Tax-Free Savings Accounts: Who Uses Them and How?

49 Pages Posted: 5 Feb 2018  

Adam Lavecchia

University of Ottawa - Department of Economics

Date Written: January 15, 2018

Abstract

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

Lavecchia, Adam, Tax-Free Savings Accounts: Who Uses Them and How? (January 15, 2018). Available at SSRN: https://ssrn.com/abstract=3110904 or http://dx.doi.org/10.2139/ssrn.3110904

Adam Lavecchia (Contact Author)

University of Ottawa - Department of Economics ( email )

Social Sciences Building
Department of Economics
Ottawa, Ontario K1N 6N5
Canada

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