Are You Using a TFSA to Full Advantage?

Nearly half of Canadians now have a TFSA - but many are under-utilizing the account as part of their savings plans

A CIBC Poll conducted by Harris/Decima reveals that nearly half of Canadians say they have a Tax-Free Savings Account (TFSA). However, the poll also highlights a missed opportunity, as only half of those with a TFSA have made a contribution so far this year, and many Canadians with a TFSA say they have no plans for the money they have saved in the account.

"It is encouraging to see that almost half of Canadians have taken advantage of the Tax Free Savings Account, which gives them an additional option to help them reach their financial goals," says Colette Delaney, Executive Vice President, Retail & Business Banking, CIBC. "Given how versatile the TFSA is, there is an opportunity for more Canadians to either contribute to their existing TFSA, or to consider how opening a TFSA could help them achieve their savings goals sooner."


Many Canadians say they have no plans for their TFSA

While the TFSA has proven to be a highly flexible savings option to help Canadians work towards goals such as a major purchase or retirement, the poll also reveals that many Canadians say they have no plans for the funds they have invested in their TFSA.

"You will get more out of your TFSA if you have a plan for the funds you invest in it," says Ms. Delaney. "These poll results suggest that some Canadians may not see the full potential of their TFSA, such as using it as part of their retirement strategy, and that highlights the need for a conversation with an advisor to help get more out of your savings."

There are some notable differences among demographics. Canadians aged 18 to 24 were more likely to say they plan to use their TFSA savings for a major purchase or for emergencies, while those between 45 and 54 years of age say they plan to use their account for retirement.


Be clear on contribution rules

While the TFSA has proven to be a flexible account, it is important to understand annual contribution rules. Canadian residents 18 and older are currently allowed to contribute up to the TFSA dollar limit for the year. This means if you have both a savings and an investment account, you are responsible for tracking your contributions to ensure you don't exceed the annual TFSA dollar limit.

While rules prevent you from re-contributing the amount you withdraw within the same calendar year, you are permitted to re-contribute the withdrawn amount the following year.

For example, in 2012 Timothy Smith, 36, had a TFSA investment account, in which he contributed bi-weekly through a regular investment plan that totaled his maximum contribution of $5,000 per year. Timothy contributed the maximum amount for each of the past four years (2009 - 2012), totalling $20,000. During this time, he also earned interest totalling $900. Timothy decides to withdraw the full $20,900 amount of his TFSA to renovate part of his home. While Timothy cannot re-contribute the amount he withdrew this year, he can re-contribute the full $20,900 the following year, plus the additional contribution room he is allowed for 2013.


Tips to maximize your TFSA savings

Meet with an advisor: An advisor can help you establish a savings plan that aligns with your short- and long-term goals, and can also help to identify opportunities to build savings and structure a repayment plan that allows for debt reduction - both key elements of a savings strategy.

Contribute regularly: Making regular contributions to your TFSA is often easier than coming up with one lump sum for your annual TFSA contribution. An advisor can help you set up an automatic regular savings plan to coincide with your pay schedule so that saving is easy.

Manage and track day-to-day spending: Managing cash flow effectively is a key element in ensuring you have the funds to support regular savings. Keeping track of spending can be accomplished through tools such as CIBC Mobile Banking to keep on top your account, or CIBC CreditSmart to stay on budget with your credit card spending.