Just over two years ago, I wrote a column for The Globe's investing section about Tax-Free Savings Accounts. It was a few months before TFSAs were widely available (on Jan. 1, 2009) and financial experts, who enthusiastically hailed them as "revolutionary," predicted an onslaught of publicity about how best to use the accounts. TFSAs, they said, were going to be as well known as RRSPs in no time.
Well, the second anniversary is coming up, and there seems to be a lot of confusion amongst Canadians about TFSAs. In a poll released by the Bank of Montreal this week, 36 per cent of respondents say they have a TFSA -- but many are unclear about what you can use them for.
The survey of 1,513 Canadians found 20 per cent did not know that mutual funds are eligible with a TFSA (they are), 26 per cent were unaware that GICs are eligible (they are, too) and 37 per cent had no idea what investments were eligible (cash, mutual funds, exchange-traded funds, stocks, GICs and bonds - if you can put it in a RRSP, you can put it in a TFSA).
The difference between RRSPs and TFSAs is that for RRSPs, you get a tax break when you invest but must pay taxes when you withdraw. With TFSAs, you get no tax break when you invest but you don't have to pay taxes when you withdraw. So if I invested $5,000 in stocks through the account and they doubled in value (hey, I can dream), I could take the $10,000 out of the account and pay no taxes on the $5,000 profit.
There's a limit of $5,000 a year that you can put into the account, but Janet Pettigrew, district vice-president with the Bank of Montreal, said that limit may be confusing consumers who believe they need $5,000 just to open one. In the poll, 40 per cent of respondents who didn't have a TFSA said it was because they didn't have enough money to invest in one.
"People think they have to have extra money for a TFSA," she said. "They don't realize they can start by putting, say, $500 or $1,000 in. No matter how small the amount is, it's still good to start your savings within a TFSA."
Ms. Pettigrew also worries that consumers are using TFSAs like traditional saving accounts - that is, they're just storing cash in them rather than taking that money and putting it into other investment options, like GICs or mutual funds, and earning higher interest. She suggests that these people go to see a financial planner at their bank and get some free advice about some alternative ways to save and invest.
The question for me has always been whether it is better to put money in an RRSP or a TFSA? Ms. Pettigrew suggests that for a long-term investment - like retirement funds -- use the RRSP; if you want to save for something shorter term - like a vacation, a home renovation or a new car -- use a TFSA, which is more flexible.
If you've used up all your eligibility room in your RRSPs, taking full advantage of a TFSA makes sense, she said.
Canadians may not be fully aware of all of the specific options available in TFSAs, but they have come around to them in general. The new investments accounts have a high approval rating - nearly 70 per cent surveyed agreed the TFSA is a good investment and savings tool. That's a good start.