Heralded by the federal government as “the most important tax innovation in a generation,” the tax-free savings account (TFSA) will quickly become established as a financial must-have for most Canadians. But will it fit with your group retirement plan?
The TFSA has some attractive features.
• Investment income, losses and capital gains from TFSAs are excluded from taxable income.
• Withdrawals can be made for any purpose and are tax-free.
• Investment room is retained after withdrawals are made.
• It doesn’t mature at age 71 and doesn’t need to be converted to another product.
• Spousal plans don’t attribute income back to the spouse who contributed the funds.
TFSAs can work quite well with your organization’s current group plan offerings, particularly if a non-registered savings plan is already part of your program. To achieve the best possible benefit, plan sponsors should assess how their plan members will take advantage of this new savings opportunity and how the investments offered in the group TFSA will meet members’ needs.
The most important consideration is to understand how your members will use a TFSA. This will help you decide whether to offer it and, if you choose to, how best to educate and communicate with members about their choices. Perhaps your group TFSA will supplement retirement savings, primarily for high-income members who’ve maxed out their RRSP and registered pension plan (RPP) limits.
If your membership profile meets these criteria, you might consider keeping your TFSA investment options similar to those already in place for your RRSPs and RPPs. This approach simplifies communication, plan administration and member investment choices.
Other sponsors may find their members want the flexibility of a TFSA—the ability to withdraw funds without being taxed—almost like a casual savings account. If this scenario is likely for your plan, consider limiting the investment options to those that preserve capital or offer minimal downside risk and low volatility. All decisions should be aligned with the plan’s purpose and your rationale for offering it.
Because a group TFSA is a capital accumulation plan (CAP), sponsors must follow the CAP Guidelines. From an administrative and governance standpoint, it’s an added responsibility, just like adding a new group RRSP or RPP.
The convenience of payroll deductions makes saving with a TFSA easy for your members—an added benefit from their point of view. Communicate clearly to members about how to use the group TFSA, what investments are offered, the fees for withdrawals and the importance of continuing to save for long-term retirement goals. A TFSA isn’t for every member of your plan, and its flexibility to accommodate withdrawals might mean it’s not for you—just yet. As with anything new, it’s best to weigh the benefits and implications before taking the leap to make the TFSA a permanent plan offering.
Michael Campbell is vice-president, marketing, group retirement services at The Great-West Life Assurance Company.
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© Copyright 2009 Rogers Publishing Ltd. This article first appeared in the April 2009 edition of BENEFITS CANADA magazine.