The ‘tax-free trap’: How a simple phrase skews Canadians’ savings choices

Preference for tax-free savings accounts may be due, in part, to a psychological bias for the phrase “tax-free." (Shutterstock)

While a rose by any other name may smell as sweet, Shakespeare’s famous maxim does not hold up when talking about tax-sheltered savings plans. Our new research finds that people are more likely to choose a plan that has the words “tax-free” in the title, regardless of the details in fine print.

Canada has two main tax-sheltered savings plans that encourage people to put money away for retirement and other expenses. Since being introduced in 2009, the tax-free savings account (TFSA) has become far more popular than the registered retirement savings plan (RRSP).