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

Leslie Berger (), Jonathan Farrar (), Ruth Pogacar () and Lu Y. Zhang ()
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Leslie Berger: Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario
Jonathan Farrar: Lazaridis School of Business and Economics, Wilfrid Laurier University, Waterloo, Ontario
Ruth Pogacar: Haskayne School of Business, University of Calgary
Lu Y. Zhang: Ted Rogers School of Management, Toronto Metropolitan University

Canadian Tax Journal, 2023, vol. 71, issue 1, 1-32

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 (search for similar items in EconPapers)
Date: 2023
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DOI: 10.32721/ctj.2023.71.1.berger

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