Tax Free Savings Account (TFSA) does not seem as popular as expected. Only about 20% of eligible Canadians have opened a TFSA as Jonathan Chevreau at The Wealthy Boomer points out in a recent post, this came as a surprise to me. A few months back when I had spoken to several banks and institutions the general answer was that the TFSA has been a great success for these institutions and they all had high expectations. I got a very similar impression from the general public many seemed very enthusiastic about the TFSA, so finding out that only 20% have actually opened a TFSA account was surprising to me. Jonathan lists some possible reasons why not more people have opened the TFSA, and some readers commented as to why they have not opened the account yet. I did a little bit of surveying and research myself; I found a few common reasons why Canadians have not opened theTFSA yet.
1. Paying off Debt
This seemed to be the number one reason why people have not yet opened or contributed to the Tax-Free Savings Account. If you have a $10,000 non tax deductible loan why contribute to the TFSA? The long standing debt of Mortgage vs. RRSP has taken a new turn, now it’s Mortgage vs. RRSP vs. TFSA. Many do not see the TFSA as a first option in this debate.
2. Maximize RRSP
RRSP is still seen as the main retirement vehicle, so most Canadians contributed to their RRSP before considering the TFSA, given that we were in the middle of the RRSP season many were concerned with contributing to their RRSP so maybe the tax refunds will trigger some TFSA account opening?
These seem to be the common reasons for not opening a TFSA account, but I think there are couple of not so obvious reasons as well.
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1. Confused about TFSA
Being involved in the financial industry as well as in the Blogsphere I see many individuals not fully understanding the TFSA. I almost get daily questions about some aspect of the account and every day I notice on forums questions popping up. Banks do not seem to be very well informed either, I walked into couple of banks to open a TFSA and asked some questions almost 60% of the time I would be given incorrect information. Recently a friend of mine opened an account at a bank and was told that he can buy whatever he wants as well as withdraw and contribute throughout the year as long as he does not hold over $5000 in the account, which is incorrect.
2. Worries about the Stock Market
People have just lost too much of their savings over the last year, many do not want to put any money in the markets.
3. Where does the TFSA fit
With RRSP, mortgage payments, RESP and pension plans there just isn’t any room for the TFSA. Many do not understand how to fit the Tax-Free Savings Account into their financial plan. Not many have develop a strategy for the Tax Free Savings Account.
These are some of the reason I believe are contributing to the low number of TFSA accounts being opened, Jonathan points out that the tax refund season may bring in a new wave of TFSA accounts being opened I believe that is a good possibility.
Personally I find the TFSA a great tool for the long term, I think if used properly can have a significant impact on retirement.
What are your reasons for not opening a TFSA Account? If you have opened one share with us how it fits in your financial plan.
Canadian Capitalist has a list of FAQ’s on TFSA
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{ 3 comments… read them below or add one }
20% doesn’t sound too bad to me this early in the first year. I think that RRSPs are in the 66% range but I doubt they started out that way.
As I’m sure I’ve said here before, I want to use my TFSA room for REITs, but probably won’t set it up this year as I’m dealing with getting my SM mortgage up and running.
While it’s true that Canadian acceptance hasn’t been as well-received as the Government may have hoped, 20% is still a significant number considering all the questions about the Tax Free Savings Account and the Economic times.
Yes I guess 20% is not a bad number, I just had expected more people to jump at the opportunity.