This TFSA mistake is costing millennial and gen Z Canadians a fortune, TD says

It is important for financial professionals to educate young people on how TFSAs work, and how they differs from traditional savings accounts. Photo by Urbancow/Getty Images/Postmedia files

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Although the majority (60 per cent) of generation Z and millennial Canadians have TFSAs, 41 per cent aren’t investing the money in these accounts, according to TD’s survey, which was published on Wednesday. This compares with 65 per cent of all respondents who have TFSAs, but a smaller proportion of whom (39 per cent) are not investing and benefiting from tax-fee growth.

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“Simply parking cash in a TFSA limits its potential and, in some cases, could lead to contribution penalties if used like a regular savings account,” said Pat Giles, vice-president, saving and investing journey at TD, in the report. “Even small, consistent investments can help Canadians maximize the full tax-free potential of their TFSAs.”

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The survey found that a quarter of generation Z intend to invest within the next year, with 40 per cent reporting they opened a TFSA because it felt like a simple first step.

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However, two in five of generation Z respondents said they don’t feel confident about when to use a TFSA compared with a registered retirement savings plan (RRSP), and one in three weren’t sure they chose the right type of account to meet their financial goals.

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Among younger Canadians who don’t have a TFSA, nearly three-quarters said their biggest barrier comes down to a lack of knowledge about the account — significantly higher than half of all respondents who reported the same. About 35 per cent of generation Z also aren’t sure where or how to begin, while a quarter said they have a limited understanding of the benefits of a TFSA and 16 per cent find said they find investing too complicated.

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“A lot of younger Canadians have some confusion over the name: tax-free savings account,” said Diandra Camilleri, associate portfolio manager at Verecan Capital Management Inc. “They’re not really aware that you can invest in that account.”

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Camilleri said it is important for financial professionals to educate young people on how this type of investment account works and how it differs from traditional savings accounts.

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With a TFSA, you can invest in a variety of different instruments, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs) and guaranteed investment certificates (GICs), Camilleri said. These funds can grow tax-free over time (contributions are made with after-tax dollars) and be withdrawn without penalties. This offers greater flexibility compared with an RRSP, for example, which taxes withdrawals and doesn’t typically give back the contribution room after a withdrawal.

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And unlike most traditional savings accounts, in which you can only increase your savings by earning interest, typically at a low rate, the returns can be much higher if you’re investing funds in an investment account such as a TFSA, Camilleri said. However, regular savings accounts have no annual contribution limit, whereas the 2025 contribution limit for a TFSA is $7,000.