Tax Free Savings Accounts have been amazingly popular this year, but confusion still exists about how the accounts fit into Canadians’ overall investment portfolios, Bank of Montreal executives said on Wednesday.

Speaking in a panel discussion in Toronto, BMO Capital Markets chief economist Sherry Cooper said that the popularity of TFSAs since their launch in January has significantly surpassed expectations. In the first six months of the year, 3.6 million people set up TFSAs, with inflows totaling $12.4 billion, according to research firm Investor Economics and pollster Ipsos Reid. This compares with a total of 6.2 million people who hold Registered Retirement Savings Plans, which have total assets of $631 billion.

“In the short life of this vehicle, it has been amazingly, amazingly successful,” Cooper said. It is likely that the popularity of the accounts has partially been driven by a renewed emphasis on savings after the recent stock market crash and recession, she said.

“Canadians were of a mind in the past year to increase their savings rate,” she said. She pointed out that on average, Canadians are now saving 4.8% of personal income, compared to an average rate of only 3.7% in 2008 and 3.8% over the first five years of this decade when the economy was booming.

Cooper expects TFSA contributions to continue to be robust next year.

A key factor driving the popularity of the TFSA is the flexibility account holders have in contributing and withdrawing funds without penalty, according to Tina Di Vito, director of retirement strategies at BMO Financial Group. “The flexibility is key with this account,” she said.

She noted that this year, the TFSA has been particularly popular among younger Canadians, such as students and young couples. Di Vito pointed out that it’s attractive to students since they don’t need to be earning income in order to contribute, as they do with RRSPs.

TFSAs are also attractive among affluent individuals who have already maximized their RRSP contributions. In addition, the accounts make sense for those who expect to have high tax rates in retirement, since savings withdrawn from a TFSA are not taxable like RRSP withdrawals, Cooper explained.

BMO representatives find that there is still confusion among Canadians around how they can get the most out of a TFSA. Di Vito said the account adds to the variety of savings vehicles already available to Canadians.

“The TFSA does add an additional level of complexity to our already wide range of investment options,” Di Vito said. She pointed to such options as the Registered Education Savings Plan and the Registered Disability Savings Plan. It’s important for Canadians to consider their specific goals and priorities to determine the right savings vehicle for them, she added.

Canadians also appear to be unaware of the investment options that they can hold in TFSAs, according to Cooper. In a report she wrote on the accounts, she points out that of the assets held in bank TFSAs, 94% are savings account deposits or term deposits.

“These are very low risk accounts,” she said. While it’s likely related to the reduced risk appetite among Canadians since the financial crisis, Cooper added that many savers appear to be unaware that they can invest their TFSA contributions in stocks, bonds and other financial assets, as well as in short-term deposits and GICs.

IE