Get group TFSAs working for you

As an advisor you now have another valuable product on your shelf to introduce to your clients. Most people are trying to catch up with what a Tax Free Savings Account (TFSA) is these days, never mind the “group” part. Let’s start at the beginning and walk through it together.

Years ago, the Canadian government came up with a way to encourage everyone to save for their retirement. The Registered Retirement Savings Plan came into being with this thinking in mind: if you and I put money away on a regular basis then the government would give us back the tax now which was deducted from our paychecks. They would not make us pay tax on the interest and dividends earned until we actually took the money out.

Yes, Virginia, there will always be a tax to be paid.

Why were they so generous? Because when we do take out that money, there will be more of it and they will get more tax. The plan is good for us too as long as we didn’t take out all of the money at once because we are in control of the amount of tax we had to pay back.

Everyone immediately jumped on the “save the tax” bandwagon in order to obtain refunds and large sums of money began to accumulate. This money was clearly for retirement but as it often does, life got in the way. People wanted to buy homes. Their houses needed repairs. Cars broke down. Some people were laid off and wanted to go back to school to give themselves more earning power. Some got sick and had no critical illness insurance to help them get through that period.

This created a clear dilemma. Some people had to withdraw funds and they got upset when they had to pay back the tax on their own money. The government thought things over and decided they would allow people to take out some of the money for two re-retirement purposes. One type of withdrawal was to buy their first home and the second was to go back to school. It encouraged the housing sector and created a better educated workforce. There are conditions to taking that money out so be careful to advise your clients professionally before withdrawing funds.

One of the serious complaints about RRSPs are that the date you must begin taking money is set by your age and also the amount you must take out at any time is mandated. With people living longer and not having saved enough, they didn’t like taking the money out until they were ready. Most clients enjoy the comfort of having some money tucked away and don’t like to see it diminish. In a down year like 2008, because withdrawal amounts are based on the previous year, folks felt that they were draining their savings.

In 2008 a very interesting new plan was put in place which answered some of the complaints that had surfaced regarding the Registered Retirement Savings Plans. What if everyone were allowed to put away up to $5,000 per year as an investment and never paid tax on the earnings of that investment and be able to take it out when they wanted to and in the amounts they wanted? Even better what if they could re-use the deposit room when times were better and never paid tax on the money either?

To be fair, there would be no immediate tax refund on the money deposited so the government wouldn’t lose all the revenue on that money. Since we all want schools, paved roads, medical care, we do need to contribute to government coffers. That’s how the Tax Free Savings Account came to be.

Now let’s talk about how this can put more money in your pocket while helping your clients plan for a rainy day and saving them tax at the same time. Most employees are familiar with the idea of contributing to their RRSP through a plan with their employer. Those advantages are for another article.

Would your clients who are employers be interested if you asked them to look at a new service for their employees which would not cost them anything except the time to write a check once a month from employees’ money? In the real world, payroll departments are often asked by employees for advances because of one sort of emergency or another. With a Group Tax Free Savings Plan in place, the employee can simply ask you for some of their own money in order to take care of these type of things without affecting future pays.

I can hear you thinking…Why would I want them bothering me?

Well, would you like to have more contact with new people? Being perceived as the person who helps when they are in financial trouble is a great way to build trust and respect. It also begins the conversation about how you can help them take care of their finances in the future. As we all know everyone needs to have insurance and investments outside of their workplace and it might as well be you. Would you’d rather make cold calls instead?

It is now possible to have a Group Tax Free Savings Account with your employer which allows you to invest in Segregated Funds (insurance backed investments), Mutual Funds, Guaranteed Investment Certificates or a combination of them. You don’t need to set up withdrawals from the employee’s bank account. This plan makes the employer a one-stop place to help worker’s take care of themselves.

Talk about a very nice corporate image!

Employees won’t ever have a shortfall for taking care of their emergencies and their retirement savings because they will be deducted before the money goes home. By combining the two major objectives with their employer they will have both a saving pocket for those life happenings and another living pocket for the time when they either don’t want to or can’t go out and make a living.

Good employers care about the people they work with every day. They want to ensure that when there is a need, it will be taken care of. Helping their employees to be financially wise through providing tools to help them is a hallmark which bosses strive for. If you aren’t approaching those employers you are missing a huge opportunity.

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Sue Ricketts, I.C.I.A., is a group and living benefits broker from Guelph, Ontario.

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Sue Ricketts