Should you open an FHSA before December 31?

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Michael Callahan, CFP®, CIM®

The First Home Savings Account (FHSA) is a government-registered, tax-free investment savings account to which you can contribute up to a lifetime maximum of $40,000 toward the purchase of your first home.

Eligibility: Can you open an FHSA?

Before we look at whether it makes sense to open an FHSA this year, let's first review the requirements to open an FHSA. To be eligible to open an FHSA, you must:

  • Be a resident of Canada,
  • Be at least age 18 (or age 19 in provinces where 19 is the age of majority) but less than age 71,
  • Not have lived in a home owned by you or your spouse/common-law partner in the year that the account is opened, or the previous four years,
  • Not have previously used an FHSA to buy a home.

Of course, just because you can open an FHSA this year, it doesn't necessarily mean you should. Now that we've covered the eligibility requirements for opening an account, let's look at some key factors to consider when determining if it makes sense for you to open an FHSA this year.

Benefits of opening an FHSA this year

In addition to the $40,000 lifetime FHSA contribution limit, there is also an annual $8,000 contribution limit. Carryforward room accumulates only after the FHSA is open. This is perhaps the top advantage to opening an account before year-end: to gain the contribution room for this current year, which can be carried forward if not used in the current year. Of course, the other key advantage to opening the account and making contributions as soon as possible is to maximize the timeframe available for tax-sheltered compound growth.

Drawbacks of opening an FHSA this year

On the other hand, there are some potential drawbacks to opening an account too early.

First, the FHSA has a maximum lifespan of 15 years, so opening an account prematurely could result in the forced closure of the account before you're ready to make a home purchase. For example, an individual that opens the account at age 18 would have to purchase a home by age 33, else the FHSA would be collapsed and the withdrawals fully taxable. Furthermore, given that FHSA contributions are tax-deductible, those deductions are more advantageous when your income is higher and you're in a higher income tax bracket. Granted, it's possible to contribute to an FHSA in one year and claim the deduction in a subsequent year. If you're at a younger age with lower income, it may be beneficial to wait until a future year to make your FHSA contributions, or at least wait until a future year to claim the deduction.

The FHSA presents Canadians with a great opportunity to save toward the purchase of a home. To find out if opening an FHSA makes sense for you, speak with your Edward Jones advisor today.