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Young savers using TFSAs to purchase homes: survey

Pay Day
The new Canadian five and 10 dollar bills, made of polymer, are displayed with the previously released 20, 50 and 100 dollar notes following an unveiling ceremony at the Bank of Canada in Ottawa April 30, 2013. REUTERS/Chris Wattie

Younger Canadians, more than ever before, are using their Tax-Free Savings Accounts (TFSAs) to save money to buy their first home.

That’s one of the key findings of a newly published survey by ING Direct. The survey looks specifically at TFSA contributions, asking Canadians of all ages how and why we are saving money.

Retirement continues to be the top reason for using the tax-free program, with 46 per cent of contributors ticking this box.

Not so with younger adults. Nearly 40 per cent of contributors between the ages of 18-34 years see TFSAs as a great way to make the leap into home ownership.

It’s true the program was originally intended to help Canadians shelter their earnings in a bid to live life to the fullest past the age of 65. Yet, the liquidity of a TFSA allows for different savings goals other than those intended.

“It’s often the first place people will go to pull money out,” said Lee Helkie, a Toronto-based financial advisor with Helkie Financial and Insurance Services.

It's this kind of flexibility that is attracting more of the young crowd. Peter Aceto, president and CEO of ING Direct, said most clients, regardless of age, contribute to a TFSA with an eye on retirement.

The bonus?

“If there is a bump in the road, if something unexpected happens in life, you can have access to those funds without there being a penalty,” he said.

But saving is saving and that’s not an attribute we hear very often about Millennials. Isn’t this the “entitled” generation – the folks who get the rap for jumping from job to job and expecting the bank of Mommy and Daddy to bail them out when they get into trouble.

Helkie said she’s encouraged to learn younger Canadians are able to put any money aside.
Given they are among the lowest earners in the country, “the fact they are even thinking about saving is terrific, to be honest,” she said.

But she, like others in the financial field, would like to see more Canadians commit to the program over the long term.

A TFSA is the place “to get the best bang for your buck, and grow some wealth in a tax-free environment,” she said.

Confusion reigns

And yet, many Canadians still don't understand how to harness the power of this savings tool. A report released last week by BMO found TFSAs are increasingly popular with 48 per cent of Canadians contributing to the program, up from 23 per cent in 2012.

But the poll also found that fewer than 20 per cent of Canadians know the annual contribution limit, 10 per cent have over-contributed since opening an account, and only 11 per cent can correctly identify the various types of investments that are eligible to be held within a TFSA.

Larry Moser, vice direct consultant with BMO’s investor line, said confusion over the contribution limits, and assessed penalties if they are exceeded, are keeping people from more fully embracing the program.

“I think there is still a bit of a learning curve when it comes to penalties that can be charged if you over-contribute to a TFSA. If you take money out, you can’t put it in again until the following calendar year,” he said.

The BMO study revealed that although the annual contribution limit is $5,500, TFSA holders plan to contribute an average of $3,625 this year.

When looking at how Canadians are contributing, the ING survey showed a lump-sum deposit one to two times a year is most popular (52 per cent), while 26 per cent contribute to their TFSA on a monthly basis.