Two of Canada’s leading banks have noted an influx of interest from young Canadians towards the newly introduced First Home Savings Account (FHSA) as they accumulate funds for their initial home purchase down payment.
The allure of the FHSA lies in its blending of the tax advantages of both the Registered Retirement Savings Plan (RRSP) and the Tax-Free Savings Account (TFSA). However, the challenge emerges in determining the optimal investment strategy, given the fluidity of the potential investment duration.
Similar to RRSPs and TFSAs, FHSA allows for diverse investment opportunities. But the funds must be readily available for withdrawal when a user decides to place a home offer, ranging from an immediate withdrawal up to a 15-year span, post which it can transition into an RRSP. This can make certain investments, like equities during a market slump or fixed-term bonds and guaranteed investment certificates (GICs), problematic.
Tax Benefits with FHSA
The inherent tax savings associated with a FHSA make it a worthy investment, even if it remains within a high-interest savings account, especially when those tax savings are compounded.
Contributions enjoy tax deductions akin to RRSPs, while investment gains remain untaxed (similar to TFSAs), provided the funds are channelled towards a first-time home acquisition. The extent of tax savings depends both on the investor’s income bracket and the performance of the invested assets.
There’s an established ceiling of $40,000 for lifetime contributions to FHSAs and an annual cap set at $8,000.
Guidance from Investment Consultants
Major banks such as RBC and National Bank of Canada, along with Questrade and Fidelity Investments Canada, are at the forefront in offering FHSAs.
RBC extends its FHSA services via its Direct Investing platform for autonomous investors, encompassing a plethora of options from GICs, mutual funds, ETFs, to stocks and bonds. Concurrently, the bank also provides a similar suite on its RBC InvestEase platform, where investment consultants curate customized investment packages for clients based on their risk appetite and investment timeframes.
National Bank of Canada similarly offers individually customized investment avenues, guided by seasoned professionals.
Minimizing Fees to Maximize Returns
In principle, opening a First Home Savings Account shouldn’t incur costs. However, it’s crucial to remember that banks thrive on profits, and a significant chunk of their revenue from accounts like FHSA, RRSP, and TFSA arises from associated investment fees.
These expenses can potentially offset the gains from the investments and even the tax advantages.
While self-managed accounts tend to have the leanest fees, the associated investments can sometimes be pricey. It’s not uncommon for mutual funds to carry annual charges that surpass two per cent of the total investment, which could dent returns from short-term investments.
Usually, direct charges aren’t associated with high-yield savings accounts or GICs, which, at present, yield yearly returns close to five per cent.
Given the financial sector’s knack for introducing intricate fee structures, it’s imperative to ask the right questions and remain informed.