“Tax-Free”: The Effect of a Heuristic Cue on the Choice Between a TFSA and an RRSP

32 Pages Posted: 17 May 2023

See all articles by Leslie Berger

Leslie Berger

Wilfrid Laurier University - School of Business & Economics

Jonathan Farrar

Wilfrid Laurier University - School of Business & Economics

Ruth Pogacar

University of Calgary - Haskayne School of Business

Lu Y. Zhang

Toronto Metropolitan University

Date Written: May 2, 2023

Abstract

The authors investigate whether and, if so, the extent to which a heuristic cue, the term “tax-free,” contained in the name of one of the two primary tax-sheltered savings plans in Canada—the tax free savings account (TFSA)—biases individuals’ saving preferences relative to the registered retirement savings plan. On the basis of the heuristic-systematic model of information processing, the authors predict that the term “tax-free” is a favourable heuristic cue that will suppress systematic processing and bias individuals toward selecting a savings plan with this term in its name. They conduct three experiments to test this proposition. Overall, the results suggest that individuals have a clear preference for a tax-sheltered savings plan with “tax-free” in its name—regardless of the content of accompanying explanatory information. The preference for savings plans with “tax-free” in the name may suggest the need for more education and financial advice to reduce the use of heuristics.

Keywords: TFSA, RRSP, Savings, Savings Plans, Psychological Aspects, Public Finance

Suggested Citation

Berger, Leslie and Farrar, Jonathan and Pogacar, Ruth and Zhang, Lu, “Tax-Free”: The Effect of a Heuristic Cue on the Choice Between a TFSA and an RRSP (May 2, 2023). Canadian Tax Journal/Revue fiscale canadienne, 2023, Vol. 71, No. 1, p. 1-32, Available at SSRN: https://ssrn.com/abstract=4435811

Leslie Berger (Contact Author)

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
CANADA

Jonathan Farrar

Wilfrid Laurier University - School of Business & Economics ( email )

Waterloo, Ontario N2L 3C5
Canada

Ruth Pogacar

University of Calgary - Haskayne School of Business ( email )

2500 University Drive, NW
Calgary, Alberta T2N 1N4
Canada

Lu Zhang

Toronto Metropolitan University ( email )

350 Victoria Street
Toronto, Ontario M5B 2K3
Canada

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