What Happens to Your FHSA If You Don’t Buy a House?

Re-evaluating financial goals

While the FHSA is designed to help you purchase your first home in Canada, it's normal for circumstances to change along the way. For instance, the following could occur:

• Personal life changes. Career relocations, family considerations, or lifestyle choices may make homeownership in Canada a less practical choice.

• Financial goal shifts. Rising home prices or a desire to focus on retirement savings could lead to different priorities taking over.

• Market conditions. Housing affordability or interest rate hikes might make buying less appealing, even for those with significant savings.

If homeownership is no longer in your plans, it's essential to reassess your financial objectives. Review your financial goals annually or after significant life changes to ensure your investments remain aligned with your priorities. Consider whether the funds could better support retirement, education, or other long-term goals.

The good news is: Even if you don't use the funds for a home, the tax benefits and flexibility make the account a valuable savings tool.

FHSA alternatives to purchasing a home

Your FHSA can stay open for 15 years or until the year you turn 71, whichever comes first. You must also transfer your FHSA to a Registered Retirement Income Fund (RRIF) as soon as you turn 71.

You can contribute up to $8,000 annually to your FHSA, with a lifetime limit of $40,000. If you don't use your FHSA savings to purchase a home, you have 2 choices:

1. Withdraw the funds

While you can withdraw the funds outright from your FHSA, you should know the entire amount will be treated as taxable income in the year you make the withdrawal. This could push you in a higher tax bracket, increasing your overall tax rate. For instance, if your annual income is $75,000 and you withdraw $25,000 from your FHSA, your total taxable income for that year becomes $100,000. Depending on your province, this may result in a significantly higher tax bill.

Beyond the immediate tax consequences, such a withdrawal can impact your long-term personal finances. The funds you withdraw will no longer be available to grow tax-free, meaning you lose out on the compounding benefits over time. Additionally, if you were planning to use the FHSA for retirement savings as an alternative, this option would no longer be viable, potentially requiring adjustments to your financial plans.

2. Transfer funds to an RRSP or RRIF

You can transfer the unused funds to a Registered Retirement Savings Plan (RRSP)or an RRIF without affecting your existing RRSP contribution limits. For your savings to continue growing in a tax-deferred environment, it's important not to withdraw the funds yourself but to arrange for a direct transfer from one financial institution to another.

Simply fill out Form RC721, Transfer from your FHSA to your FHSA, RRSP or RRIFand provide it to your financial institution. When you eventually withdraw the funds, they will then be treated as taxable income.

Note: Once you transfer funds from your FHSA to an RRSP or RRIF, you lose any unused FHSA contribution room, as it does not reset or become available again in the future. This means you forfeit the opportunity to contribute additional funds to your FHSA, even if you haven't reached the lifetime contribution limit of $40,000 or the annual limit of $8,000.

Example: Let's say you opened an FHSA and contributed $5,000 in the first year, leaving $3,000 of your annual contribution room unused. If you decide to transfer the $5,000 to your RRSP, the $3,000 of unused annual contribution room is permanently lost. Additionally, you can no longer contribute further to the FHSA in subsequent years, even if you haven't yet reached the lifetime limit of $40,000.

Transferring FHSA funds

If you decide not to use your FHSA savings to buy a home, transferring the funds to another registered account, like an RRSP or RRIF, can be a smart move. This option allows your savings to keep growing tax-free until you withdraw them later, typically in retirement. You can transfer up to $40,000 from your FHSA without impacting your existing RRSP contribution limits.

However, it's important to understand that once you transfer the funds, you lose some benefits tied to the FHSA. Specifically, the transferred amount no longer qualifies for the annual FHSA tax deduction carry forward. In simple terms, if you were hoping to use unused FHSA contribution room in the future to reduce your taxable income, you won't have that option after the transfer.

Example: Let's say you've contributed $20,000 to your FHSA, and thanks to smart investments, the account has grown to $25,000. If you decide not to buy a home, you can transfer the full $25,000 to your RRSP or RRIF. This transfer doesn't affect your RRSP or RRIF contribution room, meaning it's like getting extra RRSP savings space.

However, if you had $5,000 of unused FHSA contribution room from previous years, transferring the funds means that $5,000 is lost—you won't be able to use it in future years to reduce your taxable income.

This makes transferring a great option for long-term savings, but it's important to weigh the trade-offs and understand what you're giving up in terms of future FHSA benefits.

Tax considerations

While transferring the funds is tax-free, withdrawing them outright could have significant tax consequences while reducing your actual savings. When you withdraw funds from your FHSA, the entire amount is added to your taxable income for the year. If this pushes you into a higher tax bracket, you could be subject to a higher tax rate on the withdrawn amount. This increase in taxable income could result in a larger overall tax bill, reducing the net amount of the withdrawal that you can use.

On the other hand, transferring the funds to an RRSP is a tax-deferred option that provides additional retirement savings. This ensures the funds continue to grow tax-free until they are withdrawn later in retirement, at which point they are taxed as income. However, transferring the funds to an RRSP means you lose your FHSA contribution room permanently, eliminating any opportunity to replenish or further contribute to your FHSA.

Example: Let's say you earn $90,000 annually, placing you in a certain tax bracket. If you withdraw $20,000 from your FHSA, your taxable income increases to $110,000. This may move part of your income into the next tax bracket, subjecting the additional $20,000 to a higher tax rate.

However, if you transfer the $20,000 to your RRSP instead, you avoid immediate taxation, and the funds remain sheltered for additional retirement savings—but your FHSA contribution room is gone for good.

Carefully consider these impacts when deciding between withdrawing funds or transferring them to an RRSP.

Flexible, tax-smart savings for any path you choose

The FHSA offers significant tax advantages for first-time homebuyers. However, if your plans change, the FHSA rulesalso offer flexibility, ensuring your hard-earned savings can still support your financial future.

Whether you're saving for your first home or simply want to grow your investments, TurboTax can guide you on the tax implications of your financial decisions. Understanding how to claim a FHSA on taxes and how it integrates with other accounts ensures you maximize its benefits while adapting to your evolving financial goals. With escalating home prices and interest rate fluctuations, saving for a down payment has become a challenge. By making informed decisions, you can confidently navigate your savings journey—whether you use them for a home purchase or not.

Frequently asked questions (FAQs)

Is an FHSA tax deductible?

Yes, an FHSA is tax deductible. The FHSA rules were crafted to encourage Canadians to save for a home while enjoying both tax deductions and tax-free growth. They allow lifetime savings of up to $40,000 with annual FHSA contribution limits of $8,000.

What happens to an FHSA's unused contribution room?

Unused contribution room carries forward to future years and is calculated on a per-person basis, not per account. That means, while you can have multiple FHSA accounts, your total contributions across all accounts cannot exceed the annual and lifetime maximums set by the Canada Revenue Agency (CRA).

The accounts can remain open for 15 years or until you turn 71, whichever comes first. Once transferred, the FHSA contribution room is permanently lost.

Can you take money out of an FHSA?

While you can make withdrawals from an FHSA, they won't be tax free if they're not used towards purchasing a home and may also lead to significant tax liabilities. If you don't buy a home, you can either transfer the funds tax free to an RRSP or RRIF or withdraw them as taxable income.

Avoid withdrawing the funds outright if you're in a higher income bracket to minimize tax liabilities.

Transferring between registered accounts can seem complicated, but help is on hand to make it easier.

Do your taxes on your own, with a helping hand, or we'll do it for you.

Get Started