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Harper's TFSA promise is what voters want to hear

The election promise from the Conservatives to double the $5,000 contribution limit for tax-free savings accounts is a case of giving voters what they want, but maybe not what they need.

TFSAs have had considerable success since they were introduced in 2009 because of their simplicity and utility. However you choose to invest or save your money in a TFSA, the gains you make are never taxed. TFSAs are ideal for short- and long-term savings goals, and for conservative or aggressive investing. They can also rival registered retirement savings plans as a tool to build savings for use after you leave the workforce.

TFSA contribution room was already on track to rise along with inflation over the years, but now the Conservatives have proposed to jump ahead to a $10,000 contribution limit as soon as the deficit is eliminated. Immediate beneficiaries of the increase would be people who have used up the current level of TFSA room and have been asking for more.

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Among the people in this group are seniors who are required to make a minimum withdrawal from their registered retirement income funds every year, but don't actually have a need for this money. They'll be able to shelter excess RRIF withdrawals in a TFSA and generate tax-free investment income.

People as young as 18 can contribute to a TFSA, and if you can't contribute this year you can carry your room forward. It's versatility like that which will undoubtedly make the Conservative promise to boost contribution room popular.

Whether it's the best use of the government's revenue is another question. For example, the government could have used the tax dollars it will forego as a result of a higher TFSA limit to enhance registered education savings plans, or RESPs.

The average tuition cost in Canada is $5,138, according to Statistics Canada's most recent tally. Add other educational expenses plus room and board and you're easily looking at $15,000 to $20,000. RESPs are how parents help kids avoid monster-sized student debt that takes years to pay off. There's already a federal grant that partly matches contributions to RESPs, but it hasn't turned these vehicles into the must-have savings tools they should be.

It's widely thought as well that Canadians aren't saving enough for retirement. You can certainly use a TFSA to save for retirement, and in fact this can make sense in certain situations. But TFSAs are no more the answer to insufficient retirement savings than registered retirement savings plans have proven to be. The bottom line is that some people either can't or won't save enough for retirement on their own.

This has led to federal-provincial discussions on how to improve Canada's pension system, be it through an enhanced Canada Pension Plan or small-scale pension plans that would be administered by the financial industry and be easy and cheap for employers to adopt.

Investing federal money into whatever plan is adopted would be a way of helping to ensure the financial security of an aging population. But if you asked people what they want, they'd probably say a higher TFSA contribution limit.

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998. Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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