Given the lukewarm reception some clients have given to the two-year-old tax-free savings account, \u201c[financial] advisors need to take the initiative to explain TFSAs as a tool that should be part of a client\u2019s entire financial plan, says Tina Di Vito, head of Bank of Montreal\u2019s Retirement Institute in Toronto.
\u201cThis is something that we have proposed to clients since the beginning,\u201d she adds. \u201cWe have never viewed TFSAs as something that can only be used as a short-term savings strategy \u2014 [but that\u2019s what] a lot of places out there are saying.\u201d
Most advisors argue that TFSAs can be of great benefit to clients \u2014 particularly as a part of retirement income planning \u2014 but many others are sitting on the sidelines. A recent report by Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce<\/b>\u2019s private wealth-management division, suggests that only 20% of eligible Canadians have opened a TFSA.
Although the TFSA\u2019s slow market penetration could be partly explained by the timing of its launch in 2009, when market turmoil created suspicion of almost any new financial product, the TFSA seems to be simply misunderstood by many clients.
In particular, some clients are in the dark about how TFSA funds can be invested, says Golombek. According to his report, more that 4.8 million Canadians have opened a TFSA since the account was introduced.
\u201cThere is a fundamental misunderstanding, with the average Canadian thinking of the TFSA as a simple savings account,\u201d says Golombek, \u201cwhen in fact it could be a mutual fund account or a brokerage account or an exchange-traded fund account as well as a cash account. It isn\u2019t just about putting money into a savings account.\u201d
Last November, a survey commissioned by BMO found that more than 37% of respondents had no idea what investments were eligible for a TFSA; only 26% knew that guaranteed investment certificates are eligible investments; and just 20% knew that mutual funds are eligible.
A TFSA is a tax-sheltered account that allows Canadians over the age of 18 to contribute up to $5,000 annually. Although the contribution is not tax-deductible, any income accumulated in the TFSA is tax-free. Monies can be invested in a variety of products, including GICs, mutual funds, bonds, equities and cash products. Unused TFSA contribution room is carried forward and accumulates in future years.
Another issue dampening enthusiasm for TFSAs is that many clients are blinded by the tax refund associated with an RRSP contribution, says Golombek: \u201cMost people with limited funds can\u2019t maximize their RRSP, TFSA, pay down their mortgage and save for their children\u2019s education. What ends up happening is that they become focused on getting the instant gratification of a tax refund, as opposed to the long-term benefit of perhaps having more money in a [TFSA] than in an RRSP.\u201d
Then there\u2019s the problem of the mechanics of TFSA plans. Many clients misunderstand the contribution and withdrawal rules for TFSAs. This led to some clients overcontributing last year, attracting potential tax penalties and the attention of the Canada Revenue Agency.
Last year, some TFSA-holders contributed the maximum of $5,000, withdrew the cash in the same year, then contributed more to the account later in the year. But under the rules, clients cannot top up a TFSA or make further contributions to the account once the annual contribution limit has been reached until the next calendar year. Clients running afoul of these rules are subject to a tax penalty.
\u201cWhat advisors need to do is to strip away the confusion and focus on the key benefits of TFSAs,\u201d says Dan Richards, president of Toronto-based Client-insights. <\/b> \u201cThey need to keep their explanations at a simple level \u2014 because I think where people go wrong is they get mired in the tiny details, which then leads to confusion.\u201d
Richards says advisors need to clarify several of the following key topics for their clients:
> Unlike RRSPs, TFSAs do not provide investors with a tax break upon contributing.
> Contribution limits and carry-forward room for each client.
> Withdrawals, and how and when they can be put back into the account.
> The overall advantages, which include investing opportunities within the TFSA and the alternative it may provide to RRSPs.
This year, BMO\u2019s Retirement Institute intends to begin tackling the education question by working with clients on how they can invest the money that they have already contributed to their TFSAs.
\u201cThe problem is that many clients continue to hold their TFSA funds in cash products,\u201d says Di Vito. \u201cBut these are savings accounts in which you can hold a number of different investments. And people should still be thinking about investing to generate the best possible return based on their risk tolerance.\u201d
Andrew Pyle, financial advi-sor in Peterborough, Ont., with Toronto-based Scotia-McLeod Inc., <\/b> has the majority of his clients already investing in TFSAs as part of their retirement strategy. For long-term TFSA inves-tors, Pyle\u2019s strategy for those clients\u2019 TFSAs is to mimic the strategy followed within their current portfolios. He believes that following a familiar investment plan is reassuring to his clients.\tIE<\/b><\/p>\n","protected":false},"excerpt":{"rendered":"
Many clients are confused about how to use these accounts<\/p>\n","protected":false},"author":4,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":[],"categories":[3013,3021],"tags":[2590],"yst_prominent_words":[],"acf":[],"_links":{"self":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316807"}],"collection":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/users\/4"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/comments?post=316807"}],"version-history":[{"count":1,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316807\/revisions"}],"predecessor-version":[{"id":374106,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/posts\/316807\/revisions\/374106"}],"wp:attachment":[{"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/media?parent=316807"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/categories?post=316807"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/tags?post=316807"},{"taxonomy":"yst_prominent_words","embeddable":true,"href":"https:\/\/www.investmentexecutive.com\/wp-json\/wp\/v2\/yst_prominent_words?post=316807"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}