Retirement Planning / Tax Planning
By Edelkoort Smethurst CPAs LLP
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 RRSPif 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 aterm 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 Edelkoort Smethurst 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.
FAQs
In other words, if you do have a spouse as beneficiary, the assets in the RRIF may be transferred to their RRSP or RRIF as a tax-deferred rollover of assets. If your beneficiary is someone else, the RRIF would be closed and full market value (FMV) of the assets would be transferred to them.
Do beneficiaries pay tax on RRIF in Canada? ›
Only the part of the income earned in this period that is not taxable to the RRIF trust is reported to the beneficiary. A beneficiary will not have to pay tax on any part of the amount they received, to the extent that it can reasonably be regarded as having been included in the RRIF trust's income.
What is the excess amount transferred to the RRIF? ›
Your excess amount is any payment you receive from your RRIF that is above the minimum amount required to be paid out for the year. These amounts can be transferred directly to your RRSP , RRIF , SPP , or PRPP , or to purchase an annuity.
What are the disadvantages of RRIF? ›
Because RRIF withdrawals are considered taxable income, taking money out too early or more than you need could put you in a higher tax bracket and leave you with a larger tax bill. Withdrawals could also potentially reduce certain government benefits, like Old Age Security (OAS).
What happens to RIF upon death? ›
Amounts received from a RRIF upon the death of an annuitant can be transferred directly or indirectly to your RRSP, to your RRIF, to your PRPP, to your SPP or to buy yourself an eligible annuity if you were a qualified beneficiary of the deceased annuitant.
Can you transfer a RRIF to a family member? ›
If, at the time of the annuitant's death, you are the spouse or common-law partner, or the child or grandchild who is financially dependent on the annuitant because of an impairment in physical or mental functions, you can transfer certain amounts from the annuitant's RRSP or RRIF, on a tax-deferred basis.
What is the difference between a successor holder and a beneficiary on a RRIF? ›
With RRIFs, you can choose to name a "beneficiary" or "successor annuitant" to inherit your RRIF assets. A successor annuitant can only be a spouse or common-law partner and the designation enables them to take on ownership of your RRIF without the need to transfer funds out of the account.
What is the tax rate on RRIF withdrawals in Canada? ›
| Withholding tax rates |
|---|
| Amount more than the minimum amount | Withholding tax rate Often stated as…+ read full definition (except in Quebec) |
|---|
| Up to $5,000 | 10% |
| Between $5,000 and $15,000 | 20% |
| More than $15,000 | 30% |
Oct 4, 2023
Inherited Roth IRAs
Withdrawals of contributions from an inherited Roth are tax free. Most withdrawals of earnings from an inherited Roth IRA account are also tax-free. However, withdrawals of earnings may be subject to income tax if the Roth account is less than 5-years old at the time of the withdrawal.
Does a RRIF count as income? ›
Earnings in a RRIF are tax-free and amounts paid out of a RRIF are taxable on receipt. You can have more than one RRIF and you can have self-directed RRIFs. The rules that apply to self-directed RRIFs are generally the same as those for RRSPs.
You can transfer RRIFs between financial institutions at any time without being taxed (other than taxes owed on withdrawals); however, there may be a transfer out or other fees. You can also move some or all of your money between eligible investments within your RRIF.
Can you transfer from RRIF to TFSA? ›
You cannot move your RRIF payments directly into a TFSA. In addition to cash, withdrawals can also be made in "in kind" – meaning securities can be withdrawn at their fair market value from a RRIF and transferred to a non-registered account without selling them.
How do you avoid leaving your heirs a nasty tax surprise? ›
The moral. You should periodically check with your financial institution to make sure you've named a beneficiary of your RRIF (or RRSP) and include the same beneficiary in your will. And always get good tax advice before and immediately after a loved one dies to avoid nasty surprises.
Is there a fee to withdraw from RRIF? ›
Apart from RRIFs that are locked-in, such as an LRIF or LIF, there is no maximum withdrawal allowed. Additionally, withholding tax will apply to any amount withdrawal over the minimum.
Can you convert a RRIF into an annuity? ›
Yes – a RRIF can be converted to an Annuity at any time. Certain investment holdings (e.g. GICs) may force you to wait until maturity to access funds or face penalties. Minimum age No – there is no minimum age to purchase an Annuity.
What happens to unused RRSP contributions? ›
If you did not deduct all of the contributions you made to your RRSP, PRPP, or SPP or your spouse's or common-law partner's RRSP, or SPP, you have two options: you can leave the unused contributions in the plan. you can withdraw the unused contributions.
What happens if you don't convert RRSP to RRIF? ›
If instead of transferring into a RRIF, you choose to withdraw your RRSP as a lump sum, then it is treated as taxable income – which could result in a substantial tax hit.
Who is the successor of a RRIF account? ›
An annuitant can choose to have the RRIF payments continue to their spouse or common-law partner after death. If the terms of the RRIF contract or the deceased annuitant's will name the spouse or common-law partner as the successor annuitant, the spouse or common-law partner becomes the annuitant of the RRIF.
Who is the beneficiary of the RRSP? ›
RRSP Account Holders
However, to benefit from the deferral of taxes upon your death, the named beneficiary of your RRSP must be: Your spouse or common-law partner; A financially dependent child or grandchild under 18 years of age; or. A financially dependent mentally or physically infirm child or grandchild of any age.
