When the calendar turns to 2012, it will mark the third anniversary of the tax-free savings account (TFSA). But, while adoption rates are increasing, many Canadians are still unclear about how to maximize their investment.
Close to one-half (44 per cent) hold a TFSA, up from 36 per cent in 2010, according to a survey of 1,500 people by BMO Bank of Montreal.
“The TFSA is still relatively new but there is certainly a much higher take-up rate than RRSPs (which) took a couple of decades before it really became fairly prominent in Canada,” said Dave Ablett, director of tax and estate planning at the Investors Group in Winnipeg. “We would certainly like to see (the take-up rate) higher but, after only three years, I don’t consider it to be excessively low.”
Employers can offer TFSAs as a benefit to employees as well. A group TFSA is the same concept as a group registered retirement savings plan (RRSP) — another way for employees to save money through payroll deductions, said Ablett.
“Every two weeks, a contribution to their TFSA is being made automatically for them, so they don’t have to scramble at the end of the year to come up with the money,” he said.
The process is not burdensome for employers since it’s just changing the payroll system to accommodate the deductions from pay and remitting one contribution per period to a financial institution, said Ablett.
However, none of the TFSA providers offer it as a stand-
alone product so employers must have another product with the provider, such as an RRSP or a pension plan, said Leslie Sing, senior consultant of pension services at the Williamson Group in Brantford, Ont. And there may be some costs involved.
“If you have to add another field to a payroll system, the payroll provider may charge you and that’s not uncommon,” she said.
As of right now, there aren’t many employers offering group TFSAs to employees and this is largely due to lack of employee interest, said Sing. Many employees don’t like the commitment of payroll deductions and don’t think they have enough extra money to save, she said.
But more employers are expected to offer group TFSAs because they are a natural extension of an RRSP program, said Ablett. And others are looking into matching employee TFSA contributions, similar to those in place for RRSP contributions, as an alternative to a pension plan, he said.
Coastal Community Credit Union in Nanaimo, B.C., offers a TFSA to employees and has a take-up rate of about 60 per cent, said Bruno Dragani, chief people and administration officer at the 650-employee credit union. Since the credit union also offers TFSAs to its members, employees are trained on its benefits.
“Obviously the benefit of training employees on how it impacts savings over the long-term (is) it fosters that growth in their own leadership and understanding of what their savings tools are and they’re taking advantage of them,” he said.
More than one-third (37 per cent) of Canadians have no idea what investments are eligible within a TFSA, found the BMO survey. The service provider should assist employers by setting up seminars, offering one-on-one consultations and providing marketing materials, said Ablett. Employers can also discuss TFSAs during lunch-and-learn sessions or town hall gatherings, said Sing.
“Focus on it heavy for 20 minutes and then let them go and digest it,” she said. “Then send followup education, by mail, email, messages to their smartphones, that reinforce the message you talked about within 24 hours — otherwise it will be lost on them.”
Fifty-two per cent of survey respondents considered cash to be an eligible investment option within TFSAs, followed by guaranteed investment certificates (GICs) at 33 per cent and mutual funds at 32 per cent.
One reason why many people may be unaware of all the investment options is because of the product name, said Sing.
“I would have to assume people who decide this is a great vehicle to use for savings think of it as a bank account,” she said. “A savings account implies daily interest, it doesn’t imply that I’ll be making investment decisions and choosing between GICs and mutual funds.”
Employers should also be communicating the benefits of TFSAs to employees on an ongoing basis through channels such as the company intranet or Twitter feed, said Ablett. Aside from the fact the interest is tax-free, employees should also be aware a TFSA can be used for a variety of savings goals.
“The TFSA is not unique or specific to retirement savings — it can be used for short-term, buying a house or a car,” said Sing.
And the TFSA benefits all employees at Coastal, said Dragani. Younger employees may have limited amounts of savings available to them and prefer to use a TFSA at the start of their careers and then move into an RRSP later on as their income grows, said Ablett.
“Longer-standing employees at higher levels may be maximizing their RRSPs or participating in a pension plan but because they have higher income they may have more savings and they should be taking advantage of the TFSA so a portion of their savings is generating tax-free income,” he said.
Investors can contribute up to $5,000 per year in a TFSA and any unused room can be carried forward to the next year, said Sing. Withdrawals can be re-contributed only in the following year. And the penalty for over-contribution is “one per cent per month, so it can be significant,” said Dragani.
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