Are you currently using a Registered Retirement Savings Plan (RRSP) but want to find ways to maximize your savings for a home purchase? Then, transferring funds from your RRSP to a First Home Savings Account (FHSA) could be a game-changer.
Saving for your first home is a major financial milestone, and Canada’s FHSA offers a way to alleviate some of the financial burden while you knock out that goal.
We’ll walk through the key differences between these two accounts, the process of transferring funds, and practical strategies to maximize your savings. Along the way, Vancity and Aviso Wealth Advisor Sonny Nielsen shares expert advice and real-life examples to help you navigate this financial journey.
We’ll walk through the key differences between these two accounts, the process of transferring funds, and practical strategies to maximize your savings.
RRSP vs. FHSA: What’s the difference.
An RRSP is the cornerstone of retirement planning in Canada and offers provisions for first-time home buyers. Introduced in 2023, an FHSA also offers advantages for those saving for their first home.
“An RRSP is really meant to be for income replacement when you retire,” Sonny Nielsen explains. And, on the subject of the RRSP first-time home buyers withdrawal, Sonny says that yes, there is “a provision where an RRSP allows you to make a first-time home buyer withdrawal from it, but an FHSA is specifically designed for people who have not owned a qualifying home.” With an FHSA, contributions are tax-deductible, and funds grow tax-free within the account, just like an RRSP. But here’s the big advantage: When you withdraw funds from an FHSA to buy your first home, the withdrawal is completely tax-free if it’s a qualifying withdrawal meeting certain conditions. And unlike RRSP Home Buyers’ Plan withdrawals, repayment is not required.
FHSA contributors should be aware that the FHSA contribution deadline is different from the RRSP contribution deadline – which is within first 60 days of the following year. The FHSA contribution deadline is December 31 of that tax year.
FHSA contribution deadline is different from the RRSP contribution deadline – which is within first 60 days of the following year. – Sonny Nielsen, Vancity and Aviso Wealth Advisor.
Why transfer funds from an RRSP to an FHSA.
One of the most appealing features of an FHSA is the ability to combine it with the Home Buyers’ Plan (HBP) withdrawals from your RRSP to buy your first home. This means you can boost your savings by using both programs if you are eligible for both.
“You can do both,” Sonny confirms. “You get to add those things together if you want to.”
Here are the key advantages of an FHSA:
- Tax-deductible contributions: Like an RRSP, contributions to an FHSA can reduce your taxable income.
- Tax-free growth: Your investments grow without being taxed.
- No repayment required: Unlike the RRSP’s Home Buyers’ Plan, FHSA qualifying withdrawals for a home purchase are completely tax-free and don’t need to be repaid.
If you’re concerned about transferring funds out of your retirement savings account, try our retirement calculator to crunch the numbers and see the effect it could have on your future.
One of the most appealing features of an FHSA is the ability to combine it with the Home Buyers’ Plan (HBP) withdrawals from your RRSP to buy your first home.
Drawbacks to using an FHSA.
While the FHSA offers substantial benefits, it’s important to plan for the possibility that you may not end up purchasing a home.
“If you don’t use the funds to buy a home, FHSA contributions are considered income when withdrawn,” Sonny explains. “However, you can directly transfer unused funds back into your RRSP without immediate tax consequences. So there’s not a big downside if you don’t use it for a home purchase.”
If you do use your FHSA account to purchase a home, you must close the account by the end of the year following your first qualifying withdrawal, but may need to be sooner.
The step-by-step on how to transfer funds from an RRSP to an FHSA.
Transferring funds directly from an RRSP to an FHSA is a straightforward process, but there are important rules to keep in mind.
- Open an FHSA – work with your financial advisor to set up your FHSA account.
- Complete a transfer form. This form authorizes the transfer of funds from your RRSP to your FHSA.
- Stay within the FHSA contribution limit. You can transfer up to $8,000 per year to a lifetime maximum of $40,000.
“It’s not exactly seamless, but it is relatively straightforward,” Sonny says. “We aim to make it as easy as possible for the investor.”
Be aware that exceeding your FHSA contribution limit can trigger penalties. As Sonny explains:
“If you transfer more than your contribution limit, there’s a CRA over-contribution penalty of 1% per month on the excess amount.”
Be aware that exceeding your FHSA contribution limit can trigger penalties
Strategies to maximize your savings.
Understanding the timing and tax advantages of tools like RRSPs, Tax-Free Savings Accounts (TFSAs), and FHSAs can help you make the most of your financial strategy.
“Let’s say an 18-year-old doesn’t have a lot of income right now,” Sonny says. “Instead of contributing to an FHSA or RRSP and claim the tax deduction immediately, they might open a TFSA and build up savings. Then, when their income increases, they can withdraw from the TFSA and contribute to an FHSA or RRSP to maximize the tax benefits when they’re in a higher tax bracket.”
Your approach to your financial strategies is going to be specific to your situation and your goals. By speaking to an advisor, you can gain clarity about your options and create a tailored plan to take advantage of what’s available to you.
Planning for the future: A real-world example.
Sonny recalls working with a couple who wanted to gift money to their niece and nephew for a down payment on a house as a living inheritance. When they came to Sonny, he suggested involving the niece and nephew in the conversation and asking what their financial goals were. As Sonny points out, not everyone wants to buy a home, and that’s totally fine.
“Ultimately, we did open a First Home Savings Account for them and created a plan to build up contributions over five years,” Sonny shares. “But we also were able to plan now and say, okay, this is what this account is going to look like in about five years. And this plan allows them to get a foothold of where they want to be, with help from their aunt and uncle’s living inheritance.”
Your financial goals will guide which tools and tactics you should be using. As Sonny says, “When it comes to the First Home Savings Account, it’s a fabulous product. It’s just making sure that it’s used for what it’s intended for.”
Why you should always talk to an advisor.
Navigating the nuances of RRSPs, FHSAs, and other savings tools can be overwhelming. A simple Google search will show you the multitude of options available to you and reinforce the decision paralysis many of us face. Sonny emphasizes the importance of seeking professional advice.
“I can’t stress this enough: Have a conversation with an advisor. It’s not one-size-fits-all. It really is understanding a little bit more about your situation, where you want to be, what you want to do, and then we can recommend the right things for you.”
Take the first step toward homeownership.
Transferring funds directly from your RRSP to an FHSA is a smart way to save for your first home while taking advantage of tax benefits, but understand that this would reduce your retirement savings. With careful planning and guidance from a Vancity and Aviso Wealth Advisor like Sonny Nielsen, you can make informed decisions that bring you closer to your goals.
Need advice?
You can talk to a planner at Vancity about options relating to your specific situation. Not a Vancity member? Open an account online.
Mutual funds and other securities are offered through Aviso Wealth, a division of Aviso Financial Inc. The information contained in this article is from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This information is for informational and educational purposes and is not intended to provide specific advice including, without limitation, investment, financial, tax or similar matters. Using borrowed money to finance the purchase of securities involves greater risk than purchasing using cash resources only. If you borrow money to purchase securities, your responsibility to repay the loan and pay interest as required by its terms remains the same even if the value of the securities purchased declines. Please see our Terms of Use. or complete. This material is not intended to be investment, tax or other advice and should not be relied on without seeking the guidance of a professional to ensure your circumstances are properly considered.