Nothing in personal finance comes as close to being mistake-proof as the tax-free savings account.
And yet, 13 years after their introduction, TFSAs are only now being added in a big way to the package of group benefits employers offer workers. Sun Life Financial reports a 50-per-cent increase since 2019 in the number of plans offering a combination of TFSAs and other group retirement options. In total, 14 per cent of Sun Life’s group retirement clients offer TFSAs.
Group TFSAs are a proven way for people to save more money. If you’re changing jobs to exploit the leverage workers have in the pandemic economy, or if you’re trying to improve your current position, ask employers about group TFSAs.
As with so much of what’s happening in finance these days, the pandemic is a force behind the popularity of group TFSAs. Worker shortages have empowered job applicants to ask tougher questions about company benefits. These workers have also come to recognize the importance of having savings that aren’t necessarily for retirement.
“Employees are saying, ‘Look, is there another option where I can put some money aside in case I need it?’ ” said Eric Monteiro, Sun Life’s senior vice-president of group retirement services.
Group TFSAs work like similar accounts offered by investment companies and banks. Contributions and investment gains remain tax-free, and you can take out money any time. “Hopefully, you keep most of the money for the long term,“ Mr. Monteiro said. “But if you need it, and if there’s an emergency, you can always draw on it.”
The value of the group TFSA is more subtle than the workplace group retirement plan, which usually involves some kind of matching contribution from employers. Matching contributions for group TFSAs are rare.
What’s the benefit if you don’t get extra cash from your employer and you have to use the investing options chosen by your company from the offerings of the plan administrator, instead of choosing your own investments?
If your HR department does its job well, your group TFSA and retirement plans should be based on funds with much lower costs than comparable products available to the general public. The other benefit is that your TFSA contributions are deducted at source – right off your paycheque, along with your group retirement contributions.
Once you commit to the group TFSA, you start adding money automatically with each paycheque. This is foundational if you want to be a successful long-term investor. It’s a far smarter approach than trying to time market ups and downs with your investments, or figuring you’ll contribute to your TFSA when you have some slack in your household spending.
These moments rarely come, at least for TFSA contributions. The latest Canada Revenue Agency data show the average unused TFSA room for each person in the 2019 contribution year was $37,833. That’s more than half of the total $63,500 in accumulated contribution room from 2009 to 2019.
Unused TFSA room reflects factors such as low incomes and expensive housing and daycare, but it’s also fed by missed opportunities to put money away. A group TFSA helps with this by, let’s be frank, forcing you to save.
Sun Life is the country’s largest administrator of employer group TFSA plans, with about 42 per cent of the market. Mr. Monteiro said one of the concerns employers have about group TFSA is they will divert savings that would have otherwise gone to retirement plans.
“This hasn’t happened at all,” he said. “If you look at everybody who’s put money in [group] TFSAs, only 17 per cent of them have actually lowered the contributions to other products. So, 83 per cent of members are adding net new dollars. People are just saving more.”
Sun Life says the median amount in corporate group TFSAs it administers was $4,600 as of Dec. 31. Even with that small balance, the company has found that total median savings through employer group savings plans is about $74,000 for employees that don’t have a group TFSA and close to $100,000 for people contributing to both TFSA and retirement plans.
“It’s not necessarily that they’re richer,” Mr. Monteiro said in describing the financial profile of people with TFSAs and group retirement plants. “They’re engaged.”
Are you a young Canadian with money on your mind? To set yourself up for success and steer clear of costly mistakes, listen to our award-winning Stress Test podcast.