As more of the Baby Boomer generation (born between 1946 to 1964) is increasingly moving into retirement, it is becoming more important to consider a Registered Retirement Income Fund (RRIF). Most Baby Boomers have put a large amount of money into a Registered Retirement Savings Plan (RRSP) during their working careers. This RRSP investment must be transferred into an RRIF by the time that a person turns 71. The transfer can happen before age 71 but the absolute deadline is age 71.
Once the transfer has been made, an individual might assume that they’ve fulfilled their obligation and nothing else needs to be done. They may just want to coast through retirement living off the money from the RRIF, which will be taxed at a lower tax rate than when the RRSP contributions were made. Unfortunately, it is important to consider tax planning practices, as the minimum tax must be paid on any RRIF proceeds received. Retirement planning is not only a necessity in advance, it also continues into and after retirement.
What Happens With “Leftover” RRIF Income?
A very important part of retiring planning is to consider what will happen if there is still money in your RRIF when you pass away. What happens to the money in your RRIF after your death, and the associated tax consequences will depend on:
- whether or not you name a beneficiary for your RRIF, and
- who you choose as your beneficiary.
The beneficiary is the person or organization you choose to inherit the money remaining in your RRIF after your death. It does not have to be the same beneficiary that you chose for your RRSP if you still have an active one.
A RRIF Without a Named Beneficiary
If you don’t name a beneficiary, then the entire amount of the RRIF balance will be included in the calculation of probate fees. As well, it will be included in the taxable income for your year of death. This all results in less money available for distribution to your estate’s beneficiaries. For this reason, naming a beneficiary for your RRIF can help reduce the fees and taxes paid on the funds, leaving more to those who are most important to you.
Your Spouse as Beneficiary
If your spouse is named as your beneficiary and successor annuitant, your RRIF balances will be transferred to your spouse automatically, and probate fees will not be incurred on the balance. As well, the RRIF balance is not included in the taxable income of your estate upon death.
If you name your spouse as the beneficiary to your estate, but not to the RRIF itself, then your RRIF will be collapsed and the investments will be sold. The funds will be added to the estate, and the income tax and probate fees mentioned earlier will be applicable. Your spouse can transfer the “reduced” proceeds received to his/her own RRSP or RRIF.
Other Family Members as Beneficiaries
If you don’t have a spouse, you can avoid having to pay tax on the remaining RRIF balance upon death by naming other family members as the RRIF beneficiary. If you name a financially dependent child or grandchild as your beneficiary, there are three options to consider:
- buy a term annuity and pay tax on the payments they receive; as the child’s tax rate is very low, this can help the child or grandchild to fund tuition fees.
- transfer it tax-free to their RRSP; this amount of money will likely become part of the child’s own RRIF in the future years.
- in the case of a family member with a disability, roll it over tax-free to their Registered Disability Savings Plan (RDSP).
A Charitable Organization as Beneficiary
Another option is to donate the remaining RRIF balance after death to a favourite charity. If you name a charity as the beneficiary of your RRIF, your estate may receive a charitable donation tax credit of up to 100% of the RRIF income reported when your final tax return is filed. This may offset any income tax owing on the proceeds of the RRIF.
Spending Excess RRIF Income During One’s Lifetime
Everything mentioned so far is helpful to minimize or delay the taxes and fees payable on RRIF balances after death. However, you may wish to help your children with big expenditures, such as a down payment on a home, while you are still alive. The first thing to consider is how much yearly retirement income do you need? Once this amount is established, then you can start thinking about how much you have leftover to give to your children.
Is it worthwhile to take more than the minimum amount from your RRIF? Yes, you will pay tax on this additional amount, but you need to remember that it will be taxed at a beneficial rate. This can allow you to gift funds to your children while you are still alive. Your children can then put this money into a Tax-Free Savings Account or another smart investment.
If you are considering how to make the most of your RRIF balance before or after you pass away, the tax and accounting professionals at ESS CPAs LLP can help. Please contact us online or by phone at 905-517-2297 and get their advice on how to best manage your RRIF and other tax planning activities as you move towards retirement.