During your working years, you may have contributed to a Registered Retirement Savings Plan (RRSP) and received a tax deduction. After you retired, you took money out of the plan or moved it to a Registered Retirement Income Fund (RRIF) and did the same. You paid income tax on all your withdrawals.
After you die, your registered plans will be closed down and whatever investments are left could be cashed out and included as part of your estate – triggering probate fees and taxes – unless you take one of these three steps:
- Name your spouse or life partner as your beneficiary. He or she can take the amount as cash and pay any income tax due on it. Or, they can transfer the funds to their own RRSP or RRIF tax-free. They will pay tax on the funds as they withdraw them.
- Name a dependent child or grandchild under age 18 as a beneficiary. The money may be taxed fully in their hands, or used to buy an annuity that ends at age 18.
- Name a dependent adult child as a beneficiary. If an adult child were dependent on you because of a mental or physical infirmity, you could transfer the value of your registered funds to their RRSP or RRIF.
If you name any other beneficiaries to receive your RRSP or RRIF (such as an adult child), your RRSP or RRIF will be closed down and the value added to your final tax return. They get whatever is left over after the income tax is paid.
Tip: If you want to donate your RRSP or RRIF to your favourite charity, don’t name them as a beneficiary. Instead, make your estate your beneficiary. Then, donate the value of the RRIF to the charity in your will. There’s a tax credit for up to 100% of the tax due on your RRIF. That’s a great tax break for your estate.
Content in this section is provided in partnership with the Investor Education Fund, a non-profit organization promoting financial literacy to Canadians. To find out more go to GetSmarterAboutMoney.ca.