2012 Resolution: Educate clients on TFSA

It’s right there on the federal government’s website for the Tax Free Savings Account: “Saving just got a whole lot easier.” Despite that claim, however, Canadians continue to fumble with their TFSA.

One in four Canadians believe their contributions and withdrawals are tracked by either their financial institution (23%), the government (12%) or their advisor (7%), according to an Angus Reid Public Opinion poll commissioned by ING DIRECT.

While all three keep tabs on the inflows and outflows, it remains the responsibility of the investor to track this information as well, as over-contributions are subject to penalty. Excess contributions are liable to a tax of 1% per month, according to the CRA website.

“Like any registered product, there are certain rules when it comes to investing in a TFSA, but it takes minimal effort to familiarize yourself with the ins and outs of the account,” says Peter Aceto, president and CEO of ING DIRECT Canada.

Many Canadians seem to be confusing the TFSA with an RRSP, with 35% saying they were not sure if contributions were tax deductible, while 8% believed they were. Roughly 10% thought they would have to pay tax on funds withdrawn from the TFSA, and another third were unsure.

The survey also found that 13% of Canadians didn’t even know what a TFSA is, while 37% had a vague notion. How the TFSA works is a mystery to 14% of Canadians.

“The Tax-Free Savings Account is an invaluable tool when it comes to saving money for the future, but unfortunately many Canadians are unclear about the rules, which can lead to over-contribution mistakes and frustration for savers,” says Aceto.

The survey found that 47% of Canadians with a TFSA were just leaving the cash in a savings account, rather than seeking potentially higher returns through risk assets. Mutual funds were the second most popular option, at 19%, while 13% of savers opted for GICs and 10% invested in stocks or bonds directly.

Staff

The staff of Advisor.ca have been covering news for financial advisors since 1998.