TFSA adoption increasing but many unaware of investment options: BMO

Mature workers, B.C. residents most likely to have a TFSA
||Last Updated: 11/17/2011

As the third anniversary of the tax-free savings account (TFSA) approaches, Canadians are still unclear on the fundamentals of TFSAs, according to a survey by BMO Bank of Montreal.

Despite the fact that 44 per cent of Canadians currently have a TFSA, few know what investments can be held within one:

•More than one-third (37 per cent) have no idea what investments are eligible, unchanged from 2010.

•Slightly more than one-half of respondents (52 per cent) considered cash to be an eligible investment option within a TFSA (up seven per cent from 2010).

•One-third (32 per cent) knew that mutual funds are eligible within TFSAs, up 12 per cent from 2010; while the same proportion (33 per cent) knew GICs can be included, up from 26 per cent in 2010.

“The numbers show that while this investment tool is continuing to gain traction among Canadians, we are still seeing some confusion regarding how to make the most of out a TFSA plan,” said David Heatherly, vice-president of BMO Bank of Montreal. “A TFSA offers a variety of ways to tax shelter investments within a number of different investment vehicles, making TFSAs a suitable and sensible option for just about any type of investor.”

Canadians are contributing an average of $3,700 per year to their TFSAs, found the survey of 1,500 people from across the country.

“Tax implications should be a key consideration for any investment decision. The main point of differentiation between TFSAs and other investment products is that the earnings are tax-free and allow for significant tax sheltered wealth and growth opportunities,” said Heatherly.

A lack of awareness regarding the regulations around TFSA contributions and withdrawals has been a point of concern since TFSAs were introduced three years ago. However, BMO’s Annual TFSA Report suggests the level of awareness is improving as the vast majority (87 per cent) of TFSA investors indicated they know the regulations, found the survey.

“Essentially, once you reach your contribution limit for the year, you cannot re-invest or return money that has been withdrawn from your TFSA in the same year,” said Heatherly. “However, that withdrawal amount gets added to the contribution room available in the year following. While that has caused some confusion, this is a well-designed investment product with a lot of financial upside, and Canadian investors appear to be doing their homework.”

Other key findings:

•British Columbians are more likely to say they are knowledgeable about TFSAs than those in Quebec (70 per cent versus 53 per cent, respectively).

•Men are more likely to say they are very knowledgeable about TFSAs compared to women (19 per cent versus 12 per cent).

•Those aged 55 and over are the most likely to have a TFSA than those under 55 (54 per cent versus 39 per cent. The same is true about those without children (48 per cent versus 36 per cent) and those with a university education (54 per cent).

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