Tax Free Savings Account (TFSA) and Estate Planning
Tax Free Savings Account (TFSA) and Estate Planning
Death of the TFSA holder - Who can be named as the successor-holder in a TFSA contract?
A TFSA holder can only name a spouse or common-law partner as the successor holder in the TFSA contract. On the death of the TFSA holder, the spouse becomes the new holder of the TFSA investment, maintaining the tax exempt status of the TFSA. This will not affect the TFSA contribution room of the spouse or common law partner. Whether or not a beneficiary can be named in a TFSA contract depends on provincial legislation. As of the date of this writing, Ontario had not passed a legislation regarding the naming of a beneficiary in a TFSA contract. Some of the provinces have already revised their legislation to allow for the designation of a beneficiary. Some TFSA application forms may not be updated until later in 2009, until the provincial legislation have been enacted. If you are not able to designate a beneficiary when opening a TFSA account, check back with your financial institution within a couple of months.
What are the tax rules upon death of the TFSA holder?
Where no successor holder is named for the TFSA, the proceeds of the account will become part of the estate of the deceased. If a surviving spouse/common-law partner receives proceeds from the TFSA, the proceeds can be used to make an exempt contribution to the survivor's TFSA, and not affect the contribution room of the survivor as long as:
- It is done before the end of the first calendar year following the holder's death (rollover period);
- And, it is designated as an exempt contribution in the survivor's income tax return for the year the contribution is made.
Where there is no spouse or common-law partner named as the successor holder, the TFSA will not lose its tax-exempt status:
- Until the the earlier of the time it ceases to exist (completely paid out to beneficiaries);
- Or, end of first calendar year following the holder's death.
Any payments to beneficiaries, including during this exempt period, will be taxable to the beneficiaries, to the extent that the payment includes income or capital gains earned after the death of the holder. Take note that the income earned within the TFSA after the death of the TFSA holder becomes subject to tax.
TFSA Scenario - Death of TFSA holderTFSA holder dies with TFSA valued at $90,000. By the time the assets are distributed to the beneficiaries, the value has grown to $92,000. $2,000 will be taxable income to the beneficiaries. The $2000 income was earned after the death of TFSA's holder.
TFSA and Probate Assets with named beneficiaries such as life insurance policies or RRSPs are excluded in determining the value of an estate for purposes of probate. It is likely that a TFSA with a named successor holder would also be excluded from probate. This is a very good reason for anyone with a spouse/common-law partner to ensure that they name that person as a successor holder when setting up the TFSA.
This article is presented for general information only. Consult your financial advisor for advice regarding your specific financial situation.
Labels: estate planning, investment planning, probate, save taxes, tax free savings account, tax planning, TFSA
Tax Free Savings Accounts (TFSA) - Benefits for Seniors
Tax Free Savings Account (TFSA) and Seniors
The TFSA provides seniors with a tax-efficient savings vehicle to help meet ongoing savings needs, even after they reach age 71. Whereas for RRSP, seniors when they reach age 71, are required to convert their registered retirement savings into another type of retirement income vehicle (with annual minimum withdrawal requirement), TFSA has no age requirement. Seniors can hold TFSA past the age of 71, hence the product is referred to as a savings vehicle for all Canadians above the age of 18, a Canadian resident, and with a social insurance number.
Neither the income earned in a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits such as Old Age Security, Guaranteed Income Supplement benefits and the Goods and Services Tax Credit. The income earned has no effect on federal income-tested benefits at all, in short the product may be referred to as "
transparent" unlike RRSP, and RRIF wherein the withdrawals may trigger claw-backs of federal income benefits.
Scenario 1- Senior Couple:Mark and Patricia are retired and living comfortably on Mark’s pension. Patricia also receives a small work pension based on her years of work after raising their children. They would like to save Patricia’s pension each month and use the money it to spend the winter season in Florida (the couple are snowbirds). The TFSA will provide them with an effective means to save for their trip south each year, without paying tax on the interest earned on those savings
Impact of a TFSA on Federal Income-Tested Benefits and CreditsTFSA - savings incentive for low and modest-income seniors:A TFSA improves savings incentives for low- and modest-income individuals since neither the income earned in a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as the Canada Child Tax Benefit, the GST credit, the Age Credit, Old Age Security and Guaranteed Income Supplement benefits.
Scenario 2 – where the Senior Couple receives Federal Income BenefitsWalter and Mary, a modest-income couple, expect to receive the Guaranteed Income Supplement (GIS) in addition to Old Age Security and Canada Pension Plan benefits when they retire. They have saved for a number of years in their TFSA and now earn $2,000 a year in interest income. Neither this income, nor any TFSA withdrawals, will affect the GIS (Guaranteed Income Supplement) benefits (or any other federal income-tested benefits and credits) they expect to receive. If this $2,000 were earned on an unregistered basis, it would reduce their GIS benefits by $1,000.
To find out the comparatives of TFSA with an open (non-registered investment vehicle) follow this link to the TFSA calculators of Federal government website:
http://tfsa.gc.ca/cal-eng.htmlLearn More about the Tax-Free Saving Account:Visit the Finance Canada website at:
http://www.fin.gc.ca/fin-eng.aspVisit the Canada Revenue Agency website at:
http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/menu-eng.htmlVisit the Budget 2008 website at:
http://www.budget.gc.ca/2008/plan/chap3b-eng.aspThis article is presented for general information only. Consult your financial advisor for advice regarding your specific financial situation.
Labels: investments, new savings vehicle, retirement savings, save taxes, Savings Goals, tax free income, tax free savings account, tax planning
Tax Free Savings Account (TFSA) or RRSP, what is right for you?
Tax Free Savings Account (TFSA) or RRSP, what is right for you?
Most investors have short-term goals, which may include a major purchase, vacation or establishing an emergency fund. There are several options available for your personal Tax Free Savings Account (TFSA) depending on the “term” of short-term and the your overall plan. Explore how a TFSA can help you save for these goals faster and tax free. You can put $5000 in a variety of investment options.
Your financial advisor can help you incorporate your short-term, long-term and tax planning needs into you financial plan.
Watch your savings grow tax-free throughout your lifetime.
To analyze which savings option is right for you, there are top five differences between RRSPs and TFSAs:
1. An RRSP is a savings plan mostly aimed at saving for retirement. this savings vehicle is a tax deferral savings plan. A TFSA is for all your other savings goals. Your goal can be to save for a car, improvements for your home, a vacation, for education, and can include so many other savings goals you may have.
2. RRSP is tax deductible, you don't pay tax on the money you save in an RRSP until you take it out (fully taxable). With a TFSA, it is not tax deductible, this comes from your after tax money. You don't get to deduct your TFSA contribution from the income you report on your tax return.
3. Whenever you take money out of an RRSP, the amount is added to your income and taxed at your current tax rate. With a TFSA, there's no tax on any money you take out – not even the money you made investing, including capital gains. You put your money in, then you get your money and growth out --tax free, it is that simple....
4. You have to close/collapse an RRSP after age 71. There is no time limit for contributing to a TFSA, contributions allowed past age 71.
5. With both plans, TFSA and RRSP, you can name your spouse or common-law partner as a beneficiary. However, only the spouse or common law partner can be the successor to the TFSA plan. The money will roll over to them upon your death. But with an RRSP, after your spouse or partner dies, there will be taxes due on any money left in the account. So if your children inherited the money, they would have to pay that tax. A TFSA is different. Your children would get the whole amount tax-free. That's because you've already paid the tax on the money you contributed to your TFSA.
It's also important to note that the maximum allowable RRSP contribution may be significantly greater than the amount that may be deposited in a TFSA. RRSP limits are based on the lower of 18% of earned income or the limit for the year. By comparison, Canadians may contribute up to $5000 to a TFSA in 2009, with future increases in the yearly limit indexed to inflation. This limit is the same for everyone, regardless of income.
The easy access helps make TFSAs a good supplement to RRSPs for people who want to continue saving for retirement but have maximized their RRSP contributions or have reached the age of 71 -- the age limit for RRSP contributions. There is no maximum age for contributing to a TFSA.
Now, let us try to answer the question RRSP or TFSA, which option is right for you?
The answer depends on…
- Your marginal tax rate (will your marginal tax rate be lower at retirement?)
- Other RRSP opportunities
- Will it be enough for you?
- Flexibility versus discipline
- Your primary savings goal(s)
You also can’t forget the other opportunities of RRSPs such as:
•Pension income credit,
•Income splitting,
•pension income splitting with your partner once you’re 65, or
•Using spousal RRSPs.
If your primary goal is saving for retirement, you need to ask yourself if the $5,000 annual contribution limit that the TFSA offers will provide you with enough savings for the retirement lifestyle you desire.
TFSAs give you the flexibility to withdraw funds anytime you wish. If your primary goal is to save for your retirement, analyze your financial strategy and ask yourself if you have the discipline to put money into a TFSA and not touch it again until retirement. RRSPs have that self-imposed discipline (it is a tax deferral savings strategy – no one wants to take a tax hit if they don’t have to. A TFSA doesn’t offer you that structure/and discipline.
Or, consider that if you have other goals to save for, short term or long term, you may not want to use your entire TFSA contribution room for retirement savings.
There are other variables to consider in deciding which option is right for you. Analyse your personal financial situation, and with the advice of your financial advisor, decide on an option that is right for your financial circumstances.
This article is presented for general information only. Consult your financial advisor for advice regarding your specific financial situation.
Labels: estate planning, investment planning, Retirement Planning, save taxes, Savings Goals, tax free income, tax free savings account, tax planning, TFSA
