Throughout your life you may have contributed to your RRSP and taken a tax deduction for your contributions. During retirement, you withdraw from your RRSP or RRIF and the amount of the withdrawals are taxed as regular income. However, when you die, the remaining amount in your RRSP or RRIF is considered withdrawn and your estate may be faced with a large tax bill as a result.
There are steps you can take to defer this tax bill on death or minimize the impact.
Name Your Spouse As Your Beneficiary
If you name your spouse or common law partner as you beneficiary, the value of your registered funds will not be included in your income at death. Rather, the value will be included in your spouse or common law partner’s income to which he or she may transfer the funds to their own RRSP or RRIF and claim a deduction equal to the amount he or she received.
Name A Child or Grandchild As Beneficiary
If you name a child or grandchild as the beneficiary of your registered accounts, the proceeds can be transferred, tax-free to a child or grandchild who was “dependent” on you. The funds may be taxed fully in their hands or used to purchase an annuity that ends at age 18.
If the child or grandchild was dependent on you because of a mental of physical infirmity, the value of funds may also be transferred to their RRSP or RRIF.
Any other beneficiaries named to receive your RRSP or RRIF (such as adult children or other persons) will result in your RRSP or RRIF taxed on your final tax return.
Direct Beneficiary Designation VS The Estate As Beneficiary
With RRSPs or RRIFs you have the opportunity to name a beneficiary directly on the account. By doing do you can avoid probate and affect a direct transfer to your spouse or common law partner.
If you have named your estate as the beneficiary, your spouse and common law partner can still make an election to treat the amount as if the funds were directly transferred to their own RRSP or RRIF.
What About TFSAs?
Much has been written about TFSAs and death. When the account was rolled out earlier this year, I wrote an article titled TFSAs and Estate Planning.