01 Sep 2020  /  by:

Jim Walker and Aanchal Sandhu-The Agency at Central 1

  /  3 minutes

Could TFSA Over-contributions Explode in 2020?

Is a Registered Retirement Savings Plan (RRSP) or a Tax-Free Savings Account (TFSA) better to save for the future? This is the question for many Canadians as they financially plan and navigate the COVID-19 pandemic. While both accounts offer tax incentives and provide the opportunity to grow deposits in a variety of investment options, many of the differences between the two are still unclear to most.

To help Canadians understand what is best for their needs, financial advisors can play a crucial role as clients think about using TFSA or RRSP accounts to help pay their bills. According to a survey by TransUnion, consumers are actively paying down balances during Covid-19. Approximately, 31% indicated they intend to pay at least a partial amount of their bills and almost 13% of consumers surveyed indicated they will take advantage of payment holidays or deferrals to manage their bills. Just under 30% of Canadians say they are using money from their TFSA or RRSP accounts to cover expenses. This can cause more issues in the future because few consumers are aware there is an RRSP withdrawal tax. For those wanting to cash in their RRSPs – borrowing from a line of credit, or even a personal loan, may be a better option to help pay off debt in the short-term.

Once debt or day-to-day expenses are under control, could we see a spike in TFSA over-contributions as people re-contribute (and potentially over-contribute)?

Results from a TD Bank survey emphasize the general lack of knowledge some Canadians have about RRSPs and TFSAs.

Canadians don’t know the difference between TFSA and RRSP

  • According to the findings of a TD Bank survey, 27% of Canadians do not understand what distinguishes a TFSA from an RRSP.
  • Additional 35% of respondents said they don’t understand the tax implications of a TFSA, while another 30% said the same when it comes to an RRSP.

A 2018 BMO study noted that 40% of respondents didn’t know there was a tax penalty for over-contribution.

Recommendations for Credit Unions

Credit unions should take this time to educate their members about the potential tax implications and penalties by publishing content on their web sites and social media channels. If 30% of Canadians are in fact using these funds to pay bills, and there is confusion regarding TFSA contribution limits, it is almost a guarantee that credit unions will see a rise in members who’ll run afoul of annual TFSA contribution limits before the year is out. Helping to prevent this can help members.

A good example of TFSA rules and contribution limits information was published by Investment Executive last November.

Credit unions looking for more information about RRSPs, TFSAs or how Central 1 can help you, please contact financialservices@central1.com.