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Tax PlanningTFSA Super Powers


This article was reviewed by Jay Brecknell, CFP®.

Did you know that TFSAs have super powers?

How much do you know about Tax Free Savings Accounts? The TFSA, as it is commonly referred to, has been around since 2009, but it is still widely misunderstood.  Many people think of it as simply a savings account, but it is so much more than that.

Here are some unique features of the TFSA. 

Tax-free Growth 

All the growth (e.g. interest, gains, dividend income, etc.) that happens in a TFSA is tax-free, as are all withdrawals. In retirement, this can help to reduce your taxable income, avoid OAS clawback and qualify for other government tax credits or benefits that are based on an income threshold.

Estate Planning Tool 

Did you know that you can designate a beneficiary on your TFSA account? Usually this is a spouse, but it can also be a child, someone outside the immediate family or even a charity. This makes the TFSA extremely useful since, upon death, the account value can be transferred directly to a beneficiary of your choosing (or even multiple beneficiaries) without having to go through probate.

Your spouse can inherit your TFSA room 

If you designate your spouse (married or common-law) as the beneficiary, it is even better since a spouse is considered a “successor holder” and not just a regular beneficiary.  This means your spouse not only inherits the funds in your TFSA, but their own TFSA room is increased by that amount as well!  This could be extremely useful in future if they need to withdraw some funds with the intention of putting funds back in at a later date.

Leave it Alone

The TFSA account is the best option for your higher-earning investment funds or stocks since all of the growth is tax-free.  For this reason, it’s best to allow the funds in your TFSA to keep growing for as long as possible. Make sure to ask your advisor when is the best time to withdraw from your TFSA, especially if you’re already retired.

However, it is important to note that if you are a US citizen, you don’t want to take advantage of the TFSA as the US government doesn’t recognize this type of account and the IRS considers any income or growth in it as taxable income.