# Another reason to use TFSAs



## latebuyer (Nov 15, 2015)

I didn't realize when you die your tfsa isn't taxed

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/dth/srvr-eng.html

Contrast that to RRIFs which are taxed heavily.

It seems like a another good reason to use the tfsa. I've just posted as i've never read this in any articles on tfsas.


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## Eclectic12 (Oct 20, 2010)

Maybe different search parameters would have helped?

http://www.moneysense.ca/save/financial-planning/what-happens-to-a-tfsa-after-you-die/
http://www.taxtips.ca/tfsa/holderdeath.htm
http://www.advisor.ca/tax/estate-planning/tfsa-holders-dont-understand-death-benefits-2751


The way I read it, a lot depends on whether the beneficiary is a successor holder or not (i.e. qualified individual). 

For a regular beneficiary, any gains after the death will be taxable. The example in the tax tips link is that where the TFSA was $80K at death, if the beneficiary receives $82K - the beneficiary has to report $2K of income.


Small tax is better than big tax. :biggrin:


Cheers


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## latebuyer (Nov 15, 2015)

I agree that small tax is better then big tax. I had no idea that a rrif was taxed at the tax rate based on the amount you have and not the deceased's tax rate. Or at least that is my understanding. It almost seems better to have your money in an unregistered account.

I've never seen this advantage mentioned in an rrsp vs. tfsa article.

Wouldn't the new federal tax rate have implications for taxing the deceased's rrif?


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## none (Jan 15, 2013)

My main affection for the TFSA is just the lack of paper work required with trading. That's pretty great. The tax benefits (if only holding can equities) aren't really that huge - once you factor in the benefits of holding capital losses.


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## steve41 (Apr 18, 2009)

When you consider:-

1. There is no TFSA tax credit on contribution as there is with the RRSP

2. The tax your estate pays happens out in time (it is the PV of taxes paid that counts)

3. Future tax rates are lower due to the indexation of the tax brackets

.... then the RRSP wins out if you live to a ripe old age and the TFSA wins if you die prematurely.


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## CalgaryPotato (Mar 7, 2015)

latebuyer said:


> I agree that small tax is better then big tax. I had no idea that a rrif was taxed at the tax rate based on the amount you have and not the deceased's tax rate. Or at least that is my understanding. It almost seems better to have your money in an unregistered account.
> 
> I've never seen this advantage mentioned in an rrsp vs. tfsa article.
> 
> Wouldn't the new federal tax rate have implications for taxing the deceased's rrif?


That isn't true, I don't know where you got that from. At the date of death the RRSP or RRIF becomes fully taxable for the deceased person. It is taxable at their rate, which can sometimes become quite high if they die when they have a full account, as it may contain many years worth of "normal" salary for them.


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## latebuyer (Nov 15, 2015)

Thanks for clarifying. I certainly don't want to spread misinformation on the board.


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## Eclectic12 (Oct 20, 2010)

latebuyer said:


> I agree that small tax is better then big tax. I had no idea that a rrif was taxed at the tax rate based on the amount you have and not the deceased's tax rate. Or at least that is my understanding.


Do you have a source?

The ones I have found say that without a beneficiary, the value is included for probate fees as well as on one's tax return. Which depending on the tax regime, the first $42K is taxed at 20%, the next $3K at 24%, the next $30K at 29% etc. I haven't seen anything saying anything is different on the tax return.

Should one's spouse, a financially dependent child or grandchild who is under 18 or child or grandchild of any age who is infirm be named beneficiary - then both probate and reporting as income are avoided.

http://www.getsmarteraboutmoney.ca/...s/What-happens-to-your-RRIF-when-you-die.aspx
https://www.investorsedge.cibc.com/ie/education-centre/topics/retirement/rrifs-at-death.html
http://www.taxtips.ca/rrsp/taxonrrsprrifatdeath.htm




latebuyer said:


> I've never seen this advantage mentioned in an rrsp vs. tfsa article.
> Wouldn't the new federal tax rate have implications for taxing the deceased's rrif?


Yes ... but as I understand it, it is not one flat rate but the usual 




none said:


> My main affection for the TFSA is just the lack of paper work required with trading. That's pretty great. The tax benefits (if only holding can equities) aren't really that huge - once you factor in the benefits of holding capital losses.


Agreed on the paperwork ... as for the tax benefits being small, YMMV. It worked out nicely to have the full, non-taxed income to pay down the mortgage, addition to the full, non-taxed proceeds.

So far, (knock on wood) - no capital losses to lose out on.


Cheers


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## latebuyer (Nov 15, 2015)

The information and link I gave is from the Canada Revenue Agency's own page as to how TFSAs are taxed. I was confused about how RRIFs were taxed. It sounds to me like what Eclectic says that only gains after death is taxable with a TFSA. I guess this is where you need some sort of tax planner to sort out the details. I don't know why I care as I am single and will only leave money to nieces and sisters. Still, I don't like the government to take a large chunk.


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## Eclectic12 (Oct 20, 2010)

^^^

This is confusing as what applies to RRIF and what applies to TFSA seem mixed up.

To be clear, when I was asking for sources - I was trying to figure out why the RRIF at death was supposed to have a flat, high tax rate. As indicated, where the big $$$ from a RRIF have to be reported, it will still follow the lower levels before the higher tax rates are charged. 




latebuyer said:


> ... It sounds to me like what Eclectic says that only gains after death is taxable with a TFSA.


There's an important cavaet. This is for a run of the mill beneficiary, that is not the estate. Say your next door neighbour or a cousin.

Should a qualified beneficiary (ex. spouse named as successor holder on the paperwork) be setup, then the spouse assumes ownership with no taxes involved. They can keep two separate TFSAs open (assuming they already had their own) but usually, the spouse will roll everything into their own TFSA as this does not use up TFSA contribution room.

Having your estate as beneficiary means probate comes into play.




latebuyer said:


> ... I guess this is where you need some sort of tax planner to sort out the details. I don't know why I care as I am single and will only leave money to nieces and sisters. Still, I don't like the government to take a large chunk.


Then definitely use the TFSA first as the RRIF is going to mean taxes.


Cheers


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## OnlyMyOpinion (Sep 1, 2013)

Remember though that a qualified beneficiary (spouse, common-law partner, financially dependent child or grandchild with a mental or physical disability) can normally make a tax-deferred rollover of RRSP or RRIF into their own account.
In other words, if your spouse dies and you are named as the beneficiary, with a rollover to your account, their RRSP or RRIF will not face taxes.

Added: Oops, looks like Eclectic just made this point.


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## latebuyer (Nov 15, 2015)

This is what I found related to RRIF on CRA site

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrif-ferr/dth-eng.html

I find it pretty confusing. I think I am thinking about death more because my grandma died a few years ago. I think because the majority of her money was in an unregistered account, a good portion of her estate was still left after taxes.


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## OnlyMyOpinion (Sep 1, 2013)

Well unfortunately, death is one of those certainties we should think about and plan for eventually. Otherwise we might leave an estate mess for loved ones or others to clean up. Some won't mind that I suppose.

If your grandma had little tax liability in her unregistered account, it suggests she had interest, deemed interest, and/or dividends which have to be paid on an annual ongoing basis. Even if she had capital gains, her estate would probably have paid tax on half of the gains, and depending on the amount and her tax bracket it may not have been too onerous. 

You are correct, an RRSP or RRIF that goes into the estate can face a significant tax liability. 
As Steve likes to say, "Live rich, die broke (but not too soon)."


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## Eclectic12 (Oct 20, 2010)

latebuyer said:


> This is what I found related to RRIF on CRA site
> 
> http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/rrif-ferr/dth-eng.html
> 
> I find it pretty confusing ...


That's why I tend to start with books/articles aimed at the regular person than use CRA's links for the detailed ins & outs. The CRA link talks about "qualified" beneficiary with transfers so I believe it is aimed at the special category as opposed to say a sister or cousin.




latebuyer said:


> I think I am thinking about death more because my grandma died a few years ago. I think because the majority of her money was in an unregistered account, a good portion of her estate was still left after taxes.


Now I think I follow the "high tax" comment. The RRIF gets treated as income while the non-registered investment account may have more tax advantaged gains in it (ex. capital gains at a 50% inclusion rate).

Unfortunately, unless one knows exactly when one will expire plus have the time to structure things for it, it is hard to plan for. One can plan on a bit of both to hedge one's bets.

Or as my parents did ... pass on some of the inheritance when the beneficiaries are younger and likely need the $$$ more as gifts are not taxable. 


Cheers


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## none (Jan 15, 2013)

Eclectic12 said:


> Unfortunately, unless one knows exactly when one will expire plus have the time to structure things for it, it is hard to plan for. One can plan on a bit of both to hedge one's bets.
> 
> Or as my parents did ... pass on some of the inheritance when the beneficiaries are younger and likely need the $$$ more as gifts are not taxable.
> 
> ...


THis is actually the main huge advantage of pensions. You don't have to worry about this. You can deplete your savings at the most probable year of your expiration date and then just live in your pension alone as the stop gap. That and the forced savings aspect but really - my first point is what i see 90% of the benefit of my pension.


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## latebuyer (Nov 15, 2015)

In general i'd like to contribute more to my TFSA as the money is more accessible. However, the rrsp refund is a big carrot and hard to give up. It is good to remind myself as to how much tax I would have to pay when withdrawing from a rrif as well as at death. Given that I have a pension I doubt i'll be in a lower tax bracket in retirement so I don't know there is a lot bigger benefit to using my rrsp. Still, that carrot. I just did my taxes this week because I was excited for the refund.


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## none (Jan 15, 2013)

latebuyer said:


> In general i'd like to contribute more to my TFSA as the money is more accessible. However, the rrsp refund is a big carrot and hard to give up. It is good to remind myself as to how much tax I would have to pay when withdrawing from a rrif as well as at death. Given that I have a pension I doubt i'll be in a lower tax bracket in retirement so I don't know there is a lot bigger benefit to using my rrsp. Still, that carrot. I just did my taxes this week because I was excited for the refund.


If your tax bracket doesn't change the TFSA and RRSP are mathematically equivalent.

http://www.theglobeandmail.com/glob...xplains-tfsa-or-rrsp/article1356709/?page=all


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## steve41 (Apr 18, 2009)

none said:


> If your tax bracket doesn't change the TFSA and RRSP are mathematically equivalent.


I have seen many, many financial projections/plans. Most have tax brackets lower in retirement.


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## none (Jan 15, 2013)

steve41 said:


> I have seen many, many financial projections/plans. Most have tax brackets lower in retirement.


Of course, that's the entire basis for the RRSP program. IF your brackets do not change the RRSP and TFSA are mathematically equivalent. The 46-78ish bracket is pretty wide.


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## OnlyMyOpinion (Sep 1, 2013)

The song that never ends. 
For my 2 cents, if you have the ability to max out both your TSFA and your RRSP (including utilizing the tax refund due to an RRSP contribution if that's what it takes), then I think it usually makes sense to do that. You are then sheltering/deferring tax on your savings as much as possible. And I say this even if you have a pension. 

Letting the 72 year old tax tail (rrif, riff) wag your investing dog when it is only 20, 30, or 40 seems a stretch to me. 

It seems to me that not contributing to an RRSP because you think you might not be in a lower tax bracket in retirement has no greater certainty than the possibility that you might lose your job (and need the RRSP savings), or that your pension might run into trouble and be less than you'd expected, or that you find yourself in your mid-50's with enough saved to retire early (and melt down your RRSP) :surprise:

Again, I'm saying if you can afford to max out both. I'm not suggesting everything be saved at the expense of enjoying life today (esp. if you have a family), but I would definately fill both before I started to save substantially in a non-registered account.


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## latebuyer (Nov 15, 2015)

I can't afford to max out my rrsp and tfsa. What I think is that i'll contribute to my rrsp, but not use up my contribution room and instead contribute some money to TFSA. Then once i've paid off my mortgage, I can plow more money into the rrsp. Besides, isn't there some benefit to growing your TFSA room through investment return? It seems like if you start early you could grow the size of the tfsa quite a bit, then you could withdraw and contribute more.

Plus, my understanding is before I begin withdrawing from my RRIF when i'm 71 i'll need money to support myself and that would come from the TFSA. Then because i've increased my tfsa room, i'll be able to withdraw from my rrif and put some of that money in the TFSA. That is my plan. Does that make sense?

I also think some people start cpp right away because they don't have enough money saved outside rrsp to delay it. If I have enough in my TFSA I can delay CPP and get more money. This is looking better and better though at 43 I think my chances of growing my tfsa that much are slim.


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## Eclectic12 (Oct 20, 2010)

latebuyer said:


> In general i'd like to contribute more to my TFSA as the money is more accessible. However, the rrsp refund is a big carrot and hard to give up.


Well you could redirect the tax refund from the RRSP into the TFSA. That will reduce the tax bill in the future as the refund money will be Canadian tax free. 



latebuyer said:


> ... It is good to remind myself as to how much tax I would have to pay when withdrawing from a rrif as well as at death. Given that I have a penson I doubt i'll be in a lower tax bracket in retirement so I don't know there is a lot bigger benefit to using my rrsp.


Question is ... have you learned enough about the pension to have a reasonable estimate of all retirement income? 

I seem to run into a lot of people who are confident they won't be in a lower income level despite most people having lower income in retirement. I can recall a co-worker sitting beside me gasping at the pension presentation slide that identified that max pension with something like thirty five years of service was 60% of top employment income. She was under the mistaken impression that top pension was 100% of employment income.

The other end of the range are the people who forget to include all forms of income (ex. CPP, OAS, investment income).


Then too there are other factors to consider ... having change jobs a couple of times, top pension for me is something like 40% of employment income. It's something like five or six tax brackets down to absorb all other sources of income. 


Cheers


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## Eclectic12 (Oct 20, 2010)

latebuyer said:


> ... Besides, isn't there some benefit to growing your TFSA room through investment return? It seems like if you start early you could grow the size of the tfsa quite a bit, then you could withdraw and contribute more.


Unless there is something to spend the TFSA withdrawl on ... it is a zero sum game that is of no benefit. To have $$ to withdraw that will become TFSA contribution room the following year, the TFSA assets have to have grown. Pulling the assets out, making them taxable just to put them back is of no benefit compared to leaving them in the TFSA to keep growing tax free, with no period of being taxable.

IMO, where the TFSA withdrawal becomes contribution room is a benefit is where there is something to pay for (ex. roof, extra mortgage payments) with taxable $$$ the following year to replace it. Or where one wants to avoid TFSA transfer fees to take advantage of a better interest rate (ex. withdraw in late Dec, put into different, higher paying TFSA).

The TFSA withdrawal becoming contribution room the next year can be made use of. The idea that TFSA assets growing being a benefit as it "grows TFSA contribution room" is bogus IMO.





latebuyer said:


> ... Plus, my understanding is before I begin withdrawing from my RRIF when i'm 71 i'll need money to support myself and that would come from the TFSA. Then because i've increased my tfsa room, i'll be able to withdraw from my rrif and put some of that money in the TFSA. That is my plan. Does that make sense?


Too many variables to offer an opinion ... though the mechanics make sense. Keep in mind some start their RRIF long before age 71 to keep the minimum withdrawals at low levels to minimise the impact of that income on gov't programs such as OAS.

As well, when will the pension start?

BTW, assuming you retire at age 65 - there's twenty years of TFSA contribution room going to be added. Using today's allotment with zero increases, that is something like $110K you will be able to put into the TFSA. What will you assume for growth? What sources of income will you have before the age 71 RRIF starts?




latebuyer said:


> ... This is looking better and better though at 43 I think my chances of growing my tfsa that much are slim.


What sort of investor are you? Have you worked out a strategy?


Cheers


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## latebuyer (Nov 15, 2015)

Thank you for your thoughtful comments. I think i'll just have accept from a monetary perspective i may have been better off investing all the money in an rrsp. For my own personal reasons i want the money in a tfsa so i'm just going to accept the unknowable and go with it. I can always go back to putting more money in the rrsp when i'm comfortable with the amount of money i have.


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## latebuyer (Nov 15, 2015)

This is a really timely article about taxation and beneficiaries

https://beta.theglobeandmail.com/gl...33987944/?ref=http://www.theglobeandmail.com&

I didn't realize you could name the beneficiary as your estate or the way taxation works if you name a beneficiary for your rrsp.


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## Eclectic12 (Oct 20, 2010)

^^^

I take it then that the question about beneficiaries when opening the registered accounts didn't trigger your interest?


Cheers


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## latebuyer (Nov 15, 2015)

I have beneficiaries. What i found interesting is that the tax liability of the rrsp goes to the estate which makes a difference how i name my beneficiaries. In any event i plan to pay for a retirement planner close to retirement as all this is complex.


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## Eclectic12 (Oct 20, 2010)

^^^

If you name your estate the TFSA beneficiary, the growth after death will be taxable at the estate rate, as everything is collapsed ... so that's probably not a good idea either (though is a smaller bill).


While it may be a good idea closer to retirement ... it may also be a good idea relatively soon. Waiting until the end limits one's choices of what to do.


Cheers


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## latebuyer (Nov 15, 2015)

To be honest I still don't have a will so the first step would be to do a will. Right now i'm just leaving money to my sisters but it could get messy as I want to give money to my nieces.


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## Islenska (May 4, 2011)

Why is it cast in stone that death tosses your RRSP to the tax wolves?

We are mid 60's and combined RRSP/TFSA is $1.3mil currently with more in HoldCo etc....but I'm drawing down the RR portion and thinking better to skim it off quicker now than leave an estate where 50% goes to the tax creatures.


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## steve41 (Apr 18, 2009)

50%!!?? Your tax rate would be 20% given those numbers. Sigh.


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## Eclectic12 (Oct 20, 2010)

Islenska said:


> Why is it cast in stone that death tosses your RRSP to the tax wolves?


Because that's what's written in the tax code?
https://retirehappy.ca/what-happens-your-rrsps-when-die/#
http://www.taxplanningguide.ca/tax-planning-guide/section-2-individuals/death-rrsp/
http://www.theglobeandmail.com/glob...tax-with-a-proper-beneficiary/article4171500/


Though the impression of "tosses to the tax wolves" will vary. 

I can still recall the poster who was sure that because his income was at one of the top tax levels, his overall tax rate was going to be around 50%. When I plugged into StudioTax the gross income, no deductions beyond the personal exemption amount (i.e. no pension contribution reductions, no charitable donations, no RRSP contributions) the overall tax rate worked out to 30% instead of the 50% he was expecting.

Then too, "to the tax wolves" also assumes no spouse to roll the RRSP over to as well as no leeway for the executor to file across multiple tax years or send $$$ to one's favourite charity.





Islenska said:


> ... We are mid 60's and combined RRSP/TFSA is $1.3mil currently with more in HoldCo etc ...


As the TFSA is Canadian tax free ... why are you including the value of it in what is Canadian taxable? 
The RRSP and RRIF will be what is included in the deceased tax return - assuming there is no spouse to do a tax deferred rollover.




Islenska said:


> ... but I'm drawing down the RR portion and thinking better to skim it off quicker now than leave an estate where 50% goes to the tax creatures.


Make sure you use the actual amounts that would be taxed instead of including the TFSA when estimating the deceased's income tax return. Also think about what actions the executor might take to reduce the tax bill before getting to antsy about it.

Keep in mind that nothing is different for the deceased's tax return. Around the first $40k will be charged around 20%, the next level 24% etc.


Cheers


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