The government’s recent decision to hike TFSA contribution room by $500 has sparked fresh debate on the relevance of the savings vehicle for debt-saddled Canadians.
Detractors say the amount will neither offer a meaningful push for Canadians to save nor provide a new incentive for a vast majority that continues to ignore the tool.
The TFSA’s introduction was helpful, but increasing the limit by $500 isn’t, says Jason Round, head of financial planning support, RBC Financial Planning.
“While it’s great that there will be a little bit more flexibility in terms of where Canadians can put their savings as a result of this, it’s not a revolutionary change,” he says. “[The] $500 [increase] isn’t going to make or break someone’s financial situation.”
The sentiment is fairly consistent with a recent online poll on Advisor.ca where many said the increase was too small and meaningless, while others pointed out more than half of Canadians don’t have a TFSA.
And yet, a majority wouldn’t refute its potential for greater tax-free earnings and growth opportunities.
Peter Aceto, president and CEO of ING Direct Canada, says it would be myopic to dismiss the increase as a trifling sum.
“An extra $500 a year certainly adds up over time, especially when you’re saving for 15, 20, or 25 years,” he says.
But the fact that the minority contributes to TFSAs at all won’t be addressed by the increased limit, says Round.
“If this announcement at least creates a little bit more awareness of TFSA, that’s great,” he says. “We need to get more people moving on this way to save.”
A recent ING Direct study shows more than half of Canadians (52%) don’t have a TFSA, another 44% are foggy about how it works, and 19% don’t understand it at all.
But poor grasp isn’t the only reason for the low uptake. Many Canadians are living paycheque to paycheque and don’t have any money to contribute.
People have different financial priorities depending on their stage of life, but it’s never too late to start, asserts Aceto.
“There are some Canadians who may not be able to take advantage of the extra TFSA contribution room right now,” he says. “But it carries forward each year and the contribution room will be there when they have additional money.”
There’s a stark contrast between Aceto and Round with regards to the biggest beneficiaries of the vehicle.
“TFSAs are valuable to younger Canadians who are in lower tax brackets, but still want to put aside money for retirement or a down payment on a home,” says Aceto.
Round, on the other hand, insists it’s those at the opposite end of the spectrum.
“Retirees could be prime beneficiaries, as effective retirement income planning includes thinking about how to de-register RRSP/RRIF assets,” he says. “When funds are taken out of a RRIF for this reason, and aren’t needed for immediate expenses, TFSA are perfect as a way to shelter that money in future.”
Age and income levels notwithstanding, saving is a non-negotiable part of any financial plan.
Aceto puts it mathematically. “Whether you can afford to put aside $25 a week ($1,300 a year) or the full $5,500, the TFSA is a flexible investment option to save for your short- or long-term goals.”
Round says whatever helps you get closer to your goal. “For one person, the extra contribution to TFSA will be ideal, for another, paying down a mortgage or credit card will make more sense, and for another taking a vacation is the right answer.”
Anyone who says there’s a better way applicable to everyone is giving bad advice, he adds.