Two Benefits of TFSAs That Everyone Should Know
TFSA stands for Tax Free Savings Account, but its name is deceiving. It’s not really a savings account in the traditional sense of opening an account and earning a fixed interest rate at a financial institution.
A TFSA is a savings plan registered with the federal government that can hold cash AND investments like GICs, ETFs, stocks, bonds, mutual funds and more all in one place. The government has set annual contribution limits (for 2019 it’s $6,000) but if you don’t use all the room, it carries forward (called your contribution room). It also has the flexibility of allowing the holder to withdraw money at any time and then replacing it or not.
TFSAs were created to encourage Canadians 18 years and older to save money by offering the incentive of allowing the interest on their money to grow tax free. And while saving taxes on interest earned is a valuable benefit, there are two more HUGE benefits many Canadians don’t realize:
1. Upon your death, the funds in your TFSA can pass outside of your estate, avoiding probate fees
Money held within a TFSA can have a named Beneficiary (this could be anyone) or a Successor Holder (spouse or common-law partner) and when the TFSA owner dies, the funds held within the TFSA go directly to the Beneficiary/Successor Holder, without having to pass through the estate, avoiding probate fees. Depending on the value of your TFSA, this has the potential to be a big savings for your loved ones. This also means they can access the funds right away (generally after the will is notarized) while any funds passing through the estate can have a wait time of several months to a year.
2. You can pass your TFSA on to your spouse or common-law partner tax-free
If you named your spouse or common-law partner is your Successor Holder, then the full value of your TFSA can move directly to your spouse’s TFSA, no matter how much contribution room they have. This is a huge benefit to them.
While they don’t gain the contribution room you may have had, if your TFSA contribution room was all used up, the surviving spouse would benefit from the full possible gain.
Since TFSAs were only introduced in 2009, the maximum amount one can hold to date (2109) is $63,500 plus any interest gained over the years. As time passes though, the benefit to a surviving spouse has the potential to be huge!
A Few Final Thoughts on TFSAs
- It’s important to have a Beneficiary or Successor Holder named on your TFSA account versus only in your Will, as it makes things much easier to process.
- If you name a Successor Holder, consider naming a Beneficiary as a back up, should you and your spouse both die at the same time. If you’re not sure if you have named a beneficiary or successor holder on your TFSA paperwork, call your financial advisor or financial institution to double check.
- Keep your Beneficiary information updated. If your spouse or named beneficiary passes away before you, name a new one right away.
- Lastly, consider sharing this information with other family members like parents or grandparents, especially if you are likely to be the beneficiary of their estate, as it will you leave more of their money with you, which is what most people want for their family.
The long and short of it is, a TFSA is not just a way to save money; it’s also an estate planning tool, and a powerful one at that. More information about estate planning can be found here. You can also follow us on Facebook, where we regularly post financial tips or get in touch if you have questions.