Slightly more than half of Canadians have yet to take advantage of Tax-Free Savings Accounts (TFSAs), a survey by ING Direct finds.

While only 8% of those polled found TFSAs more complicated than RRSPs, Canadians seem to still be grappling with how best to benefit from the program.

According to a recent Angus Reid Public Opinion poll commissioned by ING Direct, 87% of Canadians who opened a TFSA since the program was launched in 2009 used it for an emergency fund or left it in a short-term investment such a savings account.

“The finding is not surprising, as the flexibility of the TFSA as a liquid investment vehicle sets it apart from an RRSP. There is no tax implication when you withdraw funds and you don’t lose your contribution room over the long-term,” says Peter Aceto, president & CEO of ING Direct Canada. “But that’s also led to confusion, meaning many Canadians are not tapping the true strength of TFSAs to shield a wide range of investments from taxation as part of a longer-term retirement strategy.”

Aceto says the financial industry has to do a better job educating savers. In 2011, contribution limits will rise to $15,000 meaning TFSAs can play a larger role in investment portfolios. But the survey found 47% of respondents unsure of which investments they would use inside their TFSAs, and only 13% considering products such as mutual funds that have the potential to generate higher returns.

“First off, all people should take the most important step of simply opening a TFSA account, as only a third of eligible Canadians have one,” says Aceto. “But they should also do their homework as many institutions charge fees if TFSA funds are moved to another institution — this can wipe out any interest gains and often deters people from moving TFSA funds from one institution to another where they could receive considerably better returns.”

As long as you use them properly, and don’t incur fees for moving your funds, Aceto says TFSAs can also be a good way to save for shorter-term goals. In the survey, about 20% of savers had made TFSA withdrawals. Of those only 14% of Canadians have used a TFSA for savings towards a goal, with home renovation (60%) being most popular followed by purchasing a vehicle (15%).

As the TFSA program matures, different segments of savers are catching on. Retirees who don’t generate earned income and can no longer make RRSP contributions see TFSAs as a good alternative for sheltering capital gains. Younger people as well as those with lower incomes who don’t capitalize on the biggest advantages of RRSPs are finding TFSAs a great tool for sheltering money from tax while benefiting from the power of compounding interest over time.

ING Direct, a pioneer in educating Canadians about the benefits of TFSAs, answers thousands of questions each year in its call centres and through email. For an extensive list of FAQs visit http://www.ingdirect.ca/en/aboutus/faq/index.html.

From Sept. 29 to 30, 2010,

The Angus Reid online survey was conducted from Sept. 29 to 30, 2010 among 1,009 randomly selected Canadian adults who are Angus Reid Forum panelists.

IE