Canadians put a lot less money into their tax-free savings accounts (TFSA) last year, according to a recent survey from BMO Financial Group, and most of them cite the same reason for their decision: they simply didn’t have any extra money to work with.

Overall, the average person put in $939 less into their TFSA in 2016 than they did the year before. BMO reports that the average contribution was $4,592 in 2016, compared to $5,531 in 2015. The slump in contributions becomes more alarming when you consider the fact that a portion of that average likely came from some form of catch-contributions not subject to the $5,500 annual limit.

Most Canadians lack the funds to invest

Among those who trimmed their contribution, 43% admitted it was because they simply didn't have enough money to invest, while 36% said they needed the cash for other expenses.

That’s not completely surprising though, when you consider that the ideal TFSA buyer isn’t really supposed to have much in savings to begin with. In terms of investment accounts, TFSAs are generally more popular among lower-income earners since they have fewer restrictions.

In fact, low-income citizens are four times more likely to contribute to a TFSA than a Registered Retirement Savings Program (RRSP), according to the latest Statistics Canada data. Low-income Canadians also have comparatively low marginal tax rates, so they won’t benefit as much from the tax advantages offered by an RRSP. So a TFSA becomes the better choice for them.

More Canadians know how to use a TFSA

The good news is, regardless of income level, Canadians' overall TFSA knowledge is definitely on the rise, according to the BMO report.

Among those surveyed, 78% are mindful that unused TFSA contribution room can be carried forward. That’s a big jump from a similar report last year, in which only 60% could say the same. As well, nearly two thirds (64%) know about the penalty tax triggered by incorrectly withdrawing and re-contributing within the same year – a further boost in awareness in comparison to last year.

“While contribution levels are slightly lower, it's encouraging to see that Canadians, particularly millennials, have expanded their knowledge on the financial instruments they use – including the TFSA,” says Ryan French, BMO’s Director, Term Investments.

How a TFSA works

On that note, French also expressed that he is still worried about what people don’t know.

One-third of those surveyed, for instance, are still unaware of the maximum annual contribution limit (likely due in part to the limit constantly changing over the years). French mentioned he feels that more work needs to be done to improve Canadians’ familiarity with TFSAs.

So if you’re looking into a simple way to save and earn interest on an investment, here are some of the basic ins and outs to a TFSA:

Providing you have sufficient non-registered funds, there’s really no good reason for not maximizing your TFSA contributions. After all, where else can you earn tax-free income for life and pay no taxes on the entire accumulated value down the road?

  • You must be at least 18 years old with a valid social insurance number to open a TFSA.
  • If you’ve never contributed to your own TFSA before, you’re allowed to contribute up to $52,000.
  • Invested in fits and starts in the past? Call the CRA to find out how much TFSA contribution room you still have, just to be sure.
  • Let’s say you deposit $2,000, then withdraw it, then deposit it again all in the same year – you’re considered to have contributed $4,000 that year.
  • Any money you withdraw from your TFSA can be added to the limit in the next tax year.
  • While you can withdraw money anytime you want, you have to wait until January of the following year (unless you still have unused contribution room) before you can put it back.
  • If you contribute more than your limit, the excess will be taxed 1% each month that those extra funds stay in your TFSA.
Gordon Powers

A long-time fund company executive, Gordon Powers now heads up the Affinity Group, a consulting firm focusing on retirement readiness. Gordon was a columnist for the Globe & Mail and Morningstar for many years and is also currently a columnist for Investment Executive, Canada’s national newspaper for financial advisors.

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