Canada's retirement landscape just expanded recently with the launch of the First Home Savings Account, or FHSA on April 1, 2023.
Combining both aspects of a Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP), the FHSA is designed to provide prospective Canadian homebuyers with a leg up in today's increasingly hot real estate market.
While investors can opt for the usual bank offerings of GICs and mutual funds in this account, I think ETFs offer a compelling, low-cost alternative for the rest of us DIY investors. Here's all you need to know about the FHSA and a guide to selecting some great Canadian ETFs picks.
What is the FHSA?
As the name suggests, the FHSA is designed to help Canadians save and invest for the purchase of their first home. As it stands, the FHSA has numerous features that are designed to make home ownership more accessible and affordable, including:
- Tax advantages: Like an RRSP, contributions made to an FHSA are tax-deductible, meaning you can deduct them from your taxable income to reduce the amount of tax you have to pay. Additionally, any investment income or growth within the account is tax-free.
- Contribution limits: You can contribute up to a $40,000 lifetime total to your FHSA. When you first open a FHSA, your contribution room is capped at $8,000. You can also transfer funds from your RRSP to a FHSA, but this will count against your contribution room. Income or capital gains earned in a FHSA will not reduce subsequent contribution room. Unused contribution room can be carried forward to subsequent years.
- Withdrawal conditions: You can withdraw funds from your FHSA to buy your first home without paying any taxes if it is a qualifying withdrawal. This is subject to filling out Form RC725, being a first-time home buyer, having a written agreement to buy or build a qualifying home, being a Canadian resident, and intending to occupy the home within a year after buying or building it.
To be eligible for the FHSA, you must be a Canadian resident and at least 18 years old. You should also be a first-time homebuyer, meaning you or your spouse/common-law partner must not have previously owned a home or lived in a home owned by either of you during the past four years. For more information on the FHSA, check out the Government of Canada's information page.
DIY FHSA investing with ETFs
Questrade was one of the first brokerage platforms in Canada to offer the FHSA, with the Big Six banks and Wealthsimple expected to follow suit throughout 2023. For DIY investors, the FHSA is offered in a self-directed version for those who want to manage their own portfolios. As a qualified investment, ETFs are eligible to be held in this account.
The FHSA has a time limit, called a maximum participation period. This ends on December 31 of the year in which the earliest of the following events occur:
- Your FHSA hits its 15th anniversary from when it was opened.
- You turn 71 years old.
- A year elapses from your first qualifying withdrawal.
This gives us a defined maximum time horizon to work with of around 15 years. Accordingly, ETF selection should be based on this and an investor's risk tolerance.
For those looking to make a qualified withdrawal within the next one to three years, a very low-risk option would be cash-like ETFs that hold their deposits in high-interest savings accounts. The yield on these ETFs moves in lockstep with the current Bank of Canada policy interest rate, so right now they're paying out competitive income.
- Purpose High Interest Savings ETF (TSX:PSA)
- High Interest Savings Account Fund (NLB:HISA)
- CI First Asset High Interest Savings ETF (CSAV)
- Horizons High Interest Savings ETF (TSX:CASH)
For those with a longer time horizon of 3-10 years, cash-like ETFs may not be ideal, especially if interest rates drop. In this case, a conservative (say, 40/60) blend of global equities and short-term Canadian aggregate (government and corporate) bonds could provide a good balance of risk and return:
- iShares MSCI World Index ETF (XWD)
- iShares Canadian Short Term Bond Index ETF (XSB)
Finally, for the young investors just starting out and looking to get a good downpayment going over the next 10-15 years, a classic 60/40 portfolio using an asset allocation ETF could provide an optimal blend of growth and preservation of capital over a longer time horizon.
- Vanguard Balanced ETF Portfolio (VBAL)
- iShares Balanced Income CorePortfolio Index ETF (XBAL)
- BMO (TSX:BMO) Balanced ETF (ZBAL)
- Mackenzie Balanced Allocation ETF (MBAL)
This content was originally published by our partners at the Canadian ETF Marketplace.