What happens to an RRSP when you die

By: Updated: March 16, 2022

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Nobody wants to consider their own death, but it’s important to plan carefully so that your family is not hit by a huge tax bill. Read on to learn more about what happens with your Registered Retirement Savings Plan (or your Registered Retirement Income Fund) when you die.

 

Can a Registered Retirement Savings Plan (RRSP) be inherited?

First of all, let’s look at the two different types of retirement accounts you may have:

RRSP: This is a savings vehicle that helps Canadians to put away money for their retirement. You receive a tax deduction when you put in money and the investments grow tax free. You only pay tax when you withdraw funds.

RRIF: When you retire, you can do an RRSP rollover into a RRIF. You don’t have to pay any taxes when you do so. The RRIF allows you to take money out to cover your living expenses. You can open a RRIF at any time, but the government requires that you convert your RRSP no later than Dec. 31 in the year you turn 71. Once you establish your RRIF, you must begin withdrawing funds every year – the government sets the minimum amount based on your age. And you must pay tax on RRIF withdrawals.

So, to return to the questions about inheritance: An RRSP can’t be inherited but there are ways to pass on the investments and minimize RRSP taxes upon death.

If you have a RRIF, you can designate a “successor annuitant.” However, there are restrictions on whom you can name:

  • A spouse or common law partner
  • A financially dependent child or grandchild. This person may have physical or mental limitations that prevent them from earning an income

The successor annuitant has three options for managing the funds from the RRIF after the account holder’s death:

  1. Continue to receive RRIF payments, just as the account holder did
  2. Transfer the assets to their own RRIF
  3. Transfer the funds to their own RRSP if they have not yet reached the age required to open a RRIF

 

RRSP beneficiary after death

Normally, the RRSP beneficiary is your spouse or common law partner. If you are single, you can name anyone, such as your surviving children or grandchildren. There can be more than one beneficiary.

However, children, grandchildren or others are called “non-qualified beneficiaries” because there are tax implications to naming a beneficiary who is not your spouse or common law partner. In these cases, your estate will face a tax hit before the funds can be passed on to your beneficiaries.

 

Scenario for RRSP account beneficiary following death

Let’s look at an example. Susan is 75 and is living off the proceeds of her RRIF and Old Age Security. She has a child who is 50 years old and who works as an accountant. Unfortunately, she cannot name her child as a “successor annuitant.” Susan can only list her daughter as a “non-qualified beneficiary”. This allows her daughter to avoid probate fees upon death. However, the estate will still have to pay income tax on the proceeds of the RRIF.

 

Can you transfer an RRSP to a family member?

You can’t change the name on your RRSP to someone else. Nor can you transfer funds from your RRSP to another person’s account.

If you want to help a family member financially, you would need to do this outside of your RRSP. For example, you can give your daughter cash and they can put it into their RRSP. Check with your financial advisor to discuss your particular situation and how you can best help your family member.

 

What happens to an RRSP when you turn 71?

You must convert your RRSP into a RRIF by Dec. 31 of the year you turn 71. As discussed, you can open a RRIF at any time but the age of 71 is a firm deadline set by the Canadian government.

Once you start a RRIF, you have to begin making minimum withdrawals. For example, if you have a RRIF and are 65 years old you must draw at least 4 percent of the total value of the RRIF. At the age of 71, this amount increases to 5.28 percent.

As you age, the minimum withdrawal continues to grow. By the time you reach the age of 95, you must take out 20 percent every year.

When you withdraw funds from your RRIF, you pay tax. Normally, your retirement income is less than your employment income was when you were working – which means that you are in a lower tax bracket. Therefore, you should pay less tax.

 

What happens to an RRSP when you retire?

When you retire, your RRSP just keeps going! If you wish, you can continue to make contributions to your RRSP and claim a tax deduction. This can be useful during your initial retirement year because you may still have substantial employment income. By making an RRSP contribution you can reduce your tax owing or even receive a refund.

However, once you retire you will probably want to begin making withdrawals to cover your living expenses. You have three options:

  1. Make withdrawals from your RRSP: You can simply take money out as needed. Your financial institution will reduce your withdrawal through a government mandated “withholding tax.” This ranges from 10 to 30 percent depending on the size of your withdrawal. When you file your income tax return, you can claim the tax paid against your total tax owing. This will reduce your tax payable or perhaps even get you a tax refund.
  2. Purchase an annuity: You send an insurance company all or part of your RRSP funds. They pay you a fixed amount every month until you die.
  3. Convert your RRSP to a RRIF: As indicated above, you can convert your RRSP into a RRIF at any time.

You must collapse your RRSP no later than Dec. 31 of the year you turn 71.

 

Prepare in advance for your RRSP

As the saying goes, death and taxes are inevitable. But it’s important to minimize your taxes and help those who will be inheriting your estate. Be sure to name a beneficiary to your RRSP – normally this is your spouse or common law partner. If you have already converted your RRSP into an RRIF, you should name a successor annuitant.

 

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