Why aren't Canadians taking advantage of tax free savings accounts?

RBC poll finds lack of funds and knowledge listed as key reasons

TORONTO , Oct. 27 /CNW/ - A majority of Canadians (71 per cent) are aware of the Tax Free Savings Account (TFSA), although three-quarters (76 per cent) have not yet opened a TFSA, according to the RBC Financial Priorities Poll released today.

The primary reasons why Canadians say they have not opened a TFSA are that they don't have the money to invest (51 per cent) or they don't fully understand how a TFSA works (22 per cent). Four-in-ten (41 per cent) Canadians who have heard of TFSAs said they want to know more about them.

"Talking to a financial advisor can help you understand the benefits of a TFSA, find the money to invest and get the right advice about investment options that are the best fit for you and your financial goals," said Lee Anne Davies , head, Retirement Strategies, RBC.

For those Canadians who have opened a TFSA, the top three reasons are emergency savings (36 per cent); sheltering savings from tax (31 per cent); and long-term savings for retirement (30 per cent).

While some Canadians may be preparing for a rainy day, the survey found that most Canadians are not taking full advantage of TFSAs to help them achieve their financial goals. The survey found that only 44 per cent of Canadians who have opened a TFSA have made the maximum contribution of $5,000 and one-in-three (33 per cent) contributed $1,000 or less. Overall, the average contribution is $2,998 . As well, TFSA holdings are quite conservative, with the top three investments being savings accounts (33 per cent), cash (20 per cent) and GICs (18 per cent).

"Many Canadians are missing out on the chance for tax free growth and peace of mind that a TFSA can provide," added Davies. "Some investors have opted to move their existing savings to a TFSA to benefit from tax sheltering - flexibility that will help achieve both short-and long-term financial goals."

Because TFSA's are sheltered from tax, the savings can add up faster. The chart below demonstrates how $5,000 , contributed annually, earning 6 per cent interest per year can grow within a TFSA compared to a non-registered investment.

    
    -------------------------------------------------------------------------
    Time invested                     TFSA                 Outside of a TFSA
    -------------------------------------------------------------------------
    5 years                         $29,877                     $28,232
    -------------------------------------------------------------------------
    10 years                        $69,858                     $62,712
    -------------------------------------------------------------------------
    15 years                       $123,363                    $104,824
    -------------------------------------------------------------------------
    20 years                       $194,964                    $156,258
    -------------------------------------------------------------------------

    Assumes tax rate of 32 per cent outside of TFSA, with interest income
    taxed annually. All contributions made at beginning of the year. Annual
    compound rate of return 6 per cent. For illustration only and not
    indicative of future returns. Actual tax rates and rates of return will
    vary.

                         Quick Facts about the TFSA
    

Contributions: The 2009 contribution limit is $5,000 . This annual limit will rise along with inflation in future years, in $500 increments. In addition, you can carry forward unused contribution room indefinitely. The federal government will report your TFSA contribution room to you annually.

Eligibility: Any Canadian resident age 18 or older with a Social Insurance Number can open a Tax-Free Savings Account.

Income requirement: You are not required to have earned income to contribute to a Tax-Free Savings Account.

Tax benefits: There is no tax deduction for contributing to a TFSA. However, the returns your investments generate (interest, dividends or capital gains) are not taxable (except for any foreign tax on foreign investments). In addition, your withdrawals are tax-free.

Withdrawals: You can withdraw money from your account at any time, (depending on what you invested in). At RBC, we will not charge you a TFSA withdrawal fee. In addition, you can re-contribute the amounts you withdrew anytime after the calendar year of withdrawal.

Investment options: You can invest in savings, GICs, mutual funds, stocks and bonds.

About the RBC Financial Priorities Poll

The RBC Financial Priorities Poll was conducted by Ipsos-Reid from September 10 to 17, 2009. The online survey of 1,231 Canadians was conducted via the Ipsos I-Say Online Panel, Ipsos Reid's national online panel. The results of this poll are based on a sample where quota sampling and weighting are employed to balance demographics and ensure that the sample's composition reflects that of the actual Canadian population according to Census data. With a representative sample of this size, the results are considered accurate to within +/-2.8 percentage points, 19 times out of 20.

Your Future by Design(R) is RBC's distinctive approach to help clients identify, plan, and realize their goals for retirement. With the guidance of RBC financial planners and investment and retirement planners, Your Future by Design helps clients create a blueprint for a successful lifestyle and financial plan for retirement based on what is truly important to them in key areas in life, including family, health, home, lifestyle, work/business, mind and spirit, and legacy. To find out more about how RBC can help build a blueprint for the future, visit www.rbc.com/yourfuture or call 1-866-335-4055.

For further information: Media contacts: Suzanne Willers, RBC, [phone]; Matt Gierasimczuk, Media Relations, [phone]