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Why naming a beneficiary for your RRIF matters
What happens to the money in your Registered Retirement Income Fund (RRIF) after your death – and the taxes on it – will depend on:
- Whether or not you name a beneficiary for your RRIF.
- Who you choose as your beneficiary.
The beneficiary is the person or organization you choose to inherit the money in your RRIF. It does not have to be the same beneficiary that you chose for your RRSP.
If you don’t name a beneficiary
Your RRIF will be included in the calculation of probate fees on your estate. The value of your RRIF will also be included as income on your final tax return. That means the beneficiaries of your estate may get less money, after all income taxes and probate fees are paid.
If you name a beneficiary
Your RRIF won’t be included in the calculation of probate fees on your estate. Your estate won’t have to include the RRIF’s value on your final tax return or pay income tax if your beneficiary is:
- Your spouse.
- A financially dependent child or grandchild who is under 18.
- A financially dependent child or grandchild of any age who is infirm.
Make sure you name a beneficiary for your RRIF. It’s an important part of estate planning.
If your RRIF beneficiary is your spouse
What happens to your RRIF depend on whether you name your spouse as the successor annuitant of your RRIF.
- If your spouse is the successor annuitant
Your spouse takes over your RRIF and automatically starts receiving your RRIF payments. They won’t have to make any changes to your RRIF investments or incur any fees. - If your spouse is not the successor annuitant
Your RRIF will be collapsed and the investments sold. As the beneficiary, your spouse can have the money from your RRIF rolled over to their RRSP or RRIF. There may be some disadvantages for your spouse:- It may not be a good time to sell the investments. Markets may be down.
- There may be selling costs.
- There may be a lot of paperwork and worry for your spouse at a difficult and stressful time.
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.
There are many different types of non-spouse beneficiaries – for example a child or grandchild, a disabled or dependent grandchild, a third party individual, a charity, or a non-resident of Canada.
If you make your spouse the successor annuitant of your RRIF, they will automatically receive your RRIF payments after your death.
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 the final tax return is filed. This may offset any tax owing on the proceeds of the RRIF.
If your RRIF beneficiary is a financially dependent child or a grandchild
Upon inheriting your RRIF, your beneficiary can:
- Buy a term annuity and pay tax on the payments they receive.
- Transfer it tax free to their RRSP.
- Roll it over tax free to their RDSP if they have a mental or physical disability.
The amount rolled over from a RRIF to an RDSP can’t be greater than the available contribution room or exceed the $200,000 lifetime maximum contribution limit for the RDSP.
Each individual’s situation may have different nuances in how RRIF transfers are treated in terms of taxation. Consider consulting with a financial advisor or estate lawyer who may be able to provide more tailored advice.
Summary
Name a beneficiary for your RRIF to avoid probate fees on your estate.
- Naming a beneficiary for your RRIF is an important part of estate planning.
- The beneficiary is the person or organization you choose to inherit the money in your RRIF. It does not have to be the same beneficiary that you chose for your RRSP.
- If you 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.
- Your RRIF is not included in the value of your estate if your beneficiary is your spouse or a financially dependent child or grandchild.
- Consult with a financial advisor or estate professional for specialized advice for your situation.
