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Why The TFSA Needs A New Name

02/24/2016 11:55 EST | Updated 02/24/2017 05:12 EST
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3D render of piggy bank with Canadian flag

On Jan. 1, 2016, the Tax Free Savings Account (TFSA) turned 7 years old. It's hard to believe how old it is getting! As a 6 year old, the TFSA did a lot of growing up; it got bigger with more Canadians contributing and it tested its limits. Midway through the year it was promised big things only to have a new boss come in and take them all away. With another year behind it and a new year ahead, it's time for the TFSA to take new strides.

If we were to ask the TFSA what it wanted for its birthday, we think it would tell us that it would like nothing more than a new name; something less confusing like "Tax Free Accounts," or "Tax Free Plans."

You might ask, why change your name now, or why bother? Well, the TFSA has learned that names are important. And because of the misleading name, whether it's intentional or not, the result is the same: many Canadians are using their TFSAs ineffectively.

In 2010, up to 70,000 Canadians faced penalties for misusing their shiny new TFSAs.

This confusion was caused by a few things: a lack of clear communication from the Canadian government and Canadian financial institutions as to when TFSAs were created, misinformation in the media channels about how they worked, and little ongoing oversight from anyone to make sure people used them correctly. While most of those issues have now been dealt with and more info on how TFSAs work is easily found from government and financial institutions, another cause for confusion has yet to be dealt with: the name itself.

When people hear "savings account" they think of something safe that earns a little bit of interest. Or put another way, something boring, that's hardly worth it. When it comes to the Tax Free Savings Account, this couldn't be further from the truth. Don't get fooled into thinking that a savings account is your only choice.

It's not a coincidence that the big financial institutions haven't said a peep about the name.

Banks want cash deposits, since they don't have to pay you very much for them and can then lend the money out at a higher rate than they pay you. The banks love to advertise their TFSA interest rate to get new business. We are bombarded with TFSA marketing promising a bit more interest here or there for a few months at a time. These are almost always time-limited promotional rates -- often just paid on new deposits -- for less than 6 months. Once the promotional rate expires you're left with an embarrassingly low return on your savings. There is so much marketing of the interest rate on TFSAs that it leads to the false impression that interest bearing savings accounts are the only investment option for a TFSA.

One of the most biggest misconceptions is that a TFSA is something that you can only get at a bank and can only be used for high-interest savings or a GIC. This is simply not true and frankly a myth that banks may want you to believe.

So, what does the name really mean?

Tax: money that you make and then pay to a government.

Free: a mythic concept of getting something for nothing.

Savings: the lost art of not spending money now and waiting to spend money later.

Account: an investment vehicle you can use to hold the money you are saving and not spending.

So, putting this all together the TFSA is really just an investment vehicle to hold money you don't spend that the government won't take. No myth, no legend, just an easy place to save money.

Like their older sibling the Registered Retirement Savings Plan (RRSP), TFSAs are a particular type of investment account in which you can hold a wide variety of investments. You can have a savings account, mutual fund, stock, bond, or many other types of investments in a TFSA.

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