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Tax-free savings accounts: Who uses them and how?

TitleTax-free savings accounts: Who uses them and how?
Year of Publication2018
AuthorsLavecchia, A. M.
JournalUniversity of Ottawa, Department of Economics Working Paper Series
Keywordscrowd-out, pre-paid versus post-paid, tax-free savings account, tax-preferred savings accounts

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.

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