain the ins and outs of the new FHSA and how you might be able to take advantage. He’ll also give us a refresher on all those other savings account acronyms you’ve heard of but might not be 100% clear on. So, you’ll come away knowing the ABCs of TFSAs, RRSPs, RESPs and more.  I’m Stephen Meurice and this is Perspectives.

Kingsley, thanks so much for joining me again.

KC: Great to be here. Thanks for having me.

SM: So we'll get right into it. Tell me about the First Home Savings Account. What is it for?

KC: Yeah, the First Home Savings Account, as the name suggests, is to help Canadians to save money to buy their first home. It has the benefit of RRSP in terms of the contribution is tax deductible and it also has the benefit of a TFSA. When you withdraw it, you use it to buy a first home, you also don't pay any income tax on it. So it's a really good vehicle to save some money to contribute to your first home.

SM: And why was it necessary, do you think?

KC: Home prices have been going up and home affordability has been a big issue on Canadians minds. And in the last federal budget, there was couple levers the federal government has deployed and the FHSA is one of them to help Canadians to save more to get to their first home.

SM: Right, because you need a big down payment these days for a house.

KC: Absolutely.

SM: So tell me how it works. You explained a little bit already about sort of the tax benefits, how it looks like both an RRSP and a TFSA, maybe a little bit more detail on that. How does it actually work?

KC: Yeah, so with the FHSA, every year you can contribute up to $8,000. So for example, if you open an account and you only contribute $4,000 out of that $8,000, for next year you actually can have $12,000. $8,000 plus $4,000 to contribute to it, right. But every year can only carry over $8,000. So when you put that $8,000 in, you get a tax deductible when you get a tax return. And once the money is into FHSA account, you can invest it in mutual funds, savings account, GIC or any other vehicle, and you grow that money. And so, once you have a home that you want to buy, you can take the money out and that’s tax exempt. So let's say you get to $40,000, with some investment you get $45,000, you take that out, you can put that $45,000 in totality into the purchase of your first home.

SM: Right, so like an RRSP, any money that you put in is tax deductible. It comes off of your taxable income. And like a TFSA, any extra income that you generate off of that interest or investment income, whatever vehicle you put it in, that's also tax free when it comes in.

KC: Yeah, and I would say for RRSP, when you finally make a withdrawal from RRSP, the total amount is taxable. Including the money that you put in.

SM: Right, so it counts as income in the year that you take it out.

KC: Exactly. For FHSA, if you're using the dollar for your first home, that is tax exempt, which is good.

SM: Right. Who would be most interested in doing that? Obviously first-time homebuyers. Is it something that people at a very young age should consider as maybe the first thing that they would start saving in, as opposed to an RRSP or a TFSA?

KC: Yeah. So one of the really interesting things about this is, you know, you have 15 years to buy a home once you open an account. And after 15 years, if you decided, ‘Hey, I'm going to be a lifelong renter, I don't want to buy a home.’ You can take that $40,000 and put it into your RRSP.

SM: Right.

KC: So essentially, you get $40,000 more contribution room in your RRSP.

SM: So it doesn't count against whatever your RRSP limit was. It's like additional RRSP space.

KC: Exactly.

SM: If you decide to not use it to buy a home.

SM: Exactly, so for any Canadians who turn 18 and thinking about saving for their retirement for RRSP, if you don't own a home, basically put your money in FHSA first because that gives you the flexibility to use the money to buy a new home. Or if you don't buy a new home, have that extra amount going into RRSP in the future.

SM: Okay. So it's pretty flexible in a bunch of ways.

KC: Yep.

SM: So what are the rules around it? Who can contribute to it? Who can't? What are the requirements to be able to make a contribution to this new type of savings account?

KC: Yeah. So you need to be a Canadian resident. You need to be 18 years of age. You cannot own a home in the past four years or in the year that you contribute to a FHSA. That year you cannot own a home.

SM: Okay.

KC: And the last criteria is the home needs to be a primary residence. It cannot be a first home, but an investment property.

SM: Okay. Could parents or grandparents create an account for their kids and start that savings for them?

KC: No, so their account needs to be opened by the person who uses it. Right, so unlike RESP, you cannot contribute to someone else’s FHSA and get the tax benefit. But what you can do is you gift the amount to the individual and individuals can contribute to the FHSA.

SM: Right, so your parents could just gift you that early on instead of helping you with the down payment later on when you're actually buying a house, which a lot of people do these days, I guess.

KC: Right.

SM: And do you have any tips for the best way to use this account? Any tips for people?

KC: Yeah. Fifteen years once the plan is open to buy a house, that's a long period of time, right? So starting early never hurts. And every year, you can contribute up to $8,000 and there's only one year carryover. So making sure you're contributing every year.

SM: And it has that it can only go up to $40,000 no matter what.

KC: That's right.

SM: Over the course of potentially 15 years.

KC: Right.

SM: Okay.

KC: If you're thinking about, as we talked a little bit before, thinking about contributing to our RRSP or FHSA, put it in your FHSA first and max that out before moving to your RRSP.

SM: Right. And say you're a young couple and you're starting to plan to buy a house. Could each of those people start their own FHSA and pool those savings together towards the purchase of a home?

KC: Yes, they can. So each of them can start their own FHSA account and when they buy a home they can go in together. Because in order to use the FHSA amount to buy a home, you need to have at least 10% equity stake. So even if you want to buy a home with friends, right, you can have four friends and each of you go in for 25% and that's everyone's first home, each of them can use the FHSA amount to contribute to that home.

SM: So in theory, you could have $80,000 plus whatever additional earnings you've had over those investments. As a couple you could have more than $80,000 towards a home.

KC: Yep.

SM: So that's amazing. So when will this savings account be available?

KC: Yeah, it's coming really soon to Scotiabank. So if you're interested in keeping up to date, go to our website and to FHSA product page and you can sign up for updates. Alternatively, make an appointment to talk to your advisors and start thinking about what's the best way to leverage this account based on your personal situation.

SM: Okay, there's another plan that the government set up for similar purposes, I think, to help people be able to put a down payment on a home. It's called a Home Buyers’ Plan. Can you explain what that is?

KC: Yeah, the Home Buyers’ Plan, and another acronym HBP is within the RRSP. So for first time homebuyers, you can take up to $35,000 from your RRSP, tax exempt, to contribute to your first home. So theoretically, if you are maximizing all your contribution, then you would have $40,000 from your FHSA and whatever growth based on that, plus the $35,000 from your RRSP HBP plan to contribute to your first home. Now, one caveat is the $35,000 that you take from RRSP. You need to pay it back within 15 years.

SM: Okay. So then you'd be making contributions to your RRSP that are really just catching up for what you took out before.

KC: Correct.

SM: Okay. So that's the FHSA. Maybe we'll talk about some of that other sort of alphabet soup of investment vehicles that people have heard about, obviously, but might not know exactly what the differences are between them. Let's start with, we talked about the RRSP, maybe just a little primer on what the RRSP is and how that differs from an FHSA.

KC: Yeah, the RRSP is the Registered Retirement Savings Plan. It is intended to help you to save for your retirement. So there is a contribution limit everyone has to contribute your RRSP.

SM: Is that based on what your income was the previous year?

KC: Yep, it is calculated based on your income level and there's up to a maximum amount that you can contribute to it. So the dollar you contribute to it is tax deductible, that's where you get tax refund coming back. And then you can grow your investment in that account. You can keep growing it. By the time you retire and you start taking money out, that dollar will become taxable income down the road.

SM: Right.

KC: So the idea is you're now in your money-earning years, you're in high tax bracket. When you are in your retirement, you start drawing those funds out and you're probably in a lower tax bracket and that's some benefits in there.

KC: So the tax burden is less then when you're taking it out.

KC: Exactly.

SM: So if somebody earns like $50,000 and they invest $5,000 in RRSP, then their taxable income comes down by the $5,000.

KC: Exactly.

SM: And it’s at $45,000 of taxable income. Okay. So then when you hit the age of 71, the RRSP becomes a...

KC: RRIF, which is the Registered Retirement Income Fund. So essentially, instead of going in contributing mode, you're in a withdrawal mode. So you need to convert that RRSP to RRIF and you can start taking money out. And the money that you take out, as we said before, will be taxable.

SM: Right. And if I understand correctly, you're actually required to take some of it out, right?

KC: There's a minimum amount that you need to take out per year when it’s converted to RRIF.

SM: Right, okay. So TFSA has now been around for a while. People are maybe a bit more familiar with it. But tell me how that works and how that differs from the RRSP.

KC: Yeah, so Tax -Free Savings Account, that's what it stands for. It's basically to help Canadian to save money and whatever capital gains that they get is tax free. That’s what the tax-free part is. The only difference is, let's say you make $1,000 and then it'll be taxable. And then whatever you contribute to TFSA is post-tax.

SM: Right.

KC: So you do need to pay for the tax for the amount that you invest in the TFSA. The good thing is, let's say $1,000 after X number of years becomes $2,000, the incremental $1,000 is tax exempt. So you’re growing your money tax free.

SM: So it's the growth that's tax free. It's not the initial investment in the TFSA.

KC: That's right.

SM: And there’s also a limit on how much you can put in a TFSA?

KC: Yeah. That the limit each year is different based on the rate set by the government. But you can easily go look up what is the historic rate and all the amounts carry forward. So it's always good to check how much room you have and essentially if you have money you’re putting in a savings account, if you have room in TFSA, it's better to put it in TFSA because the incremental interest that you earn will be tax free.

SM: Right. So you think it's around $6,000 or $7,000 a year? I think it's somewhere around that.

KC: Yep.

SM: And that just accumulates. You don't put any money in a TFSA for ten years, you've got $60,000 or $70,000 worth of TFSA room.

KC: That's right.

SM: And if you take money out of your TFSA at a certain point, does that reopen the room that you have in it?

KC: Yes, it does. And you need to wait until the next tax year to contribute that room back.

SM: Okay.

KC: So if you max out in your limit, you take $5,000 out this year, you cannot put $5,000 back in this year, you've got to wait till next year to put that $5,000 in.

SM: Right, okay. All right. We'll move on to the next one, the RESP. I understand you yourself now have a six-month-old.

KC: [laughs] Yes.

SM: And you're probably thinking about this yourself. Tell us about the RESP.

KC: Yeah, that is the Registered Education Savings Plan. And so, it's basically the government tries to incentivize Canadians to save for post-secondary education. So the Canadian government will match up to a certain percentage of your contribution every year, up to a lifetime of $7,200 that the government would contribute to add to your contribution to RESP. Right, so every year you can contribute your RESP government will match up to, I think between 10% to 20% depending on income level, up to $7,200. And then you can accumulate those dollars. And when it's used for your children's education, the incremental gains on those will be tax exempt.

SM: Right. So pretty much free money. So even if you're not making a great rate of return on whatever you invest in the RESP, you're still getting something back because the government's topping it up.

KC: Absolutely.

SM: Right. And then when, say, your kid goes off to university and you're using the RESP money, you're withdrawing that from the account, that's taxable?

KC: For the student.

SM: Right.

KC: And so the student probably at that time doesn’t earn an income, so he or she wouldn't be taxed in that situation.

SM: Right or at a very low rate.

KC: Or at a super low rate, yeah.

SM: Okay. All right. The next one, perhaps fewer people might have heard about what's an RDSP.

KC: It’s the Registered Disability Savings Plan. So this is a program for individuals with disabilities to save money, and there's actually government contributions. So you can receive up to $3 of government funding for every dollar that you contribute based on the income level of the individual.

SM: And finally, an MPSA.

KC: Stephen, you should be familiar with that one because it's our own product.

SM: I know, I’m a little embarrassed.

KC: It's the momentum plus savings account. And so, that's not related to any registered account, it’s a high interest saving account that we offer our customers. And so if you're looking for good rates to put some money away and you can lock some money in, then that's a good vehicle for you to earn some interest.

SM: All right. Get a little plug in there, that's good.

KC: That's right. Those are the key alphabet saving plans.

SM: Well, Kingsley, thank you so much for explaining that alphabet soup of savings plans. Thanks so much for doing that.

KC: Thanks for having me, Stephen. It's great to be here.

SM: I've been speaking with Kingsley Chak, who is Senior Vice President of Deposits, Savings and Investments at Scotiabank. And hey, this is our last episode of the season. I want to thank all of our listeners for tuning in week after week. And we look forward to seeing you in the fall for another season.

The Perspectives Podcast is made by me, Stephen Meurice, Armina Ligaya and our producer Andrew Norton. For a transcript of this episode, visit our website, Scotiabank.com/Perspectives. Have a great summer and we’ll see you next time.