When we hear the term Tax-Free Savings Account (TFSA), the first thing that comes to mind is a low- or no-interest account at a bank. People are surprised to learn that almost every investment option available to their RRSP is also available to them in a TFSA plan. This includes; Mutual Funds, Segregated Funds, ETFs, Stocks, GICs, etc…And the gains are TAX-FREE. Maybe they should call these TFIAs: “Tax-Free Investment Accounts” since tax sheltering investment gains is truly where they shine!
Joey, 58, is of modest means and has saved less than $70,000 in his RRSPs. He likes the fact that TFSA withdrawals will not affect his income-tested social benefits, like OAS and the Guaranteed Income Supplement when he retires. It may make more sense for Joey to gradually collapse his RRSP before he retires and deposit the after-tax proceeds in a TFSA to mitigate clawbacks.
Ross and Rachel like the fact that they can use a life insurance company deposit product for their TFSAs since they can name a beneficiary. They can also name secondary beneficiaries so that if they die together, their children will automatically be next in line to receive the proceeds. This means that Ross and Rachel’s kids won’t have to wait for their estate to be settled before they can access the TFSA funds. They also avoid legal and probate fees on the money.
What are the rules? If you’ve ignored your TFSA up until now, don’t worry because you are not alone. Since its introduction in 2009, many Canadians have not used their TFSA contribution room. You can get your TFSA room directly from your Tax Advisor or the CRA- if you’ve never contributed you likely have $69,500 of contribution room available to you (in 2020), which you can use all at once or deposit a bit at a time. Each year this contribution room grows; allowing you to tax shelter more of your hard-earned money.
We think TFSAs are pretty nifty and encourage our clients to take advantage of their benefits. Many of our clients who don’t have life insurance opt to load up their TFSAs with a life insurance company in Segregated Funds, GIFs, or GICs and directly name their beneficiaries so that their loved ones have access to these funds quickly in a time of need.