I recently had a meeting with a senior client who wants to ensure that all her financial affairs are in place so her money can pass on to her family tax efficiently. One of the things we reviewed was her Tax-Free Savings Account (TFSA).
As you may recall, this account allows you to grow your investments tax-free. There’s no tax involved when you invest within the account, and even when you withdraw from it. That is why I have been helping many clients grow their money with the TFSA.
During our conversation, we discussed the importance of properly designating beneficiaries for her TFSA. There are different designations such as “successor holder” and “beneficiary.” Though they sound similar, they can lead to different outcomes.
Successor Holder vs. Beneficiary
If you name your spouse as the “successor holder” of your TFSA, there will be no tax consequences. The surviving spouse can simply take over the plan by becoming the new TFSA holder. Also, it will not use their contribution room.
This means the account can maintain its tax-free status and continue to grow seamlessly.
On the other hand, if there is no spouse or common-law partner, you could name another person, such as a family member, to be the “beneficiary“. Whether they could contribute back to their own TFSA would depend if they have enough contribution room.
What Happens If You Don’t Name a Beneficiary or Successor?
If you don’t name any beneficiary or successor, the TFSA will go to the estate and be distributed according to the will. Going the estate route could take time. And depending on the size of the estate, it may result in unnecessary probate fees.
Here are Some Helpful Tips
In short, consider naming your spouse or common-law partner as the successor holder of your TFSA. If there’s no spouse, you may consider naming another person as a beneficiary, like a family member.
Here’s a reading piece from Fidelity Investments that covers this topic in more details.
But of course, the above is just a general idea. Everyone’s situation is unique, and how they want to distribute their account may differ. For example, is the beneficiary a minor child? or someone unable to manage their own finance due to disabilities? This is a discussion I regularly have with my clients
to ensure their accounts have the proper designation.
And of course, you are also welcome to contact me at Samuel@SamuelConsultant.com, so we can discuss further.
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