It’s Time to Rename Tax-Free Savings Accounts

Reading the Financial Post this weekend, an incredible statistic was reported about TFSA’s. About 90% of all tax-free savings account contributions were held in actual savings accounts earning a paltry .25% give or take. With interest rates like that, who cares if the earnings are tax free as you earned $12.50 over the course of the year on a $5000 contribution.

Part of the problem no doubt were the teaser rates that companies offered for the first three months of the year at 3% – 4%. After that, the rates came down but who could bother changing things at that point. Obviously, 90% of contributors couldn’t be bothered.

Tax Free Savings Accounts should be renamed Tax-Free Investment Accounts. After all, we are allowed to buy stocks, bonds, mutual funds, etc… in these accounts. Corporate bonds still offer yields in the 4% – 7% range that can be very attractive when no tax is being paid. A $5000 investment would yield $200 – $350 per year depending in the bond purchased. Considerably higher than the $12.50 more than 90% of TFSA holders earned last year.

If you did open one of these accounts last year, its time for a review. Oh!!! If you did put your contribution in a savings account, consider talking to a financial advisor about your options as your bank or trust company didn’t do you any favours by paying you .25%. Your comments are always appreciated.