Tax-Free Savings Accounts (TFSAs) have been around for a decade, created in part, to help low-income Canadians bolster their retirement income.
But they haven’t really taken off in popularity and many low-income savers aren’t taking advantage, says the Institute for Research on Public Policy. Instead, the benefits have been tilted towards the wealthy.
For example, a single retiree can get up $10,780 dollars per year through the Guaranteed Income Supplement (GIS). But if your annual income exceeds $18,240, you’ll no longer qualify.
One of the main advantages of using a TFSA to help fund retirement is that withdrawn money is not only tax-free, but it doesn’t count as income. This is not the case with income generated from an RRSP or RPP.
“Too many future GIS recipients are not getting the advice they need to shed their RRSPs and some are still, wastefully, saving in them,” says Richard Shillington, an Ottawa-based statistician.
Shillington says only 36 per cent of workers without an employer-sponsored pension plan have opened a TFSA since it debuted.
“Given the potential benefits of TFSAs for low-income seniors, we should be seeing a significant movement away from savings in RRSPs and toward TFSAs among Canadians likely to qualify for the GIS,” says Shillington.
“This has not occurred to the extent policy-makers envisioned when TFSAs were introduced, says Shillington.”
Shillington says policy-makers need to do more to encourage low-income earners to make use of TFSAs. He suggests tax incentives, a savers credit, and workplace plans like the one proposed by Ryerson University’s National Institute on Ageing.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains