Weekend Reading – The New Tax-Free First Home Savings Account (FHSA)
Welcome to a new and important edition, especially those saving for a home, highlighting the new Tax-Free First Home Savings Account (FHSA).
More on that theme in a bit.
First up, some recent reading material!
A reminder when it comes to long-term portfolio returns, owning a few high-yield stocks is hardly a bad move. Don’t take my word for it. An expert recently mentioned this in this edition:
“If you read my recent exploration of the poor returns generated by stocks with extremely high yields, you might be surprised at the 13.7-per-cent average annual return of the high-yield portfolio.”
I also moved up a revised post on my site from 2012, not a typo, about how I feel about the RRSP-generated tax refund when it comes to the RRSP vs. TFSA debate.
Consider this tax season…
Finally, in a very popular recent Weekend Reading edition, I highlight how much spending $1.7 million really is – given many Canadians feel they need $1.7 million to retire.
Just don’t skip breakfast on your financial journey, that’s important to your overall health despite what the WSJ says! Geez…
Back to my theme for this week, the FHSA and reasons why younger Canadians should really opt-in to opening this account with any intention to buy their first home over time…
The New Tax-Free First Home Savings Account (FHSA) Facts:
- Think of the FHSA like a hybrid of the Registered Retirement Savings Plan (RRSP) / Home Buyers’ Plan and Tax-Free Savings Account (TFSA): FHSA contributions are tax-deductible like the RRSP and qualifying withdrawals out of the account are not taxed just like the TFSA.
- To be eligiable to open and contribute to your FHSA you must be:
- A Canadian resident + 18 years or older + *a first-time home buyer. (Meaning, existing homeowners AND folks that owned a home in the *last four preceding years of trying to open the FHSA won’t qualify to open this account).
*An individual is considered to be a first-time home buyer if at any time in the part of the calendar year before the account is opened or at any time in the preceding four years they did not live in a qualifying home (or what would be a qualifying home if located in Canada) that either (i) they owned or (ii) their spouse or common-law partner owned (if they have a spouse or common-law partner at the time the account is opened).
- The FHSA can hold stocks and bonds and ETFs just like the TFSA and RRSP.
FHSA Contributions and Tax Deductions:
- Individuals would be able to claim an income tax deduction for FHSA contributions made in a particular taxation year; contributions currently capped at $8,000 per year up to a $40,000 lifetime contribution limit. So, a solid 5-years of striving to max-out the account for tax-free withdrawals.
- Like the TFSA, your unused FHSA contribution room can be carried forward to the following year but only up to a maximum of $8,000.
FHSA Holding Period and Withdrawals:
The account can stay open for 15 years OR until the end of the year you turn 71 (not very likely???) OR until the end of the year following the year in which you make a qualifying withdrawal from an FHSA for the first home purchase, whichever comes first.
FHSA worst-case? What if you open an account and you don’t purchase a home??
Any savings not used to purchase a qualifying home could be transferred to an RRSP or RRIF (Registered Retirement Income Fund) on a non-taxable transfer basis, subject to applicable rules. Of course, funds transferred to an RRSP or RRIF will be taxed upon withdrawal.
My FHSA Thesis
Overall, pretty great stuff with the FHSA and a major opportunity for younger investors who are really trying to find ways to sock away more money for their very first home.
Ideally, from a taxpayer and much more practical perspective, I wish our government would have done one or two very simple things:
- Increase annual TFSA contribution limits so that no boutique FHSA is required, and/or
- Alter the RRSP Home Buyers’ Plan such that if younger folks really, really wanted to borrow money from their future-self, they could, by increasing that borrowing limit slightly and also without any HBP payback responsibilities in the 15-year period.
Two very simple changes that don’t complicate our tax system and the support other saving and behavioural approaches. Meh, tax simplicity is not going to happen in my lifetime…
Guess what? Dividends matter.
In previous and other Weekend Reading editions, I’ve highlighted “dividends matter” despite some folks (i.e., some not all advisors) in the financial community saying otherwise. I get what they are saying to a point, dividends unto themselves are not magical nor essential to drive total returns. Sure.
But the reality is, and thankfully indexing giant Vanguard is now saying this – that dividends do really matter. As in A LOT.
In a recent article and I quote:
“The bedrock of long-term returns
Dividends can play a crucial role in driving long-term equity returns. This is even the case in stock markets which have traditionally been considered growth-led, such as the US. The chart below highlights the importance of dividends when compounded over long time horizons for the S&P 500 index – and the contribution of dividends may surprise some investors.
Contribution to long-term total returns in the US equity market
I’m not sure that is too surprising since whether you decide to own some individual paying stocks, that pay dividends, or you index invest in all stocks that pay some dividends, lots of dividends or no dividends at all – of course as part of total returns dividends do matter.
And they matter to me like many investors for the purposes of optionality.
From My Dividends page:
- Reason #4 – companies know investors like optionality. You see, in a perfect world, all businesses would allocate capital in a way to perfectly maximize the return on that capital. This would be done so reinvested money would go back into the business in way that pays off immensely for the shareholder (by increasing returns over time AND by continually reducing the company’s tax burden). But you should know by now we don’t live in a perfect world. This means shareholders have over time demanded a dividend – for the purposes of “optionality”. Shareholders like optionality – and dividends provide that optionality – to give investors the choice to increase or decrease their exposure to the business. Reinvested dividends therefore, take advantage of that optionality, to increase exposure. Dividends taken as cash, do not….meaning you can spend your money as you please…
And from RBC, on the returns:
Congrats to Cheesy Finance, outstanding work.
CNQ just provided shareholders like me/us a 6% raise. Raises matter. On top of that, more to come from CNQ in 2023 if you own some…
Canadian Natural Resources Limited
Quick Take 4Q—Accelerates 100% Payout Plan and Canada's 2023 budget preview 🤣🤣$cnq #com #oott #stocks #investing #retirement #passiveincome #divtwit #dividends #oilandgas #crude #oilsands #canada #alberta #cdnpoli pic.twitter.com/CkiCLEAASg
— Burnsco (@garquake) March 2, 2023
On real estate…
Maria and her family continue to invest in real estate. Check out her 2023 real estate investing strategy below:
On investing fees…they matter too!
From my friend, Mark Noble:
Before I moved to ETFs I had this issue in my first portfolio I built. I took the time to break down the math, and it was almost exactly due to the compounding of fees which were on average 100 to 150bps more than an equivalent exposure index strategy. Fees matter.
— Mark Noble (@Swordless) March 3, 2023
I interviewed Mark here on low-cost Horizons ETFs as strong considerations for your tax-efficient portfolio.
Dividend Growth Investor was also on the same wavelength, related to money management fees.
“The more fees you pay each year, the less money you have to compound for you. Unless you are paying for an exceptional investment manager, it is simply not worth it.”
As a follow-up to “RRSP season”…
Now that you’ve contributed to your RRSP, and should you wish to avoid any individual stock selection based on your investing temperament and objectives, Cashflows & Portfolios highlighted some the Best ETFs for Your RRSP this week.
A reminder…that free site Cashflows & Portfolios is pretty much dedicated to helping you manage your cashflow and portfolio wisely including any drawdown plans.
After visiting the site, hit me up on our Contact page to find out more about our services.
I use professional financial software to deliver customized, personal reports to help you answer just some of the following:
- Do you have enough to retire?
- When can you retire?
- How much can you spend?
- Should you take CPP at age 65 or 70?
- How do you minimize the OAS clawback?
- Which account (and when) should you withdraw from for the highest tax efficiency and estate value?
- And more and more!
The best part: because I’m not in the business of providing any direct financial advice, the cost of these services is well below what any financial advisor would charge! BIG time. 🙂
Even if you have your semi-retirement or retirement projections figured out, you might always learn just a bit more by visiting my standing Retirement page with dozens of free case studies and free tools to use.
I’ll be at the Ottawa 67s game this weekend cheering on my hometown team again.
Have a great weekend!