It’s been almost three years since the federal government introduced Tax-Free Savings Accounts, but a new survey from ING DIRECT reveals the majority of Canadians are still unclear about them.

Those surveyed indicated they have a vague idea (37%) or don’t understand how the TFSA works (14%), while 13% of Canadians said they don’t know what a TFSA is.

A similar survey conducted in 2008 found 39% of Canadians had a vague idea about the TFSA, suggesting awareness hasn’t increased that much in the last three years.

“The Tax-Free Savings Account is the most important savings vehicle we’ve been given since the RRSP was introduced in the 1950s, so it’s discouraging that Canadians still aren’t fully aware of it,” says Peter Aceto, president and CEO of ING DIRECT Canada. “Also, less than half of Canadians say they have a TFSA, meaning the majority of us still aren’t taking advantage of saving tax-free.”

Who’s using the TFSA?

Of the 41% of Canadians who have a TFSA, 46% earn $100K+ per year, versus 34% who earn less than $50K.

Of the Canadians who have a TFSA, those aged 35-54 are least represented at 36% versus older (48%) and younger (40%) age brackets.

Older Canadians (55+) indicated they fully understand what a TFSA is, versus 28% of those 18-34 years and 31% of those 35-54 years.

Fifty-six per cent of those aged 35-55+ indicated they use their TFSA for retirement savings versus 11% of those aged 18-34.

Those aged 55+ have used more than half the contribution room available ($8,395) whereas those aged 18-34 have used less than a third of the contribution available ($4,538).

Seventy per cent of Canadians said they felt the TFSA was a long-term savings vehicle, however only 24% of respondents indicated they use the TFSA primarily for retirement savings. Almost half of Canadians (48%) say their TFSA is just another way of saving money, while 10% use their TFSAs as an emergency fund.

The survey also revealed that more Canadians are dipping into their TFSAs, with 31% of respondents admitting they’ve made a withdrawal from their account since they started saving, up from 20% last year. Those who withdrew funds said they needed the money for an emergency (54%), they used their TFSA to save for a goal and achieved it (17%) or they use their TFSA as a regular savings account (17%).

When asked what they would like the annual maximum TFSA contribution amount to be if they could choose to change it, a surprising number of Canadians (51%) indicated they would opt to increase the limit, with the largest percentage of respondents (19%) preferring to have $7,501 – $10,000 in annual contribution room. Despite wanting the option to increase their annual limits, only one in 10 Canadians has contributed close to the maximum contribution limit ($14,001 – $15,000). A quarter of Canadians have contributed less than half of their available TFSA contribution room.

ING DIRECT is encouraging Canadians to consider the significance TFSAs can have on an investment portfolio. Clients can earn double interest on its 2012 TFSA Kick Start Account between October 1 and December 31, 2011 as a reward for planning ahead to save tax-free.

On January 1, 2012, the money in a client’s 2012 TFSA Kick Start Account will be transferred to an official Tax-Free Investment Savings Account where it will grow tax-free.

IE