TFSAs still not used to the fullest

While the economy and the mood of Canadians continue to improve after the recession, life for the new Tax Free Savings Account (TFSA) doesn’t seem to be getting a whole lot better.

They’ve been called one of the best financial savings instruments to come along in decades since the introduction of the Registered Retirement Savings Plan (RRSP), and they’ve been available for a year and a half.

But Canadians still don’t seem to know much about them.

A recent test conducted for Mackenzie Investments found that Canadians still have a lot to learn about the little savings accounts.

“A number of Canadians already have taken advantage of the TFSA, but many still need to learn about this new vehicle for building wealth,” says Wilmot George, Director of Tax and Estate Planning for Mackenzie. “It’s encouraging to see Canadians are turning their attention to the TFSA, but when it comes to learning the basics, there’s still some work to be done. When the government gives you a tax break, you’ve got to take it.”

A recent poll by RBC found that most Canadians are aware of TFSAs but 76 per cent haven’t yet opened one, either because they don’t have the money to invest or they don’t fully understand how they work.

In the Mackenzie test, only 41 per cent of respondents knew that you can hold a broad range of investments in their TFSA including stocks, bonds and mutual funds, and only 43 per cent knew that contributions to a TFSA are not tax deductible as they are with an RRSP.

Although there is no tax deduction for contributing to a TFSA, the returns that your investments generate through interest, dividends or capital gains are not taxable, except for any foreign tax on foreign investments. As well, your withdrawals from the TFSA are tax free.
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In the TFSA test, only 36 per cent knew that if you don’t contribute the full $5,000 in a year, the remaining contribution is not lost, and only 22 knew correctly that an individual can have more than one TFSA account.

On the positive side of the test results, 63 per cent were correct in knowing that contribution room to a TFSA does not depend on earned income.

Regardless of your income level, any Canadian resident age 18 or older with a social insurance number can open a TFSA. The annual contribution limit in 2009 was $5,000. This limit will rise along with inflation in future years in $500 increments.

The test found that young people need the most education about TFSAs. Only three per cent of 18-24 year olds answered all five questions in the test correctly. It also reconfirmed the results of the earlier RBC poll, showing that the majority of Canadians (68 per cent) still haven’t opened an account.

The Mackenzie survey also revealed that, given the change in the economic climate, 39 per cent of TFSA holders are planning to adjust their investments to benefit from the more favourable market conditions.

Only about 44 per cent of people who have opened an account have made the maximum $5,000 contribution and one third have contributed $1,000 or less. The overall average contribution to TFSAs is close to $3,000.

“What you don’t know (about TFSAs) can mean a lost opportunity,” says George. “Canadians have a great opportunity to grow their savings free of income tax through a variety of investments in a TFSA, not just lower interest savings accounts. Mutual funds can provide various levels of growth while managing risk through diversification. A financial adviser can help investors choose investments that are best suited to them.”