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Lack of money, clarity keep Canadians away from TFSAs

Despite widespread public interest in tax-free savings accounts, three-quarters of Canadians have not opened one because they don't have the funds or they don't understand how the accounts work, according to a survey released Tuesday.

Introduced by the federal government on Jan. 1 of this year, TFSAs allow people to save or invest $5,000 a year for any purpose - retirement, education or a rainy-day fund - without paying tax on investment or capital gains when the money is withdraw them down the road.

An RBC poll on financial priorities, conducted last month, found that while 71 per cent of Canadians are aware of TFSAs, 76 per cent have not opened one. The main reason for not having done so, cited by 51 per cent, was a lack of money. Twenty-two per cent of those polled said they don't fully understand how a TFSA works.

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Among the minority of Canadians who have opened an account, 36 per cent said they were using it for emergency savings, 31 per cent said they were sheltering savings from tax and 30 per cent said they saw the account as a place to park long-term retirement savings.

TFSAs have been in the financial spotlight because of their tax-free status, but because they are still relatively new there is little information available on how many people are using them and for what. The new accounts have been pitched primarily as savings instruments for individuals.

RBC's 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.

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Withdrawals: You can withdraw money from your account at any time (depending on what you invested in). At RBC, there is no charge on a TFSA withdrawal fee. In addition, you can re-contribute the amounts you withdrew any time after the calendar year of withdrawal.

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

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About the Author
Personal Finance Web Editor

Roma Luciw is the Globe and Mail’s personal finance editor. She has worked at the Globe as a business journalist since 2001, covering stock markets, breaking news, and most recently anything that helps regular Canadians manage their own money. More

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