TFSAs are in Need of a Rebrand

Justin da Rosa
by Justin da Rosa March 15, 2018 / No Comments

Look, Tax-Free Savings Accounts (TFSAs) are great, no one is denying that. They were lauded by economists, industry associations, and financial planners when launched in 2009 and they have since become the investment account of choice for millions of Canadians.

This isn’t an article about the merits of a TFSA vs. a savings account vs. an RRSP. It’s about the accuracy and simplicity of names.

Savings account. Simple.

Registered Retirement Savings Plan. Simple.

Tax-Free Savings Account. Confusing.

As mentioned, TFSAs have become one of the leading choices among Canadians for an investment account for retirement.

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The investment account of choice. So why are they called savings accounts? Doesn’t that just create confusion? TFSAs are so much more than savings accounts and the name, in this writer’s humble opinion, doesn’t quite do these hard-working financial instruments justice. That’s why I’m petitioning to have them renamed to something like the Tax-Free Investment Account (TFIA) (and this is definitely not an original idea).

It’s not much of a stretch; if you Google “Tax-Free Investment Account” guess what comes up? That’s right. A bunch of pages for TFSAs. And the current name likely confuses some novice investors; that confusion could force them to overlook TFSAs.

Yeah, this is likely to be ignored. But hear me out.

TFSAs – a primer

As mentioned, TFSAs were launched in 2009 as an investment option for Canadians similar to the long-standing Registered Retirement Savings Plan (RRSP) – an admittedly much more accurate name than Tax-Free Savings Account.

Similar to RRSPs, TFSAs offer tax benefits. While RRSPs offer tax deductions on contributions, TFSAs offer tax shelter on investment income. So, capital gains and dividends earned in TFSAs are not taxed, even when they are withdrawn.

Also, similar to RRSPs, TFSAs aren’t merely savings accounts; they allow you to hold investments such as stocks, bonds, mutual and index funds, GICs, ETFs, and others within them.

How TFSAs work: The rules

TFSAs, like RRSPs, have rules that need to be followed. TFSA account holders must be 18 and a Canadian citizen.

The most important rule, perhaps, pertains to contribution room. TFSAs account holders have a maximum amount of room in which they can contribute. It started at $5,000 per year from 2009-2012, increased to $5,500 from 2013-2014, spiked to $10,000 in 2015, before settling back down at $5,500 from 2016 onward.

So, Canadians who were over the age of 18 in 2009 when the TFSA debuted (another rule: TFSA holders must be the age of majority) have a cumulative total of $57,500. And while there are yearly limits, contribution room carries over – meaning Canadians can put a total of $57,500 in their account, even as a lump sum.

But what happens if you over-contribute? You have to pay 1% per month on the balance exceeding your contribution limit.

What’s in a name?

Admittedly, this article was originally cooked up somewhat in jest. But the more time spent thinking about it, the more a rebrand makes sense. TFSAs are investment accounts. And the fact that they’re so new means there are probably thousands of Canadians who don’t fully understand what they’re capable of. Especially older Canadians who grew up thinking RRSPs were the only way to go for retirement savings.

But changing the name to Tax-Free Investment Accounts would be one small step to helping Canadians understand just how powerful they are. And it may encourage them to do a little more research and realize they are one of the best tools for investing for retirement.

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