You can tell a lot about who will be using first home savings accounts by looking at the annual $8,000 maximum contribution.
FHSAs are available to people 18 and older who don’t own a home. Know many teenagers or early 20-somethings who have that much to put away each year? Me neither. So let’s get real about FHSAs: lots of money flowing into these accounts is going to come from parents.
One of these parents got in touch recently to ask what the better contribution strategy is for an 18-year-old who is starting university and expected to buy a house at age 33. Start adding $8,000 a year right away or wait until the adult child has graduated and is earning a good salary? Note: the lifetime maximum contribution is $40,000.
Parents cannot add money to a child’s FHSA but they can give them money for a contribution with no tax consequences. FHSAs combine the attributes of tax-free savings accounts and registered retirement savings plans. Assets compound tax-free, and no tax applies on withdrawals. As with RRSPs, there’s a tax deduction for contributions.
The parent asking about FHSA strategies wondered if starting an account early, when a child has minimal income, means forgoing the benefit of tax deduction. Would it be better to start the FHSA at 18 and get the benefit of compounding or wait until later to squeeze the most juice from the tax deduction?
For an answer, I consulted Aravind Sithamparapillai, an associate with Ironwood Wealth Management Group in Fonthill, Ont. He said contributing to the FHSA right away makes sense.
For one thing, the tax deduction can be deferred to a year when the account holder’s income is higher. Also, the tax-free returns generated by contributions starting at age 18 can be significant. Using an after-fee return of 5 per cent, Mr. Sithamparapillai estimated an end value of $75,605 if $8,000 is contributed to an FHSA for five years and the account is open for the full 15 years. FHSAs must be used or transferred to an RRSP after that.
Now, for the alternative. The FHSA is set up at age 24, when it’s assumed the child has graduated and entered the workforce. We’ll assume a home is bought at age 33, which means the FHSA would be active for nine years. Mr. Sithamparapillai said the FHSA in this case would be worth $56,418 by then.
He had some thoughts as well on using the tax deductions generated by full FHSA contributions made for five straight years starting at age 18. He suggested waiting to deduct $24,000 at age 24, when the child is earning a full-time salary, then another $16,000 at age 25. These deductions would produce total tax savings of $11,860 for someone with an income in the $60,000-to-$80,000 range in Ontario.
One more suggestion from Mr. Sithamparapillai: Invest this refund money in a TFSA or RRSP. A benefit of using the RRSP option is that this account can be tapped for a home purchase using the federal Home Buyers’ Plan. The FHSA and HBP can be used for the same home purchase.