Tax-Free Savings Accounts: Who Uses Them and How?
49 Pages Posted: 5 Feb 2018
Date Written: January 15, 2018
This paper studies the savings effect of Canadian Tax-Free Savings Account (TFSAs) using microdata from the 2012 Survey of Financial Security. TFSA contributions are made with after-tax income, balances accumulate tax-free and withdrawals do not increase taxable income. The paper makes two important contributions. First, I characterize the profiles of TFSA owners, documenting new patterns in account ownership and balances. The age profile of TFSA ownership is U-shaped and balances are positively correlated with educational attainment and saving in other retirement accounts. Second, I develop a new instrumental variables strategy to estimate whether TFSA balances crowd-out saving in taxable financial assets and saving in traditional tax-deferred plans. The results suggest that TFSA balances crowd-out saving in taxable fixed income assets and have no statistically significant effect on balances in tax-deferred accounts.
Keywords: Tax-Preferred Savings Accounts, Pre-Paid Versus Post-Paid, Tax-Free Savings Account, Crowd-Out
JEL Classification: H2, H31
Suggested Citation: Suggested Citation