Designating Beneficiaries for RRSPs and RRIFs

One area of tax planning that does not receive enough attention is the designation of beneficiaries when it comes to Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). When you open up an RRSP or RRIF, you are opening up a special contract under the Income Tax Act, which allows you to designate one or more beneficiaries.

Far too often, this is done too casually and without enough thought. More importantly, as your circumstances change, like marriage, divorce or children, you should consider reviewing your beneficiaries to make sure you have the right people designated.

Taxation of the RRSPs/RRIFs at death

Puzzle PieceThe first place to start in understanding whom to list as a beneficiary is to understand the taxation of these contracts at death.

The general rule for an RRSP or RRIF is that the value of the RRSP or RRIF at the date of death is included in the income of the deceased for the tax return for the year of death. There are three exceptions to this rule where the tax can be deferred if the beneficiary of the RRSP, RRIF, or estate is:

  1. the spouse (includes common-law partner)
  2. financially dependent child or grandchild under 18 years of age, or
  3. financially dependent mentally or physically infirm child or grandchild of any age.

Who should be the Beneficiary?

For obvious reasons, there are tax benefits to naming your spouse, dependent children/grandchildren under the age of 18 or dependent adult children who are mentally or physically inform.

That being said, anyone can be named the beneficiary. Most often, it is the spouse, children or the estate that are named but it does not have to be that way.

RRIFs and Beneficiary Designations

When you are converting your RRSP to a RRIF, you are setting up a new contract and you must designate a beneficiary at that time. If you assume the RRSP designation would continue to apply, that would not be the right assumption.

Successor Annuitant for RRIFs

For RRIFs, when naming your spouse as beneficiary, you are given the option of having your spouse receive the RRIF as a lump sum or choosing your spouse as the “successor annuitant” to the RRIF.

If a successor annuitant election is not made, the deceased’s RRIF will be collapsed causing a disposition of the investments in the RRIF followed by a rollover to an RRSP or RRIF of the surviving spouse. There may be several disadvantages to this. It may not be a good time to sell the investments in the RRIF or there may also be selling costs to consider. Also, there is the issue of preparing all of the paperwork at a difficult and stressful time for the surviving spouse.

The successor annuitant designation is effortless. The spouse simply takes over from the deceased and continues to receive RRIF payments in his/her place. The investments in the RRIF are not affected by this, as there is no need to execute a new contract.

Probate Fees

One key benefit is if a beneficiary is designated in the RRIF contract, the RRIF value will not be included in the calculation of probate fees on death. While probate fees are not as significant as income taxes, such a simple step will ensure that there is more available for your beneficiaries.

Giving money to charities

The most significant changes affecting estate planning relates to the ability to receive a credit of up to 100% of taxable income for donations made through a Will. This means that the tax on RRSPs and RRIFs arising from the death of the annuitant can be avoided completely if a donation equal to the value of the RRSP or RRIF is made in his/her Will.

This is a great opportunity for individuals to donate money to their favorite charity that would have otherwise gone to the government in the form of taxes.

RRSPs, RRIFs and estate planning

As you can see, the designation of the beneficiary in your RRSPs and RRIFs is one of the most important factors in how much taxes you are going to have to pay at the time of death. Yet, it is astonishing how many people make this decision without regard to the overall estate plan or simply forget to designate a beneficiary.

When setting up a RRSP or a RRIF, it is crucial that you make good beneficiary choices. It is equally important that you review the beneficiaries in the RRSPs, RRIFs and through your will from time to time. If you haven’t done this in a while, review it sooner than later.

Written by Jim Yih

Jim Yih is a Fee Only Advisor, Best Selling Author, and Financial Speaker on wealth, retirement and personal finance. Currently, Jim specializes in putting Financial Education programs into the workplace.For more information you can follow him on Twitter @JimYih or visit his other websites Group Benefits Online and Advisor Think Box.

2 Responses to Designating Beneficiaries for RRSPs and RRIFs

  1. Dour says:

    Just recently my father passed away and thru my parents will my mother received the cash in the bank and a small RRIF of my dads which was transferred into mothers RRIF. There is a size able amount of cash and about $45000.00 in my mothers RRIF and no property. . There is a will in place naming her children the beneficiaries of the estate. In the event of her passing would the will have to go to probate because of the RRIF . If one of us was named a beneficiary of the RRIF what would the tax implication be on the beneficiary and would the will have to go to probate if there was only cash left.

  2. Deanne says:

    I have three brothers and one sister. My sister is Power of Attorney for both parents. My sister took control over parents’ finances even though mother is still mentally competent. My sister instructed my parents to go to the Bank to have their annuity from an insurance company transferred into a RRIF. My sister had instructed parents’ by bullying and coercion to sign beneficiary designation for both their RRIFs and TFSAs designating my sister as the beneficiary. My brother had my mother revoke her Power of Attorney and he is her Attorney re: Enduring Power of Attorney. Unfortunately, my father has dementia. My sister had my parents go to a lawyer June 28, 2010 to sign Power of Attorney documents naming my sister as Attorney. 13 days later my sister took my father to a doctor who deemed father incompetent and January 4, 2011 second doctor deemed him incompetent which then activated Power of Attorney. September 4, 2010 sister instructed parents to go to the bank to sign designation beneficiary documents and to name her as beneficiary on all of their RRIFs and TFSAs. We are in the process of getting a court application to have sister removed as the Attorney for father. It has cost a lot of $$$$ because the lawyer who did the Power of Attorney documents has been protecting my sister so we had to hire our own lawyer to fight against her lawyer. If my father were to pass away my surviving mother will not receive any RRIF & TFSA payment proceeds and my sister will receive $100,000 tax free with the estate having to pay all the estate taxes. I am hoping the Judge will immediately realize my sister abused her Power of Attorney duties and will rectify the situation. Is there a pension law that stipulates that if a surviving spouse is still alive the beneficiary cannot be a non-dependent adult child. My siblings and I are wondering how the banks allowed what had transpired. Parents Last Will & Testament was done 30 years ago & is divided equally among siblings but we are worried my sister had parents change their Wills recently naming her as the sole beneficiary of their Wills. I would appreciate your reply to the above fiasco. Thank you, Deanne

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