There’s a lot of talk these days about TFSAs, to the point where it seems they’re more heavily advertised than RRSPs.
I, for one, am somewhat lukewarm on the benefi ts of TFSAs. And I fear they’re destined to be over-hyped and under-utilized.
For both clients and advisors, they require paperwork to set up; a client can’t just put funds into a pre-existing savings account, portfolio or RRSP. Account fees and withdrawal fees might apply (and some of these could be quite signifi cant). And while it creates an opportunity for advisors to speak to clients and review asset mixes, in the end it becomes yet another small portion of assets to track.
Let’s face it, many investors have much better and more taxeffective places to put their funds. They can make RRSP contributions, pay down credit card or other non-deductible debt, or reduce their mortgages.
Meanwhile, putting too much into a TFSA results in a monthly over-contribution penalty of 1% per month. And, if clients withdraw from a TFSA during the year, they must wait until the following year to put the funds back; otherwise an over-contribution situation will arise. Worse, the tax savings aren’t signifi cant, especially if clients use them as savings accounts. They’ll earn about 2%, and account fees and any withdrawal fees have the potential to more than offset the tax savings.
Instead, advisors should look at these accounts as an extension to their clients’ holdings and include a regular asset mix similar to the rest of their portfolios. With current low equity market valuations, now may be the best time to start a TFSA portfolio for a client and his or her spouse or partner. The regular attribution rules between spouses don’t apply to TFSAs, so one spouse can fund the TFSA for the other.
Advisors who offer this option should ensure benefi ciary designations between spouses are in place to protect potential rollovers of TFSA accumulations in the event of an estate situation (some provinces are still working on the forms to permit these designations).
In spite of the paperwork, an advisor can assist clients now by getting the TFSA introduced into portfolio discussions. And they’ll need to, because these are longterm plays. It could be fi ve to 10 years before clients accumulate enough to make them meaningful. In the meantime, we depend on Ottawa’s promise to continue with these plans and to permit the regular indexation of room granted each year.
Ottawa could have made additional concessions to savers and investors in their recent budget. The government could have permitted a special TFSA contribution entitlement: a one-time contribution of a fi xed amount into a TFSA. For example, allow investors to contribute an extra one-time amount of $20,000 in either 2009 or 2010 to their TFSAs. This would help retirees and others whose portfolios have been dragged down by market conditions. The special contribution would sharpen interest in TFSAs and make them a more meaningful part of longterm fi nancial security.
Absent this budget enhancement, it falls to advisors to make their clients aware of the longterm benefits of these plans, ensure the pitfalls are well understood and educate investors that, really, these are not simple savings accounts for rainy-day funds.