Half of Canadians don’t know what they can hold in their TFSAs

A recent poll by CIBC finds that half (50 per cent) of Canadians are unsure what they can hold in a Tax-Free Savings Account (TFSA).

Despite their lack of knowledge, the majority (80 per cent) of Canadians have never talked to a financial advisor on how to make the most of their TFSA, with half admitting they need advice.

“With TFSAs becoming a larger part of investment portfolios, it’s certainly eye-opening to see how many Canadians are unaware of how to use them to full effect,” says David Scandiffio, President, CIBC Asset Management. “It seems most people still view TFSAs as rainy day funds rather than vehicles to help them achieve their longer-term financial goals, such as building up your retirement nest egg or saving for a down payment on a house.”

With the annual TFSA dollar limit nearly doubling to $10,000, TFSA balances are expected to increase significantly over time, becoming a more and more substantial part of investment portfolios. That means longer-term investment options that produce higher returns, such as stocks and mutual funds, should be considered rather than only short-term or low-risk savings vehicles, such as cash or GICs, says Mr. Scandiffio.

Yet, the poll findings show that the majority of Canadians still view TFSAs as largely savings accounts, with only a small percentage of Canadians able to accurately identify mutual funds (29 per cent), GICs (28 per cent), bonds (23 per cent) or stocks (22 per cent) as being investment options for TFSAs.

“You don’t need to take on undue risk with your TFSA money, but it’s important to recognize that the TFSA can be a powerful retirement planning tool, especially given the increased annual dollar limit, its tax efficiency and the flexibility to include investments with higher-return potential,” he says. “The first step is to educate yourself and sit down with an expert to understand how a TFSA fits into your overall financial plan.”

Canadians confused over TFSA rules

The poll also finds that Canadians are confused about TFSA contribution rules, with 38 per cent saying they don’t know what happens to unused TFSA contribution room and another 13 per cent who think the unused contribution room is lost after the current tax year, when in fact it is carried forward and accumulates over the years.

“Investors stand to leave a lot of money on the table if they don’t fully understand the investment options and tax considerations related to TFSAs,” says Jamie Golombek, Managing Director, Tax and Estate Planning, CIBC Wealth Advisory Services. “There are tax benefits to maximizing TFSA contributions.”

For example, if you were at least 18 and a resident in Canada since 2009, but have never contributed to a TFSA, your cumulative contribution limit now stands at $41,000 – and will rise by $10,000 annually.

“It often makes sense for investors to catch up on any outstanding contribution room from prior years because it can have a meaningful impact on your long-term savings and play a key role in helping you to reach your financial goals,” says Mr. Golombek.

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